|TEV||1||TEV/EBIT||-0||TTM 2019-06-30, in MM, except price, ratios|
|Item 1. Business|
|Item 1A. Risk Factors|
|Item 1B. Unresolved Staff Comments|
|Item 2. Properties|
|Item 3. Legal Proceedings|
|Item 4. Mine Safety Disclosures|
|Item 5. Market for Common Equity, Related Stockholder Matters and Purchase of Equity Securities|
|Item 6. Selected Financial Data|
|Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations|
|Item 7A. Quantitative and Qualitative Disclosures About Market Risk|
|Item 8. Financial Statements and Supplementary Data|
|Note 1 - Organization and Nature of Activities|
|Note 2 - Summary of Significant Accounting Policies|
|Note 3 - Acquisitions|
|Note 4 - Going Concern|
|Note 5 - Intangible Assets|
|Note 6 - Property, Plant and Equipment|
|Note 7 - Related Party Transactions|
|Note 8 - Stockholders' Equity|
|Note 9 - Loans Payable|
|Note 10 - Convertible Notes Payable|
|Note 11 - Convertible Debentures|
|Note 12 - Derivative Liability|
|Note 13 - Income Taxes|
|Note 14 - Committments and Contingencies|
|Note 15 - Revenue Concentration|
|Note 16 - Stock Options and Warrants|
|Note 17 - Subsequent Events|
|Item 9. Changes in and Disagreements with Accountants|
|Item 9A. Controls and Procedures|
|Item 9B. Other Information|
|Item 10. Directors, Executive Officers and Corporate Governance|
|Item 11. Executive Compensation|
|Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters|
|Item 13. Certain Relationships and Related Transactions and Director Independence|
|Item 14. Principal Accountant Fees and Services|
|Item 15. Exhibits|
|Balance Sheet||Income Statement||Cash Flow|
Rev, G Profit, Net Income
Ops, Inv, Fin
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2019
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission File Number: 000-12350
|(Exact name of registrant as specified in its charter)|
|(State of Incorporation)||(I.R.S. Employer Identification No.)|
|2340 Horizon Ridge Dr. Suite 120 Henderson, NV||89052|
|(Address of principal executive offices)||(Zip Code)|
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $.0001 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
|Large accelerated filer||[ ]||Accelerated filer||[ ]|
|Non-accelerated filer||[X]||Smaller reporting company||[X]|
|Emerging Growth company||[X]|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant based upon the closing price of $1.25 per share as of March 31, 2019 was approximately $16,621,047.
As of May 9, 2020, there were 85,842,473 shares of registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
|Item 1A.||Risk Factors||7|
|Item 1B.||Unresolved Staff Comments||8|
|Item 3.||Legal Proceedings||9|
|Item 4.||Mine Safety Disclosure||9|
|Item 5.||Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities||10|
|Item 6.||Selected Financial Data||11|
|Item 7.||Management’s Discussion and Analysis of Financial Condition and Results of Operations||12|
|Item 7A.||Quantitative and Qualitative Disclosures About Market Risk||17|
|Item 8.||Financial Statements and Supplementary Data||18|
|Statements of Operations||F-3|
|Statements of Stockholders’ Equity (Deficit)||F-5|
|Statements of Cash Flows||F-6|
|Item 9.||Changes in and Disagreements with Accountants on Accounting and Financial Disclosure||19|
|Item 9A.||Controls and Procedures||19|
|Item 9B.||Other Information||20|
|Item 10.||Directors, Executive Officers and Corporate Governance||21|
|Item 11.||Executive Compensation||22|
|Item 12.||Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters||23|
|Item 13.||Certain Relationships and Related Transactions, and Director Independence||23|
|Item 14.||Principal Accountant Fees and Services||23|
|Item 15.||Exhibits and Financial Statement Schedules||24|
This report includes “forward-looking” statements as the term is defined in the Private Securities Litigation Reform Act of 1995 or by the U.S. Securities and Exchange Commission. All statements other than statements of historical facts contained in this report, including statements regarding our future financial position, business strategy and plans and objectives of management for future operations may be deemed to be forward-looking statements. The words “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “could,” “target,” “potential,” “is likely,” “will,” “expect” and similar expressions, as they relate to us, are also intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. In addition, our past results of operations do not necessarily indicate our future results.
Other sections of this report may include additional factors which could adversely affect our business and financial performance. New risk factors emerge from time to time and it is not possible for us to anticipate all the relevant risks to our business, and we cannot assess the impact of all such risks on our business or the extent to which any risk, or combination of risks, may cause actual results to differ materially from those contained in any forward-looking statements. Those factors include, among others, those matters disclosed in this Annual Report on Form 10-K.
Except as otherwise required by applicable laws and regulations, we undertake no obligation to publicly update or revise any forward-looking statements or the risk factors described in this report, whether as a result of new information, future events, changed circumstances or any other reason after the date of this report. Neither the Private Securities Litigation Reform Act of 1995 nor Section 27A of the Securities Act of 1933 provides any protection to us for statements made in this report. You should not rely upon forward-looking statements as predictions of future events or performance. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.
The Company maintains an internet website at www.eviolabs.com. The Company makes available, free of charge, through the Investor Information section of the web site, its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Section 16 filings and all amendments to those reports, as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission. Any of the foregoing information is available in print to any stockholder who requests it by contacting our Investor Relations Department.
Corporate Background and Our Business
EVIO, Inc. supports and optimizes our clients’ businesses, and protects the health and safety of consumers by providing analytical testing, compliance consulting, and research & development services to the legal cannabis and hemp industries.
Our founders believe that products derived from the cannabis sativa plant could have the potential to provide an alternative to pharmaceutical products and may improve wellness. Our founders also believe that it is imperative that there be third party verification of the safety and quality of these products by qualified scientists in adherence with the highest accreditation standards, including ISO 17025, TNI NELAP, and GMP.
We believe that as we leverage best practices from labs across North America, we are building standardized and optimized methods and procedures that will provide EVIO a considerable advantage in a future global market for cannabis and hemp ingredients and products.
We work to ensure the EVIO brand is synonymous with safe, high quality products.
EVIO, Inc’s core business is analytical testing services for cannabis and hemp growers, product formulators, processors, distributors, and retailers. We perform testing as required by state and provincial mandates, as well as for research and development or informational purposes.
Tests include identification and quantification of compounds including cannabinoids such as THC and CBD, and terpenes. This testing includes mandated hemp field verifications, quantitation for product labeling, and testing to support product formulations. We also perform homogeneity and process control testing, and other tests to determine the quality and conformance of cannabis products.
We also identify contaminants such as solvents, pesticides, e. coli, salmonella, aflatoxins, excess moisture, and heavy metals in cannabis and related products including soils, water, hemp and CBD products.
Our labs rely on instrumentation including High Performance Liquid Chromatography (PLC) for cannabinoid testing; triple-quadrupole mass spectrometry for pesticide testing; gas chromatography for solvent and terpene testing; Inductively Coupled Plasma Mass Spectrometer (ICPMS) to identify heavy metal; Polymerase Chain Reaction (PCR) technology for identification of DNA or RNA from harmful microbial contaminants; and other support instruments including moisture analyzers and water activity meters, plating, and microscopy.
EVIO Biosciences and our advisory services work include providing technical guidance to our clients and governments in the areas of industry best practices, regulatory compliance, support for product formulation, assisting businesses with setting up their own internal research laboratories, providing expert advice and data to governments and financial auditors, and assisting with state and local cannabis licensing. We also leverage our expertise and access to data to perform R&D and identify new and novel testing methods and gain insights about cannabis and its potential uses.
Our company is led by a team of technology-focused professionals who came from Fortune-500 companies. Each of our labs are led by experienced laboratory directors who hold PhD’s or other advanced degrees in chemistry, biology, chemical engineering or other sciences. Our laboratory teams include analytical chemists and biologists and laboratory technicians who are trained to EVIO’s standardized methods and procedures to be both specialists in one area of testing and attain cross-training in other tests.
Our teams collaborate across labs to share best practices, and we continuously improve our methods and processes across all labs based on lessons learned in each. The ability to learn from labs across the country provides a significant advantage compared to our competitors that operate one or two labs.
EVIO, INC. was originally incorporated in the State of New York, December 12, 1977 under the name 3171 Holding Corporation. On February 22, 1979 the name was changed to Electronomic Industries Corp. and on February 23, 1983 the name was changed to Quantech Electronics Corp. The Company was reincorporated in the State of Colorado on December 15, 2003. On August 29, 2014, Signal Bay Research, Inc., a Nevada corporation completed a reverse merger with Quantech Electronics Corp., a public shell company. In September 2014, the Company changed its name to Signal Bay, Inc. (now named EVIO). The Company has selected September 30 as its fiscal year end. The Company is domiciled in the State of Colorado, and its corporate headquarters is located in Henderson, NV.
During 2014 and 2015, Signal Bay’s primary business focus was providing consulting services, market research, and data analysis for businesses, governments, and individuals, involved with the emerging legal cannabis industry. In 2015, the founders identified the testing market as an underserved segment of the emerging cannabis industry that provided a service that was in alignment with our vision to contribute to the development of a safe and compliant industry.
In September 2015, the Company acquired a majority stake of an analytical testing laboratory in Bend, OR. The Company continued to acquire laboratories with the goal of attaining best practices and capturing market share in advance of the adult-use legalization of cannabis in Oregon. By 2018, the Company had acquired 4 testing labs in Oregon and gained licensing and accreditation for all four labs to perform testing to the newly adopted rigorous testing standards required by the State of Oregon. The labs began operating under one name, EVIO Labs. The company continued its growth in other states, through both acquisitions and licensing agreements.
In August 2018, Signal Bay, Inc. changed its name to EVIO, Inc.
In January 2019, the Company acquired C3 Labs, LLC, a cannabis research and development laboratory in Berkeley California. During 2019, we expanded the scope of lab services to include compliance testing, in anticipation of newly adopted rules to serve California’s mandated testing requirements.
In May 2019, the Company formed EVIO Canada, Inc. and acquired a 50% state in Keystone Labs, Inc. located in Edmonton, Alberta. Keystone provides a full array of analytical and microbiological testing services for pharmaceutical, biotechnology, medical device, nutraceutical, and medical cannabis industries.
In September 2019, the company operated or licensed labs in 6 states and Alberta, Canada.
|Trade Name (dba)||Company Name|
|Ownership %||Inception/Acquisition Month|
|EVIO Labs Medford||Smith Scientific Industries, LLC||Oregon||80||%||June 2016|
|EVIO Labs Portland||Greenhaus Analytical Labs, LLC||Oregon||100||%||October 2016|
|EVIO Labs MA||Viridis Analytics LLC||Massachusetts||100||%||August 2018|
|EVIO Labs Berkeley||C3 Labs, LLC||Nevada||90||%||January 2019|
|EVIO Labs Humboldt||EVIO Labs Humboldt, LLC||California||100||%||April 2019|
|Keystone Labs||Keystone Labs, Inc.||Canada||50||%||May 2019|
EVIO Business Segments
The Company currently has three principal business segments: (1) Management and Corporate; (2) Consulting Services to the cannabis industry; and (3) Analytical Testing Services to the cannabis industry.
None of the Company’s business segments constitutes the transport, production, distribution, storage, sale or possession of cannabis for non-medical purposes.
1. Management and Corporate
The Company provides overall management and corporate reporting functions for the entire organization. This includes marketing, human resources, financial management and reporting, investor relations, mergers & acquisitions, and corporate compliance.
The Company competes with other cannabis testing labs on a state by state basis. Digipath Labs is a known publicly traded cannabis testing lab. It has one location in Nevada. The Company does not currently operate in Nevada. Each of our labs compete with other laboratories in their respective states as described below.
The Company maintains intangible property including its brand, which it uses internally and licenses to certain laboratories. It also has consolidated customer lists and has developed proprietary laboratory methods, procedures, and software.
As of September 30, 2019, the Management and Corporate division has seven employees. These corporate employees include the Chief Executive Officer, Chief Operating Officer, Chief Science Officer, Controller, Vice President of Operations, Director of Human Resources, and Accountant.
2. Consulting Services
The Company provides advisory, product formulation, licensing and compliance services to the cannabis industry. Consulting clients are located in states that have state managed medical and/or recreational cannabis programs. The Company assists such clients with business planning, state compliance, product and process development advice, and ongoing operational support, evaluation of processes, identification of alternative solutions, formulations, or processes, recommendations of resources needed, and deliverable reports or prototype products.
Business advisory and compliance consulting require specialized skills in the areas of policy and compliance, cannabis industry regulations, and cannabis operations. Cannabis product formulation, custom R&D, and process optimization consulting require additional skills in chemistry and/or chemical engineering, product formulation and product development. Consulting services depends on the shared resources of corporate and laboratory personnel on an as-needed basis. The Chief Operations Officer, and/or Chief Science Officer lead advisory projects, and recruit qualified personnel from our labs, as well as outside consultants, to perform services on an as-needed basis.
There are many small private cannabis consulting firms and sole proprietor consultants working in the cannabis industry today. Most of our consulting clients come to us as referral business from our testing operations, or as referrals from or repeat business from our consulting clients. Therefore, we rarely encounter direct competition for our consulting services, which we currently provide as a companion or value-added service to our analytical testing services.
3. Testing Services
Testing services represents the core of the Company’s operations. The Company provides analytical testing services to the cannabis industry under the EVIO Labs brand. As of September 30, 2019.
EVIO Labs clients are located in Oregon, California, Massachusetts and Edmonton and consists of distributors, growers, processors and dispensaries. Operating under the rule of the appropriate state regulating bodies, EVIO Labs certifies products have been tested and are free from pesticide and other contaminants before resale to patients and consumers. The Company’s deliverable is a certificate of analysis that is provided to both the Company’s client and the state regulators. The Company has hundreds of customers across North America. No single customer comprises more that 15% of total consolidated revenue of the Company.
Production and Services
EVIO tests cannabis and hemp and related products to quantify, or detect the presence of, certain compounds including those that might endanger consumer health. At a minimum, we test the compounds required for sale of product by regulation, and in addition, we provide additional testing services. A description of those services is set forth below:
EVIO Labs provides product testing for agricultural, medical, and biotechnology companies, currently specializing in analytical services for the emerging legal cannabis industry. EVIO Labs provides a variety of testing services for the cannabis industry including cannabinoid potency testing, terpene analysis, pesticide testing, residual solvent screening, visual inspections, biological contaminant testing, and more. In addition, our laboratories work together to engage in internal research to improve methods and develop additional technical services. The tests we perform include the following:
|-||Cannabinoid Potency (detecting the presence of cannabinoids including d9-THC, THCA, CBD, CBDA, CBN, CBC and CBG; this also includes THC:CBD ratio for immature plants. Some labs may also detect additional cannabinoids such as THCV, d8-THC)|
|-||Water Activity and Moisture Content|
|o||Bacterial Testing (E. coli, Salmonella)|
|o||Mycotoxins and Aflatoxins|
|-||Residual Solvent Screening|
|-||Immature Plant Inspection|
|-||Foreign Matter Inspections|
|-||Heavy Metals Detection (Lead, Mercury, Arsenic, Cadmium)|
Specialized Skill and Knowledge
Our testing labs require the specialized expertise of qualified chemists and micro-biologists at each lab location. All of the Company’s laboratory technicians have undergraduate degrees in science; laboratory analysts have masters’ degrees or equivalent experience; and laboratory directors have post-graduate degrees or prior laboratory experience plus management expertise. Laboratory staff have both scientific knowledge and specialized expertise in performing analytical testing, and specifically testing cannabis and cannabis products. The labs also require specialized personnel in the areas of compliance and quality assurance.
Due to prohibitions on interstate transport of cannabis in the US, cannabis labs compete on a state by state level.
In Oregon, according to the Oregon Liquor Licensing Commission there are approximately 20 accredited cannabis test labs, of which we owned four, and consolidated to two. Competitors in Oregon include GreenLeaf Labs, ChemHistory, Juniper Labs, and Pixis Labs. None of the Company’s competitors in Oregon have labs at multiple locations.
In Massachusetts, according to the Cannabis Control Commission, there are four labs, of which the Company owns one. Competing labs in Massachusetts include MCR Labs and Pro Verde.
In Canada, according to Health Canada, the Company competes with 33 “licensed testing companies” nationwide.
In California, according to the Bureau of Cannabis Control, there are currently 32 licensed cannabis laboratories. Current incumbent competitors include: Steep Hill Labs, SC Labs, PharmLabs and CW Analytical.
DigiPath in Nevada is the only other publicly traded lab and operates in Las Vegas, Nevada, where we do not compete.
Our Growth Strategy
Focus on the newly legalized markets in California and Massachusetts. California is projected to be the largest cannabis market in the world. In 2019, California implemented new testing requirements that require all cannabis sold in the recently regulated adult-use dispensaries be tested. This opens a substantial opportunity for EVIO to capture substantial market share of the California market. Massachusetts is also a recent addition to the roster of adult-use states and has created an immediate opportunity to perform testing, especially because of the small number of labs in the state.
Increase participation in the recently regulated hemp and CBD markets. With the emergence of CBD products, and a market that is expected to soon eclipse the cannabis market, we anticipate that the states, and the FDA will require that hemp-derived CBD products undergo testing. EVIO is well positioned to perform this testing.
Evaluate new domestic and international markets for growth. The cannabis market continues to grow as more US states and many countries implement medical and adult use cannabis programs. EVIO will continue to evaluate new markets.
Establish partnerships with the industry’s leading national brands and organizations. We believe that consolidation within the industry is likely. Therefore, we will focus our efforts on establishing partnerships with the companies and brands that are most likely to emerge as leaders. EVIO’s national footprint should attract the multi-state and multi-national operators that seek consistent testing and a consistent customer experience at any lab they work with.
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
The above statement notwithstanding, shareholders and prospective investors should be aware that certain risks exist with respect to the Company and its business, including those risk factors contained in our most recent Registration Statements on Form 10, as amended. These risks include, among others: limited assets, lack of significant revenues and only losses since inception, industry risks, dependence on third party manufacturers/suppliers and the need for additional capital.
On March 11, 2020, the World Health Organization (“WHO”) declared the COVID-19 outbreak to be a global pandemic. In addition to the devastating effects on human life, the pandemic is having a negative ripple effect on the global economy, leading to disruptions and volatility in the global financial markets. Most U.S. states and many countries have issued policies intended to stop or slow the further spread of the disease.
COVID-19 and the U.S.’s response to the pandemic are significantly affecting the economy. There are no comparable events that provide guidance as to the effect the COVID-19 pandemic may have, and, as a result, the ultimate effect of the pandemic is highly uncertain and subject to change. We do not yet know the full extent of the effects on the economy, the markets we serve, our business or our operations.
Risks Related To Our Cannabis Related Businesses
Our Cannabis testing business is dependent on state laws pertaining to the cannabis and hemp industries. The states where EVIO works have allowed the use of cannabis for medical use, adult use or both. Continued development of the cannabis industry is dependent upon continued legislative authorization of cannabis at the state level. Any number of factors could slow or halt progress in this area. Further progress in the cannabis industry, while encouraging, is not assured. While there may be ample public support for legislative action, numerous factors impact the legislative process. Any one of these factors could slow or halt use of cannabis, which would negatively impact our business.
Cannabis containing over 0.3% THC remains illegal under federal law and a change in federal enforcement practices could significantly and negatively affect our business. Despite the rapid development of the cannabis industry, and recent legalization of industrial hemp state laws legalizing medicinal and adult cannabis use continue to be in conflict with the Federal Controlled Substances Act, which classifies cannabis as a Schedule-I controlled substance and makes cannabis use and possession illegal on a national level. The United States Supreme Court has ruled that it is the Federal government that has the right to regulate and criminalize cannabis, even for medical purposes, and thus Federal law criminalizing the use of cannabis preempts state laws that legalize its use. Our business requires us to be in possession of cannabis, plus we provide services to customers that are engaged in the business of possession, use, cultivation, and/or transfer of cannabis. As a result, law enforcement authorities, in their attempt to regulate the illegal use of cannabis, may seek to bring an action or actions against us, including, but not limited, to a claim of aiding and abetting another’s criminal activities. As a result of such an action, we may be forced to cease operations at any one or more of our labs. Such an action would have a material negative effect on our business and operations.
Laws and regulations affecting the cannabis and hemp industries are constantly changing, which could detrimentally affect our business, and we cannot predict the impact that future regulations may have on us. Local, state and federal cannabis laws and regulations are constantly changing, and they are subject to evolving interpretations, which could require us to incur substantial costs associated with compliance or to alter one or more of our service offerings. In addition, violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our revenues, profitability, and financial condition. We cannot predict the nature of any future laws, regulations, interpretations or applications, nor can we determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our business. Any change in law or interpretation could have a material adverse effect on our business, financial condition, and results of operations.
If the federal government were to change its practices or were to expand its resources attacking providers in the cannabis industry, such action could have a materially adverse effect on our operations, our customers, or the sales of our products. It is possible that additional Federal or state legislation could be enacted in the future that would prohibit our customers from selling cannabis, and if such legislation were enacted, such customers may discontinue the use of our services. We cannot predict the nature of any future laws, regulations, interpretations or applications, nor can we determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our business.
Due to our involvement in the cannabis industry, we may have a difficult time obtaining the various insurances that are desired to operate our business, which may expose us to additional risk and financial liabilities. Insurance that is otherwise readily available, such as workers’ compensation, general liability, and directors and officer’s insurance, is more difficult for us to find, and more expensive, because we are service providers to companies in the cannabis industry. There are no guarantees that we will be able to find such insurances in the future, or that the cost will be affordable to us. If we are forced to go without such insurances, it may prevent us from entering into certain business sectors, may inhibit our growth, and may expose us to additional risk and financial liabilities.
Participants in the cannabis industry have difficulty accessing the service of banks, which makes it difficult for us to operate. Banks have the responsibility to assure that the funds they receive from businesses are lawfully attained. Since the use of cannabis remains illegal under federal law, most banks will not accept for deposit, funds derived from the sale or distribution of cannabis. Consequently, businesses involved in the cannabis industry are at risk of maintaining banking relationships. An inability to open and maintain bank accounts may make it difficult for us and our customers to do business. The inability for some of our clients to maintain a bank account has resulted in our transporting and holding large sums of cash and exposes us to a greater risk of theft.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
Our executive mailing address is located at 2340 W. Horizon Ridge Parkway, Suite 120, Henderson NV 89052 and our telephone number is (888) 544-3846 (EVIO). Our locations include:
|Medford, OR:||540 E. Vilas Rd, Suite F, Central Point, OR 97502||Leased|
|Tigard, OR:||14775 SW 74th Ave. Tigard, OR 97224||Owned|
|Berkeley, CA||1200 Fifth St, Berkeley, CA 94710||Leased|
|Costa Mesa, CA:||3505 Cadillac, Unit F1, Costa Mesa, CA 92626||Leased|
|Framingham, MA:||40 Speen Street, Suite 301 Framingham, MA 01701||Leased|
|Henderson, NV||2340 W. Horizon Ridge Parkway, Henderson, NV 89052||Leased|
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.
On May 9, 2019, Stephanie Head, a former part-time lab administrator for EVIO Labs Eugene, LLC, filed a wrongful termination lawsuit with the US District Court - District of Oregon, Eugene Division, Case No. 6:19-CV-00681, against EVIO Labs Eugene, LLC, EVIO, Inc. and Lori Glauser. In December, 2018, EVIO Labs Eugene, LLC terminated Stephanie Head because she was not available to work full-time. In February 2019, Ms. Head filed complaint to Oregon Bureau of Labor & Industries (“BOLI”) with allegations that she was discriminated against and unlawfully terminated. In October, 2019 BOLI found substantial evidence of unlawful employment on the basis of protected whistle-blowing, but found no substantial evidence of Ms. Head’s seven other allegations of unlawful employment practice. In April, 2019, BOLI notified EVIO Labs Eugene, LLC that BOLI elected not to pursue the charges further and closed the file. On January 28, 2020, the case was settled for $35,000, $25,000 payable in cash and $10,000 in EVIO Common Stock.
On August 29, 2019, the Company issued FIRSTFIRE GLOBAL OPPORTUNITIES FUND, LLC (“Creditor”) a Promissory Note in the original principal amount of $220,000.00 (the “Note”). The Company failed to timely pay certain sums under the Note and, as a result of the Breach, on or about August 7, 2019, Creditor filed a Complaint - Breach of Promissory Note in the Circuit Court of the 17th Judicial Circuit in and for Broward County, Florida. Since such filing, the Company and Creditor have entered into a Settlement Agreement and Stipulation, pursuant to which the Company has agreed to issue the Creditor 1,000,000 shares of its common stock under 3(a)(10) of the Securities Act of 1933 in settlement for all claims. The settlement was approved by the court on August 27, 2019. The shares were issued on September 6, 2019.
On February 6, 2020, MC CRE Investments, LLC landlord for the Palm Desert location, filed a Breach of Lease Agreement with the Superior Court of the State of California, County of Riverside. EVIO Labs Palm Desert has vacated the space and turned it back over to the landlord. The Company has expensed past due rents and late fees and these items are included in the liabilities in the balance sheet.
On or about March 5, 2020, Paul Tomaso and Jonah Barber beneficiaries for MRX Labs, LLC, filed a Breach of Promissory Note in the original principal amount of $750,000, plus late fees and penalties, with the Circuit Court of the State in Oregon, in Multnomah County against Greenhaus Analytical Labs, LLC. The Company has expensed penalties and late fees and these items are included in the liabilities in the balance sheet.
On or about April 30, 2020, Michele Malaret and Gordon Griswold filed, filed a Breach of Contract in the original principal amount of $500,000, with the Superior Court of California, County of Humboldt. The Company currently recognizes the fully liability on its balance sheet. There is no interest due associated with the note.
Our common stock trades over-the-counter and is quoted on the OTC Market’s Pink Marketplace under the symbol “EVIO.” The table below sets forth the high and low bid prices for our common stock as reflected on the OTC Bulletin Board for the last two fiscal years. Quotations represent prices between dealers, do not include retail markups, markdowns or commissions, and do not necessarily represent prices at which actual transactions were affected.
|Fiscal Year 2019||High||Low|
|Fiscal Year 2018||High||Low|
Holders of Common Equity
As of May 9, 2020, there were approximately 119 holders of record of our common stock. Such number does not include any shareholders holding shares in nominee or “street name”. As of May 9, 2020, there were 85,842,473 shares of common stock issued and outstanding.
Penny Stock Rules
Due to the price of our common stock, as well as the fact that we are not listed on Nasdaq or another national securities exchange, our stock is characterized as a “penny stock” under applicable securities regulations. Our stock therefore is subject to rules adopted by the SEC regulating broker-dealer practices in connection with transactions in penny stocks. The broker or dealer proposing to affect a transaction in a penny stock must furnish his customer a document containing information prescribed by the SEC and obtain from the customer an executed acknowledgment of receipt of that document. The broker or dealer must also provide the customer with pricing information regarding the security prior to the transaction and with the written confirmation of the transaction. The broker or dealer must also disclose the aggregate amount of any compensation received or receivable by him in connection with such transaction prior to consummating the transaction and with the written confirmation of the trade. The broker or dealer must also send an account statement to each customer for which he has executed a transaction in a penny stock each month in which such security is held for the customer’s account. The existence of these rules may have an effect on the price of our stock, and the willingness of certain brokers to effect transactions in our stock.
Pacific Stock Transfer is the transfer agent for our common stock with its business address at 6725 Via Austi Pkwy, Suite 300 Las Vegas, NV 89119 and its telephone number is (702) 433-1979.
Since inception we have not paid any dividends on our common stock. We currently do not anticipate paying any cash dividends in the foreseeable future on our common stock. Although we intend to retain our earnings, if any, to finance the development and growth of our business, our Board of Directors has the discretion to declare and pay dividends in the future
Equity Incentive Plan
The company does not have an effective employee incentive plan.
Recent Sales of Unregistered Securities
During the year ended September 30, 2019, the company entered into the following transactions:
|●||The company issued 838,017 common shares valued at $186,550 for vesting of services.|
|●||The company issued 287,500 common shares $391,980 for vesting of employee services|
|●||The company issued 2,054,887 common shares for the conversion of $687,200 of outstanding principal on convertible notes payable|
|●||The company issued 10,163 common shares for the conversion of $25,111 accrued interest|
|●||The company issued 669,362 common shares for the settlement of $388,000 debenture conversions|
|●||The company issued 31,579 common shares for the settlement of $15,000 of accounts payable|
|●||The company issued 1,415,000 common shares for cash proceeds of $586,000|
|●||The company issued 200,000 common shares professional services of $150,341|
|●||The company issued 532,500 common shares for the conversion of Preferred Series D stock|
|●||The company issued 20,000 common shares for debt issuance costs of $11,760|
All the above securities issued were offered and issued in reliance upon the exemption from registration pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”) and/or Regulation S promulgated thereunder.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain matters discussed herein are forward-looking statements. Such forward-looking statements contained herein involve risks and uncertainties, including statements as to:
|●||our future operating results;|
|●||our business prospects;|
|●||our contractual arrangements and relationships with third parties;|
|●||the dependence of our future success on the general economy;|
|●||our possible financings; and|
|●||the adequacy of our cash resources and working capital.|
These forward-looking statements can generally be identified as such because the context of the statement will include words such as we “believe,” “anticipate,” “expect,” “estimate” or words of similar meaning. Similarly, statements that describe our future plans, objectives or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties which are described in close proximity to such statements and which could cause actual results to differ materially from those anticipated as of the date of this report. Shareholders, potential investors and other readers are urged to consider these factors in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included herein are only made as of the date of this report, and we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the notes thereto, included elsewhere in this report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to those differences include those discussed below and elsewhere in this report, particularly in the “Risk Factors” section.
The Company’s financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, the Company has negative working capital, recurring losses, and does not have an established source of revenues sufficient to cover its operating costs. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plan described in the preceding paragraph and eventually attain profitable operations. The accompanying financial statements do not include any adjustments that may be necessary if the Company is unable to continue as a going concern.
In the coming year, the Company’s foreseeable cash requirements will relate to continual development of the operations of its business, maintaining its good standing and making the requisite filings with the Securities and Exchange Commission, and the payment of expenses associated with operations and business developments. The Company may experience a cash shortfall and be required to raise additional capital.
Historically, it has mostly relied upon private offerings and internally generated funds such as shareholder loans and advances to finance its operations and growth. Management may raise additional capital by retaining net earnings or through future public or private offerings of the Company’s stock or through loans from private investors, although there can be no assurance that it will be able to obtain such financing. The Company’s failure to do so could have a material and adverse effect upon it and its shareholders.
Critical Accounting Policies and Estimates.
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations section discusses our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources.
The Company recognizes revenue from the sale of services in accordance with ASC 606. Revenue is recognized only when the transfer of the promised goods or services to the customer has occurred and recognized in an amount that reflects the consideration to which the Company expects to be entitled to in exchange for those goods and services.
Stock Based Compensation
In accordance with ASC No. 718, Compensation – Stock Compensation (“ASC 718”), the Company measures the cost of stock-based compensation arrangements based on the grant-date fair value and recognizes the cost in the financial statements at the time goods are received or over the period during which employees and non-employees are required to provide services. If the Company cannot estimate reliably the fair value of the goods and services received, the Company shall measure their value indirectly by reference to the fair value of the equity instruments granted. For transactions with employees and others providing similar services, the Company measures the fair value of the services by reference to the fair value of the equity instruments granted. Stock-based compensation arrangements may include stock options, restricted stock plans, performance-based awards, stock appreciation rights and employee stock purchase plans.
The Company utilizes the Black-Scholes simulation model, which was developed for use in estimating the fair value of options. Option-pricing models require the input of highly complex and subjective variables including the expected life of options granted and the expected volatility of the Company’s stock price over a period equal to or greater than the expected life of the options.
While our significant accounting policies are more fully described in notes to our consolidated financial statements appearing elsewhere in this Form 10-K, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our reported financial results and affect the more significant judgments and estimates that we used in the preparation of our financial statements.
RESULTS OF OPERATIONS
|Percentage of Revenue|
|Cost of revenue|
|Total cost of revenue||4,725,855||3,837,288||888,567||124.7||%||114.0||%|
Revenues for the year ended September 30, 2019 were $3,786,815 compared to $3,365,525 for the year ended September 30, 2018. The 19% increase in revenues during the year ended September 30, 2019 is primarily the result of increased testing revenue during the year. This was attributed to recognition of a full year operating results from both Canadian and California operations, off-set by the consolidation of two Oregon laboratories. Cost of revenues for the year ended September 30, 2019 were $3,494,607 compared to $3,837,288 for the year ended September 30, 2018. The 12% increase in the cost of revenue during the year ended September 30, 2019 is the result of the increased direct costs associated with additional labor, lab supplies, rent, equipment repair and maintenance, and depreciation and amortization.
Gross profit for the year ended September 30, 2019 was $(936,040) compared to $(471,763) during the year ended September 30, 2018. Gross profit as a percentage of revenue decreased from -14% during the year ended September 30, 2018 to -25% during the year ended September 30, 2019 primarily due to startup and integration expenses for acquired labs and required relocation, reaccreditation and licensing of EVIO Labs Massachusetts beginning May, 2019.
|Percentage of Revenue|
|Selling, general and administrative||$||6,155,187||$||7,501,788||$||(1,346,601||)||162||%||223||%|
|Depreciation and amortization||234,477||202,873||31,604||6||%||6||%|
|Total Operating Expenses||$||6,389,664||$||7,704,661||$||(1,314,997||)||169||%||229||%|
Total operating expenses during the year ended September 30, 2019 decreased $1,314,997 compared to prior year. Total operating expenses were $6,389,664 compared to $7,704,661 during the year ended September 30, 2018. The reduced costs can be attributed to decreased stock option expense, as well as decreased legal, accounting, and promotion expenses, offset by an increase in bad debt expense.
|Percentage of Revenue|
|Loss on settlement of debt||-||56,093||(56,093||)||0||%||2||%|
|Loss (gain) on change in fair market value of derivative liabilities||366,974||(2,555,350||)||2,922,324||10||%||-76||%|
|Total Other Expenses||$||13,335,635||$||3,759,919||$||9,575,716||352||%||112||%|
Total other expenses were $13,335,635 during the year ended September 30, 2019 compared to $3,759,919 during the year ended September 30, 2018. Interest expense increased by $793,139, which is primarily attributable to the amortization of debt discounts. The impairment loss increase of $5,859,405 compared to prior year relates to impairment of goodwill for Keystone Labs, Greenhaus Analytical Labs, Viridis Analytical and Leaf Detective due to changing outlook of market conditions.
|Percentage of Revenue|
Net loss during the year ended September 30, 2019 was $20,669,033 compared to $11,936,343 during the year ended September 30, 2018. The increase in net loss can be attributed primarily to the increase in total other expenses of $13,355,635 which includes increased impairment loss for Keystone Labs and Greenhaus Analytical Labs and increased loss on change in fair market value of derivative liabilities.
Liquidity and Capital Resources
Year Ended September 30, 2019
The Company had cash on hand of $110,325 as of September 30, 2019, current assets of $982,400 and current liabilities of $13,268,665 creating a working capital deficit of $12,286,265. Current assets consisted of cash totaling $110,325, accounts receivable net of allowances totaling $133,022, prepaid expenses totaling $190,460, other current assets of $9,689 and current portion of a note receivable of $538,904. Current liabilities consisted of accounts payable and accrued liabilities of $3,811,237, client deposits of $108,418, convertible notes payable net of discounts of $3,695,484, current capital lease obligations of $957,673, interest payable of $1,387,642, derivative liabilities of $2,545,735, and current portion of notes payable net of discounts of $762,476.
During the year ended September 30, 2019, the Company used $2,506,654 of cash in operating activities which consisted of a net loss of $20,669,033, non-cash losses of $16,300,966 and changes in working capital of $1,861,413.
Net cash used in investing activities total $353,231 during the year ended September 30, 2019. The Company paid $407,865 for the purchase of equipment and had notes receivable of $761,096 for payments due primarily from Kaycha Holdings for the purchase of Phytatech Note.
During the year ended September 30, 2019, the Company generated cash of $2,186,589 from financing activities. The Company repaid $305,781 of capital lease obligations; received $374,000 of cash from the issuance of convertible debenture, $586,000 from the sale of common stock; $1,270,435 in cash from convertible notes payable, net of original issue discounts and fees, repaid loans payable $(36,629), repaid related party notes payable $ (112,277), and $410,841 proceeds from related party advances.
Subsequent to year ended September 30, 2019, the Company repaid $1,659,341 in convertible notes payable and $525,778 accrued liabilities through conversion into common stock.
The Company did not declare any dividends during the years ended September 30, 2019 or 2018.
As of September 30, 2019 EVIO, Inc. had 43 full time employees and 5 part time employee compared to 57 full time and 1 part-time employee in 2018.
Need for Additional Financing
The Company is uncertain of its ability to generate sufficient liquidity from its operations so the need for additional funding may be necessary. The Company may sell stock and/or issue additional debt to raise capital to accelerate our growth.
Going Concern Uncertainties
In management’s opinion, the Company’s cash position is insufficient to maintain its operations at the current level for the next 12 months. Any expansion may cause the Company to require additional capital until such expansion began generating revenue. It is anticipated that the raise of additional funds will principally be through the sales of our securities. As of the date of this report, additional funding has not been secured and no assurance may be given that we will be able to raise additional funds.
Emerging Growth Company Status
We are an “emerging growth company” as defined under the Jumpstart Our Business Startups Act, commonly referred to as the JOBS Act. We will remain an “emerging growth company” for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our total annual gross revenues exceed $1 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, which would occur if the market value of our ordinary shares that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period.
As an “emerging growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to:
|●||not being required to comply with the auditor attestation requirements of section 404(b) of the Sarbanes-Oxley Act (we also will not be subject to the auditor attestation requirements of Section 404(b) as long as we are a “smaller reporting company,” which includes issuers that had a public float of less than $ 75 million as of the last business day of their most recently completed second fiscal quarter);|
|●||reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and|
|●||exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.|
In addition, Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Under this provision, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. In other words, an “emerging growth company” can delay the adoption of such accounting standards until those standards would otherwise apply to private companies until the first to occur of the date the subject company (i) is no longer an “emerging growth company” or (ii) affirmatively and irrevocably opts out of the extended transition period provided in Securities Act Section 7(a) (2) (B). The Company has elected to take advantage of this extended transition period and, as a result, our financial statements may not be comparable to the financial statements of other public companies. Accordingly, until the date that we are no longer an “emerging growth company” or affirmatively and irrevocably opt out of the exemption provided by Securities Act Section 7(a) (2) (B), upon the issuance of a new or revised accounting standard that applies to your financial statements and has a different effective date for public and private companies, clarify that we will disclose the date on which adoption is required for non-emerging growth companies and the date on which we will adopt the recently issued accounting standard.
Off-balance sheet arrangements
On March 31, 2018, the Company entered into a long-term operating lease requiring monthly payments of $10,275 for a period of 36 months terminating on March 31, 2021.
We have no other significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires lessees to recognize assets and liabilities for most leases. ASU 2016-02 is effective for public entity financial statements for annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early adoption is permitted, including adoption in an interim period. ASU 2016-02 was further clarified and amended within ASU 2018-01, ASU 2018-10, ASU 2018-11 and ASU 2018-20 which included provisions that would provide us with the option to adopt the provisions of the new guidance using a modified retrospective transition approach, without adjusting the comparative periods presented. The Company is currently evaluating ASU 2016-02 and its impact on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment”. The amendments in this update simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. This update is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 31, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing after January 1, 2017. The Company notes that this guidance applies to its reporting requirements and will implement the new guidance accordingly in performing goodwill impairment testing; however, the Company does not believe this update will have a material impact on the consolidated financial statements.
The Company, as a smaller reporting company, as defined by Rule 229.10(f)(1), is not required to provide the information required by this Item.
September 30, 2019 and 2018
TABLE OF CONTENTS
|REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS||F-1|
|Consolidated Balance Sheets||F-2|
|Consolidated Statements of Operations and comprehensive income||F-3|
|Consolidated Statements of Stockholders’ Equity||F-5|
|Consolidated Statements of Cash Flows||F-6|
|Notes to the Consolidated Financial Statements||F-7|
To the shareholders and the board of directors of Evio, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Evio, Inc. as of September 30, 2019 and 2018, the related statements of operations, stockholders’ equity (deficit), and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2019 and 2018, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Substantial Doubt about the Company’s Ability to Continue as a Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 4 to the financial statements, the Company has suffered recurring losses from operations and has a significant accumulated deficit. In addition, the Company continues to experience negative cash flows from operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 4. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/S/ BF Borgers CPA PC
We have served as the Company’s auditor since 2019
May 18, 2020
CONSOLIDATED BALANCE SHEETS
|Accounts receivable, net of allowance of $215,933 and $414,475||133,022||234,178|
|Other current assets||9,689||146,816|
|Note receivable, current portion||538,904||100,000|
|Total current assets||982,400||608,670|
|Right of use assets||2,543,976||-|
|Capital assets, net of accumulated depreciation of $422,570 and $123,854, respectively||1,383,828||411,241|
|Assets not in service||-||455,540|
|Property and equipment, net of accumulated depreciation of $1,089,403 and $520,437, respectively||3,080,425||3,525,772|
|Note receivable, net of current portion||-||1,200,000|
|Prepaid expenses, net of current portion||4,061||63,582|
|Intangible assets, net of accumulated amortization of $1,977,660 and $318,816||-||1,680,569|
|LIABILITIES AND STOCKHOLDERS’ EQUITY|
|Accounts payable and accrued liabilities||$||3,811,237||$||1,546,617|
|Capital lease obligation, current||957,673||677,030|
|Convertible notes payable, net of discounts of $716,714 and $753,557, respectively||3,695,484||1,678,265|
|Loans payable, current, net of discounts of $0 and $119,000, respectively||762,476||643,927|
|Loans payable, related party, current||-|
|Total current liabilities||13,268,665||6,506,787|
|Convertible debentures payable, net of discounts of $3,448,110 and $4,043,836, respectively||1,734,890||1,153,164|
|Capital lease obligation, net of current portion||381,786||148,433|
|Loans payable, net of current portion||657,603||1,193,781|
|Convertible loans payable, related party, net of current portion, net of discounts of $0 and $23,737, respectively||61,263|
|Loans payable, related party, net of current portion, net of discounts of $26,563 and $51,971, respectively||1,560,849||1,348,793|
|Series B Convertible Preferred Stock, Par Value $0.0001; 5,000,000 authorized; 5,000,000 shares issued and outstanding at September 30, 2019 and 2018, respectively||500||500|
|Series C Convertible Preferred Stock, Par Value $0.0001; 500,000 authorized; 500,000 shares issued and outstanding at September 30, 2019 and 2018, respectively||50||50|
|Series D Convertible Preferred Stock, Par Value $0.0001; 1,000,000 authorized; 339,500 and 552,500 shares issued and outstanding at September 30, 2019 and 2018, respectively||34||55|
|Common Stock, Par Value $0.0001, 1,000,000,000 authorized; 29,314,419 and 23,255,411 issued and outstanding at September 30, 2019 and 2018, respectively||2,931||2,326|
|Additional Paid In Capital||26,498,076||21,495,621|
|Other Comprehensive Income||(353,090||)||(263,985||)|
|Total stockholders’ equity||(11,626,682||)||2,008,105|
|Total liabilities and stockholders’ equity||$||8,386,159||$||14,354,960|
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
|Year ended September 30,|
|Cost of revenue|
|Depreciation and amortization||1,231,247||521,992|
|Total cost of revenue||4,725,855||3,837,288|
|Selling, general and administrative||6,155,187||7,501,788|
|Depreciation and amortization||234,477||202,873|
|Total operating expenses||6,389,664||7,704,661|
|Loss from operations||(7,325,704||)||(8,176,424||)|
|Other income (expense)|
|Interest expense, net of interest income||(5,663,242||)||(4,870,103||)|
|Loss on settlement of debt and account payable||-||(56,093||)|
|Gain (loss) on change in fair market value of derivative liabilities||(366,974||)||2,555,350||)|
|Total other income (expense)||(13,335,635||)||(3,759,919||)|
|Income (loss) before income taxes||(20,661,339||)||(11,936,343||)|
|Provision for income taxes (benefit)||7,694|
|Gain (loss) attributable to non-controlling interest||(2,120,312||)||(302,252||)|
|Net loss attributable to EVIO, Inc.||$||(18,548,721||)||$||(11,634,091||)|
|Basic and diluted loss per common share||$ (0.69||)||$||(0.70||)|
|Weighted average common shares outstanding||26,887,932||16,548,473|
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Comprehensive Income
|Year ended September 30,|
|Other comprehensive income|
|Foreign currency translation adjustment||(89,105||)|
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Changes in Stockholders’ Equity
|Series D Preferred Stock||Common Stock||Stock|
|Balance, September 30, 2017||5,000,000||$||500||500,000||$||50||832,500||$||83||10,732,922||$||1,073||$||-||$||7,657,982||$||(7,592,371||)||$||-||$||67,317||$||158,124||$||225,441|
|Net income (loss)||-||-||-||-||-||-||-||-||-||-||(11,634,091||)||-||(11,634,091||)||(302,252||)||(11,936,343||)|
|Change in foreign currency translation||-||-||-||-||-||-||-||-||-||-||-||(263,985||)||(263,985||)||-||(263,985||)|
|Issuance of common stock in connection with the conversion of Series D preferred stock||-||-||-||-||(280,000||)||(28||)||700,000||70||-||(42||)||-||-||-||-||-|
|Issuance of common stock in connection with sales made under private offerings||-||-||-||-||-||-||2,561,392||256||-||2,041,246||-||-||2,041,502||-||2,041,502|
|Issuance of common stock in connection with the exercise of common stock purchase warrants||-||-||-||-||-||-||13,333||1||-||1,999||-||-||2,000||-||2,000|
|Issuance of common stock as compensation to employees, officers and/or directors||-||-||-||-||-||-||478,500||48||-||2,532,000||-||-||2,532,048||-||2,532,048|
|Issuance of common stock in exchange for consulting, professional and other services provided||-||-||-||-||-||-||301,250||30||-||278,758||-||-||278,788||-||278,788|
|Issuance of common stock in satisfaction of debt issuances costs||-||-||-||-||-||-||670,271||67||-||1,414,840||-||-||1,414,907||-||1,414,907|
|Issuance of common stock in connection with the settlement of accounts payable||-||-||-||-||-||-||37,500||4||-||18,746||-||-||18,750||-||18,750|
|Issuance of common stock in connection with the settlement of notes payable||-||-||-||-||-||-||324,000||32||-||161,968||-||-||162,000||-||162,000|
|Issuance of common stock in connection with the conversion of loans payable||-||-||-||-||-||-||4,790,693||480||-||2,755,019||-||-||2,755,499||-||2,755,499|
|Issuance of common stock in connection with the conversion of debentures||-||-||-||-||-||-||2,309,997||231||-||1,385,769||-||-||1,386,000||-||1,386,000|
|Issuance of common stock in connection with the conversion of related party notes payable||-||-||-||-||-||-||125,000||13||-||62,488||-||-||62,501||-||62,501|
|Issuance of common stock in connection with the conversion of interest payable||-||-||-||-||-||-||210,553||21||-||114,771||-||-||114,792||-||114,792|
|Reclassifcation of derivative liability to additional paid-in capital||-||-||-||-||-||-||-||-||-||2,342,112||-||-||2,342,112||-||2,342,112|
|Recognition of beneficial conversion features related to convertible debt instruments||-||-||-||-||-||-||-||-||-||727,965||-||-||727,965||-||727,965|
|Acquisition of equity interests in subsidiaries||-||-||-||-||-||-||-||-||-||-||-||-||-||2,078,762||2,078,762|
|Balance, September 30, 2018||5,000,000||$||500||500,000||$||50||552,500||$||55||23,255,411||$||2,326||$||-||$||21,495,621||$||(19,226,462||)||$||(263,985||)||$||2,008,105||$||1,934,634||$||3,942,739|
|Net income (loss)||-||-||-||-||-||-||-||-||-||-||(18,548,721||)||-||(18,548,721||)||(2,120,312||)||(20,669,033||)|
|Change in foreign currency translation||-||-||-||-||-||-||-||-||-||-||-||(89,105||)||(89,105||)||-||(89,105||)|
|Issuance of common stock in connection with the conversion of Series D preferred stock||-||-||-||-||(213,000||)||(21||)||532,500||53||-||(32||)||-||-||-||-||-|
|Issuance of common stock in connection with sales made under private offerings||-||-||-||-||-||-||1,415,000||141||-||585,859||-||-||586,000||-||586,000|
|Issuance of common stock as compensation to employees, officers and/or directors||-||-||-||-||-||-||287,500||29||-||397,951||-||-||397,980||-||397,980|
|Issuance of common stock in exchange for consulting, professional and other services provided||-||-||-||-||-||-||1,038,017||104||-||336,787||-||-||336,891||-||336,891|
|Issuance of common stock in connection with the settlement of accounts payable||-||-||-||-||-||-||31,579||3||-||14,997||-||-||15,000||-||15,000|
|Issuance of common stock in connection with the conversion of loans payable||-||-||-||-||-||-||2,054,887||205||-||686,995||-||-||687,200||-||687,200|
|Issuance of common stock in connection with the conversion of debentures||-||-||-||-||-||-||669,362||67||-||387,933||-||-||388,000||-||388,000|
|Issuance of common stock in connection with the conversion of interest payable||-||-||-||-||-||-||10,163||1||-||25,109||-||-||25,110||-||25,110|
|Issuance of common stock purchase warrants in satisfaction of debt issuances costs||-||-||-||-||-||-||20,000||2||-||11,758||-||-||11,760||-||11,760|
|Recognition of beneficial conversion features related to convertible debt instruments||-||-||-||-||-||-||-||-||-||1,844,834||-||-||1,844,834||-||1,844,834|
|Stock based compensation related to employee stock options||-||-||-||-||-||-||-||-||-||710,264||-||-||710,264||-||710,264|
|Balance, September 30, 2019||5,000,000||$||500||500,000||$||50||339,500||$||34||29,314,419||$||2,931||$||-||$||26,498,076||$||(37,775,183||)||$||(353,090||)||$||(11,626,682||)||$||(185,678||)||$||(11,812,360||)|
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|Year Ended September 30,|
|Cash flows from operating activities|
|Adjustments to reconcile net loss to net cash used in operating activities:|
|Amortization of Debt Discount||3,713,299||4,359,074|
|Common stock issued in exchange for fees and services||348,651||-|
|Default penalties and other covenant adjustments on convertible debentures||491,896||-|
|Depreciation and amortization expense||1,465,724||724,865|
|Impairment of goodwill and intangible assets||7,255,724||1,367,813|
|Loss on disposal of assets||64,095||-|
|Loss on settlement of accounts payable||-||-|
|Loss on settlement of debt||63,651||52,343|
|Provision for doubtful accounts||1,422,708||309,116|
|Stock based compensation||1,108,244||2,810,836|
|(Gain) loss on derivative liability||366,974||(2,555,350||)|
|Changes in operating assets and liabilities:|
|Other current asset||137,128||(245,885||)|
|Accounts payable and accrued liabilities||2,280,801||387,204|
|Operating lease right of use assets||50,750||-|
|Customer deposits and deferred revenue||(254,667||)||23,980|
|Net cash used in operating activities||(2,506,654||)||(4,377,645||)|
|Cash flows from investing activities|
|Net cash paid in acquisitions of subsidiaries||-||(2,825,889||)|
|Purchase of equipment||(407,865||)||(1,395,450||)|
|Net cash used in investing activities||353,231||(4,221,339||)|
|Cash flows from financing activities|
|Repayments of capital leases||(305,781||)||(199,568||)|
|Proceeds from issuance of convertible debenture||374,000||6,136,120|
|Proceeds from exercise of common stock warrants||-||2,000|
|Proceeds from issuance of common stock||586,000||2,041,501|
|Proceeds from convertible notes, net of original issue discounts and fees||1,270,435||2,163,750|
|Payment on loan payable||(36,629||)||(1,114,331||)|
|Proceeds from related party advances||410,841||155,066|
|Payments on notes payable - related party||(112,277||)||(449,800||)|
|Net cash provided by financing activities||2,186,589||8,734,738|
|Effect of foreign currency translation adjustment||(4,576||)||(175,031||)|
|Net cash increase for period||28,590||(39,277||)|
|Cash balance, beginning of period||81,735||121,013|
|Cash balance, end of period||$||110,325||$||81,736|
|Supplemental disclosure of cash flow information:|
|Cash paid for interest||$||67,370||$||230,424|
|Cash paid for income tax||$||-||$||-|
|Supplemental disclosure of non-cash investing and financing activities:|
|Conversion of convertible note and accrued interest into common stock||$||1,100,310||$||4,256,291|
|Reclassification of derivative liability to additional paid in capital||$||0||$||2,342,112|
|Settlement of account payable for common stock||$||15,000||$||18,750|
|Common stock issued for settlement of note payable||$||0||$||162,000|
|Common stock issued for settlement of related party note payable||$||0||$||62,500|
|Conversion of Series D Preferred stock to common stock||$||0||$||70|
|Debt discount recorded on convertible notes and debentures payable upon initial measurement of derivative liability||$||997,483||$||6,318,324|
|Debt discounts recorded for original issue discounts on convertible debentures||$||0||$||599,052|
|Debt discounts recorded for beneficial conversion features on convertible debentures and notes payable||$||1,844,834||$||-|
|Acquisition of C3 Labs through issuance of note payable and convertible note payable||$||0||$||600,000|
|Sale and assumption of note payable and accrued interest||$||577,588||$||-|
|Equipment financed through capital leases||$||829,273||$||466,195|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND NATURE OF ACTIVITIES
EVIO, Inc., a Colorado corporation and its subsidiaries provide analytical testing and advisory services to the emerging legalized cannabis industry. EVIO, Inc. was originally incorporated in the State of New York, December 12, 1977 under the name 3171 Holding Corporation. On February 22, 1979, the name was changed to Electronomic Industries Corp. and on February 23, 1983 the name was changed to Quantech Electronics Corp. The Company was reincorporated in the State of Colorado on December 15, 2003. On August 29, 2014, the Company completed a reverse merger with Signal Bay Research, Inc., a Nevada Corporation, and assumed its operations. In September 2014, the Company changed its name from Quantech Electronics Corp. to Signal Bay, Inc. then to EVIO, INC. in August 2018. The Company has selected September 30 as its fiscal year end. The Company is domiciled in the State of Colorado, and its corporate headquarters are located in Henderson, Nevada.
As a part of and prior to the consummation of the reverse merger, William Waldrop and Lori Glauser, principals of Signal Bay Research, Inc., purchased 80% of the issued and outstanding common stock from WB Partners. The merger between the Company and Signal Bay Research was finalized and closed contemporaneously with the share purchase. As part of this share purchase, Mr. Waldrop and Ms. Glauser became the officers and directors of the Company. Immediately after the reverse, WB Partners owned less than 5% of the common stock. The company filed a Form 10-12G on November 25, 2014 and was determined to be a shell company by the SEC as per the Form 10-12G/A which went effective on January 24, 2015. On January 29, 2015, the company filed an 8-K stating it entered into a material agreement and was no longer a shell company.
After the reverse merger, Signal Bay Research, Inc. continues to operate as a wholly owned subsidiary providing compliance, research and advisory services for Signal Bay, Inc.
Signal Bay Services was formed on January 25, 2015, as the management services division of EVIO.
On September 17, 2015, EVIO entered into a share exchange agreement with CR Labs, Inc., an Oregon Corporation, pursuant to which the Company acquired 80% of the outstanding common stock of CR Labs, Inc.
EVIO Inc. was formed on April 4, 2016 to become the holding company for all laboratory operations.
EVIO Labs Eugene was formed on May 23, 2016, as a wholly owned subsidiary of EVIO Inc. Subsequently on May 24, 2016, EVIO Labs Eugene acquired all of the assets of Oregon Analytical Services, LLC, inclusive of client lists, equipment, trade names and personnel.
On June 1, 2016, EVIO Inc. entered into a share purchase agreement to purchase 80% of the outstanding common stock of Smith Scientific Industries, Inc. d/b/a Kenevir Research in Medford, OR.
On October 19, 2016, the Company entered into a Membership Interest Purchase Agreement to purchase 100% of the ownership of GreenHaus Analytical Labs, LLC.
On October 26, 2016, the Company entered into an Asset Purchase Agreement with Green Style Consulting, LLC which was closed on November 1, 2016.
The Company entered into a Membership Interest Purchase Agreement with Viridis Analytics MA, LLC which was closed on August 1, 2018.
On December 29, 2018, the Company entered into a Membership Purchase Agreement to purchase 60% of the outstanding shares of C3 Labs, LLC which closed On January 1, 2019.
On June 27, 2018, Greenhaus Analytical Labs LLC, a wholly-owned subsidiary of EVIO, Inc. entered into a Purchase and Sale Agreement with Michael G. Myers for the property located at 14775 SW 74th Ave., Tigard, OR 97224.
On June 27, 2018, Greenhaus Analytical Labs, LLC, a wholly-owned subsidiary of EVIO, Inc., entered into an Asset Purchase Agreement with MRX Labs LLC which closed on July 5, 2019.
On April 29, 2018, the Company entered into an Asset Purchase Agreement with Leaf Detective, LLC which was closed on the same date.
On May 2, 2018, the Company entered into a Stock Purchase Agreement with Keystone, Labs, Inc. to purchase 50% of the outstanding shares of Keystone Labs which was closed on the same date.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
A summary of significant accounting policies of EVIO, INC. (the “Company”) is presented to assist in understanding the Company’s financial statements. The accounting policies presented in these footnotes conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the accompanying financial statements. These financial statements and notes are representations of the Company’s management who are responsible for their integrity and objectivity.
Principles of Consolidation
The Company prepares its consolidated financial statements on the accrual basis of accounting. The accompanying consolidated financial statements include the accounts of the Company and its wholly and partially owned subsidiaries, all of which have a fiscal year end of September 30. All intercompany accounts, balances and transactions have been eliminated in the consolidation.
The Company consolidates its subsidiaries in accordance with ASC 810, and specifically ASC 810-10-15-8 which states, the usual condition for a controlling financial interest is ownership of a majority voting interest, and, therefore, as a general rule ownership by one reporting entity, directly or indirectly, or over 50% of the outstanding voting shares of another entity is a condition pointing toward consolidation.”
Cash and Cash Equivalents
All cash is maintained with major financial institutions. Deposits may exceed the amount of insurance provided on such deposits. For the purposes of the cash flows, the Company considers all short-term debt securities purchased with original maturity of three months or less to be cash equivalents. The Company did not have any cash equivalents as of September 30, 2019 or 2018.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at their original invoice amounts. We regularly review collectability and establish an allowance for uncollectible amounts as necessary based on our experience with historical collectability. Management recognized an allowance for uncollectible amounts, of $215,933 and $414,475 for 2019 and 2018, respectively.
The Company accounts investments for notes receivable in accordance with ASC 320. On September 6, 2017, the Company entered in a note receivable with an unrelated entity for $1,300,000. The note is due on September 6, 2024 and carries interest at a rate of 8% per annum. The note requires minimum principal payments of $100,000 plus accrued interest on each anniversary date with the unpaid principal and interest being due on September 6, 2024. The note was purchased in May 2019, by an unrelated third party. The balance on the purchased note as of September 30, 2019 was $538,904. The Company evaluated the collectability of the note receivable as of September 30, 2019 and determined the full balance is collectible and no reserve for write off was recorded.
Goodwill and Other Intangible Assets
Goodwill and indefinite-lived intangible assets are not amortized but are evaluated for impairment annually or more often if indicators of a potential impairment are present. Our annual impairment tests are conducted at the beginning of the fourth quarter. We use a two-step process to quantitatively evaluate goodwill for impairment. In the first step, we compare the fair value of each reporting unit with the carrying amount of the reporting unit, including goodwill. If the estimated fair value of the reporting unit is less than the carrying amount of the reporting unit, we complete a second step to determine the amount of the goodwill impairment that we should record. In the second step, we determine an implied fair value of the reporting unit’s goodwill by allocating the reporting unit’s fair value to all of its assets and liabilities other than goodwill (including any unrecognized intangible assets). We compare the resulting implied fair value of the goodwill to the carrying amount and record an impairment charge for the difference. We test individual indefinite-lived intangible assets by comparing the estimated fair value with the book values of each asset.
The Company recognizes an acquired intangible apart from goodwill whenever the intangible arises from contractual or other legal rights, or whenever it can be separated or divided from the acquired entity and sold, transferred, licensed, rented or exchanged, either individually or in combination with a related contract, asset or liability. Such intangibles are amortized on a straight-line basis over their estimated useful lives unless the estimated useful life is determined to be indefinite. The Company’s intangible assets consist of client lists (amortized over five years), assembled workforce (amortized over five years), websites and domain names (amortized over 15 years) and testing licenses (amortized over 5 years).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company performed its annual fair value assessment at September 30, 2019, on its subsidiaries with material goodwill and intangible asset amounts on their respective balance sheets and determined that carrying value of its goodwill and Intangible assets on our financial statements exceeds its fair value. As such, the Company recorded an impairment charge to its goodwill of $7,255,724. The impairment charge included $1,569,911 for Greenhaus Analytical Labs, $477,900 for EVIO Labs Humboldt, $3,264,623 for Keystone Labs, $784,814 for EVIO Labs Berkeley, $441,903 for Smith Scientific, and $643,729 for EVIO Labs MA due to changing outlook of market conditions.
Business Combinations. We have adopted the amendment to ASC 805 for the accounting for business acquisitions both during the period of the acquisition and in subsequent periods. Among the more significant changes in the accounting for acquisitions are the following:
|●||Contingent consideration is recorded at fair value as an element of purchase price with subsequent adjustments recognized in operations.|
|●||Subsequent decreases in valuation allowances on acquired deferred tax assets are recognized in operations after the measurement period.|
|●||Upon gaining control of an entity in which an equity method or cost basis investment was held, the carrying value of that investment is adjusted to fair value with the related gain or loss recorded in earnings.|
Certain amounts in the 2018 financial statements have been reclassified to conform to the 2019 financial presentation. These reclassifications have no impact on net loss.
Use of Estimates
The preparation of financial statements in accounting principles generally accepted in the United States of America 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 revenues and expenses during the reporting period. A change in managements’ estimates or assumptions may have a material impact on the financial condition and results of operations of the Company during the period in which such changes occurred. Actual results could differ from those estimates. The Company’s financial statements reflect all adjustments that management believes are necessary for the fair presentation of their financial condition and results of operations for the periods presented.
In 2019 the Company recognizes revenue under ASC 606, Revenue from Contracts with Customers. The core principle of the new revenue standard is that a company should 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. The following five steps are applied to achieve that core principle:
|●||Step 1: Identify the contract with the customer|
|●||Step 2: Identify the performance obligations in the contract|