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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2022

OR

 

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

For the transition period from _______ to _______

 

Commission file number 000-54730

 

ITEM 9 LABS CORP.

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of

incorporation or organization)

96-0665018

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

 

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

(Address of principal executive offices and zip code)

 

1-833-867-6337

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2

 

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

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes No

 

As of August 15, 2022, there were 96,264,406 shares of the issuer's common stock, $0.0001 par value per share, outstanding. 

 

 

 
 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Certain information included in this Quarterly Report on Form 10-Q and other filings of the Registrant under the Securities Act of 1933, as amended (the "Securities Act"), and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as well as information communicated orally or in writing between the dates of such filings, contains or may contain "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking statements in this Quarterly Report on Form 10-Q, including without limitation, statements related to our plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from expected results. Among these risks, trends and uncertainties are the availability of working capital to fund our operations, the competitive market in which we operate, the efficient and uninterrupted operation of our computer and communications systems, our ability to generate a profit and execute our business plan, the retention of key personnel, our ability to protect and defend our intellectual property, the effects of governmental regulation, and other risks identified in the Registrant's filings with the Securities and Exchange Commission from time to time.

 

In some cases, forward-looking statements can be identified by terminology such as "may," "will," "should," "could," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of such terms or other comparable terminology. Although the Registrant believes that the expectations reflected in the forward-looking statements contained herein are reasonable, the Registrant cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither the Registrant, nor any other person, assumes responsibility for the accuracy and completeness of such statements. The Registrant is under no duty to update any of the forward-looking statements contained herein after the date of this Quarterly Report on Form 10-Q.

 

 

 
 

 

 

 

ITEM 9 LABS CORP.

FORM 10-Q

JUNE 30, 2022

 

 

INDEX

 

    Page
Part I - Financial Information   
      
Item 1. Financial Statements F-1 
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 25 
Item 3. Quantitative and Qualitative Disclosures about Market Risk 31 
Item 4. Controls and Procedures 31 
      
Part II - Other Information 33 
      
Item 1. Legal Proceedings 33 
Item 1A. Risk Factors 33 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 33 
Item 3. Defaults Upon Senior Securities 33 
Item 4. Mine Safety Disclosures 33 
Item 5. Other Information 33 
Item 6. Exhibits 34 
      
Signatures 35 
      
Certifications   

 

 

 
 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

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

 

 

 F-1 

 

ITEM 9 LABS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

    June 30,    Se`ptember 30, 
    2022    2021 
    (unaudited)      
ASSETS          
Current Assets:          
Cash and cash equivalents  $441,662   $1,454,460 
Accounts receivable, net   591,504    1,448,280 
Inventory   4,130,779    6,391,351 
Prepaid expenses and other current assets   527,655    802,558 
Total current assets   5,691,600    10,096,649 
           
Property and equipment, net   26,307,212    10,877,848 
Right of use asset   1,001,192    156,938 
Construction escrow deposits   8,586,463    17,744,913 
Deposits   86,604    600,000 
Other assets   1,398,720    608,874 
Intangible assets, net   19,222,666    18,659,095 
Goodwill   58,233,386    58,064,816 
Total Assets  $120,527,843   $116,809,133 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current Liabilities:          
Accounts payable  $5,819,455   $3,759,818 
Accrued payroll and payroll taxes   1,846,614    2,678,694 
Accrued interest   2,011,369    1,391,766 
Accrued expenses   1,514,448    1,169,776 
Deferred revenue, current portion   214,994    119,992 
Notes payable, current portion, net of discounts   24,532,509    4,536,002 
Income tax payable   7,948       
Operating lease liability, current portion   256,471    56,592 
Convertible notes payable, net of discounts   3,266,179    1,277,394 
Total current liabilities   39,469,987    14,990,034 
           
Deferred revenue, net of current portion   345,855    655,851 
Operating lease liability, net of current portion   756,604    104,406 
Notes payables, net of current portion and discounts   1,448,860    14,957,399 
Total liabilities   42,021,306    30,707,690 
           
Commitments and Contingencies          
           
Stockholders' Equity:          
Common stock, par value $.0001 per share, 2,000,000,000 shares authorized; 108,562,706 and 107,074,417 shares issued and 96,262,706 and 94,774,417 shares outstanding at June 30, 2022 and September 30, 2021, respectively   10,856    10,707 
Additional paid-in capital   138,499,394    133,414,830 
Accumulated deficit   (46,567,663)   (33,874,094)
Treasury stock   (13,450,000)   (13,450,000)
           
Total Item 9 Labs Corp. Stockholders' Equity   78,492,587    86,101,443 
Non-controlling interest   13,950       
           
Total Stockholders' Equity   78,506,537    86,101,443 
           
Total Liabilities and Stockholders' Equity  $120,527,843   $116,809,133 

 

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

 

 

 F-2 

 

ITEM 9 LABS CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

   For the three months ended  For the three months ended  For the nine months ended  For the nine months ended
   June 30, 2022  June 30, 2021  June 30, 2022  June 30, 2021
Revenues, net  $4,931,322   $6,693,061   $17,755,519   $15,843,256 
Cost of revenues   3,341,367    3,802,447    11,089,560    8,531,623 
Gross profit   1,589,955    2,890,614    6,665,959    7,311,633 
                     
Operating expenses                    
     Professional fees and outside services   993,452    442,483    2,207,618    1,350,196 
     Payroll and employee related expenses   2,683,722    1,592,673    7,889,672    4,014,819 
     Sales and marketing   207,213    262,473    1,260,551    389,819 
     Depreciation and amortization   439,052    112,159    1,320,664    360,601 
     Other operating expenses   1,114,323    728,100    2,747,158    1,292,154 
     Provision for (recovery of) bad debt               (5,000)      
Total expenses   5,437,762    3,137,888    15,420,663    7,407,589 
                     
Loss from operations   (3,847,807)   (247,274)   (8,754,704)   (95,956)
                     
Other income (expense)                    
     Interest expense   (1,625,155)   (629,265)   (3,932,918)   (1,806,019)
     Other income         42,634    318    42,634 
Total other income (expense), net   (1,625,155)   (586,631)   (3,932,600)   (1,763,385)
                     
Net loss, before income tax provision (benefit)   (5,472,962)   (833,905)   (12,687,304)   (1,859,341)
                     
Income tax provision (benefit)   4,624          7,948       
                     
Net loss   (5,477,586)   (833,905)   (12,695,252)   (1,859,341)
Less: Net loss attributable to non-controlling interest   (7,109)         (1,683)      
                     
Net loss attributable to Item 9 Labs Corp.  $(5,470,477)  $(833,905)  $(12,693,569)  $(1,859,341)
                     
Basic net income (loss) per common share  $(0.06)  $(0.01)  $(0.13)  $(0.03)
                     
Basic weighted average common shares outstanding   96,162,616    92,209,521    95,446,846    72,115,022 
                     
Diluted net income (loss) per common share   (0.06)   (0.01)   (0.13)   (0.03)
                     
Diluted weighted average common shares outstanding   96,162,616    92,209,521    95,446,846    72,115,022 

 

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

 

 

 

 F-3 

 

ITEM 9 LABS CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

THREE AND NINE MONTHS ENDED JUNE 30, 2022 AND 2021

 

                       
   Item 9 Labs Corp. Equity      
         Additional           Non-   
   Common Stock  Paid-in  Treasury Stock  Accumulated  Controlling   
   Shares  Amount  Capital  Shares  Amount  (Deficit)  Interest  Total
Balance at September 30, 2020   68,336,113   $6,834   $44,426,737    (12,300,000)  $(13,450,000)  $(22,968,322)  $     $8,015,249 
                                         
Stock issued for cash, net   6,813,206    681    5,790,544    —                        5,791,225 
Issuance of shares for services   111,765    11    163,225    —                        163,236 
Stock based compensation   —            304,672    —                        304,672 
Net loss   —                  —            (1,074,456)         (1,074,456)
Balance at December 31, 2020   75,261,084    7,526    50,685,178    (12,300,000)   (13,450,000)   (24,042,778)         13,199,926 
                                         
Stock issued for cash, net   8,433,437    843    7,167,740    —                        7,168,583 
Stock issued for acquisition   19,080,000    1,908    64,998,092    —                        65,000,000 
Warrants issued for acquisition   —            51,081,066    —                        51,081,066 
Stock to be issued for convertible notes   1,335,000    134    (134)   —                           
Warrants issued with convertible notes   —            926,198    —                        926,198 
Beneficial conversion features   —            428,802    —                        428,802 
Stock based compensation   —            304,672    —                        304,672 
Net income   —                  —            49,020          49,020 
Balance at March 31, 2021   104,109,521    10,411    175,591,614    (12,300,000)   (13,450,000)   (23,993,758)         138,158,267 
                                         
Stock issued for cash, net   400,000    40    339,960    —                        340,000 
Adjustment to acquisition price, warrants   —            (2,359,063)   —                        (2,359,063)
Stock based compensation   —            304,672    —                        304,672 
Net loss   —                  —            (833,905)         (833,905)
Balance at June 30, 2021   104,509,521   $10,451   $173,877,183    (12,300,000)  $(13,450,000)  $(24,827,663)  $     $135,609,971 
                                         
Balance at September 30, 2021   107,074,417   $10,707   $133,414,830    (12,300,000)  $(13,450,000.00)  $(33,874,094)  $     $86,101,443 
Stock issued for debt inducement   142,365    14    128,348    —                        128,362 
Warrants issued with debt   —            574,239    —                        574,239 
Beneficial conversion feature   —            470,047    —                        470,047 
Issuance of shares for services   16,666    2    25,830    —                        25,832 
Stock based compensation   —            507,294    —                        507,294 
Stock issued on exercise of options   9,896    1    (1)   —                           
Net loss   —                  —            (3,345,014)         (3,345,014)
Balance at December 31, 2021   107,243,344    10,724    135,120,587    (12,300,000)   (13,450,000)   (37,219,108)         84,462,203 
                                         
Stock issued for cash, net   278,000    28    288,813    —                        288,841 
Stock issued for acquisition   69,892    7    64,993    —                        65,000 
Stock issued for licenses   300,000    30    335,970    —                        336,000 
Stock issued for debt inducement   25,000    2    24,998    —                        25,000 
Beneficial conversion feature   —            25,000    —                        25,000 
Issuance of shares for services   335,159    34    328,466    —                        328,500 
Stock based compensation   —            1,091,560    —                        1,091,560 
Stock issued on exercise of options   18,033    2    (2)   —                           
Non-controlling interest   —                  —                  15,633    15,633 
Net income (loss)   —                  —            (3,878,078)   5,426    (3,872,652)
Balance at March 31, 2022   108,269,428    10,827    137,280,385    (12,300,000)   (13,450,000)   (41,097,186)   21,059    82,765,085 
                                         
Stock issued for cash, net   263,313    26    254,311    —                        254,337 
Issuance of shares for services   29,965    3    30,017    —                        30,020 
Stock based compensation   —            934,681    —                        934,681 
Net loss   —                  —            (5,470,477)   (7,109)   (5,477,586)
Balance at June 30, 2022   108,562,706    10,856    138,499,394    (12,300,000)   (13,450,000)   (46,567,663)   13,950    78,506,537 

 

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

 

 

 

 F-4 

 

ITEM 9 LABS CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   For the nine months ended  For the nine months ended
   June 30, 2022  June 30, 2021
Operating Activities:          
Net loss  $(12,695,252)  $(1,859,341)
Adjustments to reconcile net loss to net cash used in operating activities:          
     Depreciation   217,363    100,535 
     Amortization of intangible assets   1,103,301    260,066 
     Amortization of right of use asset   89,844    39,818 
     Amortization of debt discounts   2,311,783    565,021 
     Common stock issued for services   498,983    163,236 
     Stock based compensation expense   2,533,535    914,016 
     Recovery of bad debt   (5,000)      
     Loss on disposal of fixed assets   10,841       
Changes in operating assets and liabilities:          
     Accounts receivable   856,776    (1,703,092)
     Inventory   2,276,205    (6,348,573)
     Prepaid expenses and other assets   (339,994)   (192,292)
     Deposits   (86,604)      
     Accounts payable   2,107,137    524,088 
     Accrued payroll and payroll taxes   (832,080)   (114,703)
     Income tax payable   7,948       
     Accrued interest   542,841    643,068 
     Accrued expenses   (316,760)   147,868 
     Deferred revenue   (214,994)   22,844 
     Operating lease liability   (82,021)   (39,818)
Net Cash Used in Operating Activities   (2,016,148)   (6,877,259)
           
Investing Activities:          
     Deposit on acquisition         (1,685,368)
     Cash paid for acquisition   (140,726)      
     Purchases of property, equipment and construction in progress   (2,918,584)   (2,263,388)
     Cash received for note receivable   5,000    5,000 
     Cash received from construction escrow accounts   816,227       
     Cash acquired in acquisition   6,143    94,596 
     Cash paid to acquisition escrow accounts   (406,932)      
     Capitalized license fees         (2,790)
     Purchase of license   (1,130,872)      
Net Cash Used in Investing Activities   (3,769,744)   (3,851,950)
           
Financing Activities:          
     Proceeds from the sale of common stock   555,911    13,298,965 
     Costs for sale of common stock   (12,733)      
     Payment of debt discount   (50,750)      
     Proceeds from the issuance of debt   7,282,763    1,355,000 
     Payment of debt   (3,002,097)   (3,712,541)
Net Cash Provided by Financing Activities   4,773,094    10,941,424 
           
Net Increase (Decrease) in Cash   (1,012,798)   212,215 
           
Cash and cash equivalents- Beginning of Period   1,454,460    84,677 
           
Cash and cash equivalents - End of Period  $441,662   $296,892 
           
Supplemental disclosure of cash flow information:          
Interest paid in cash  $3,855,724   $597,930 
Income taxes paid in cash  $     $   
           
Supplemental disclosure of non-cash investing and financing activities:          
Stock issued for acquisitions  $65,000   $65,000,000 
Stock issued for acquisition of a license  $336,000   $   
Accrued interest transferred to debt  $1,762   $160,590 
Warrants issued for debt and acquisition  $574,239   $49,648,201 
Stock issued for debt  $223,214   $   
Non-controlling interest  $15,633   $   
Stock issuance costs paid in stock  $89,645   $   
Fixed assets purchased with debt  $     $50,914 
Debt issued for acquisition of a license  $200,000   $   
Debt proceeds used to pay debt discounts  $80,000   $   
Land purchased with escrow funds and deposit  $3,000,000   $   
Stock issued to pay accounts payable and prepay expenses  $292,500   $   
Operating lease right of use asset and liability  $934,098   $   
Beneficial conversion feature on convertible debt  $495,047   $428,802 
Construction in progress paid with escrow funds  $6,426,063   $   
Accrued debt discount fees  $75,000   $   
Debt discount amortization capitalized to construction in progress  $2,620,476   $   
Accrued liabilities capitalized in construction in progress  $612,158   $   
Amortized debt discount capitalized in construction in progress  $2,620,476   $   

 

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

 

 

 F-5 

 

ITEM 9 LABS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

Description of Business

 

Item 9 Labs Corp. ("Item 9 Labs" or, including its subsidiaries, the "Company"), formerly Airware Labs Corp., is a Delaware corporation. The Company was incorporated under the laws of the State of Delaware on June 15, 2010 as Crown Dynamics Corp.

 

Item 9 Labs is a holding company, investing in cannabis and cannabis-related businesses. Its subsidiaries currently compete in two different market segments: (1) production of cannabis and cannabis-derived products and technologies through its Item 9 Labs brand (“Cultivation”), which is currently distributed though out the State of Arizona in licensed medical and adult-use dispensaries; and (2) sale of medical and adult-use cannabis dispensary franchises under its franchise brand “Unity Rd.” (“Franchising”).

 

In March 2021, the Company closed on the acquisition of OCG, Inc, dba Unity Rd, a dispensary franchisor. The transaction was structured as a reverse triangular merger, with the effect of OCG, Inc. becoming a wholly owned subsidiary of the Company. Unity Rd has agreements with more than twenty (20) entrepreneurial groups to open more than thirty (30) Unity Rd retail dispensary locations in twelve (12) states. The majority of the locations are in the licensing process. We currently have one franchisee operating in Boulder, Colorado. Unity Rd will be the vehicle to bring Item 9 Labs products across the United States and internationally, while keeping dispensaries locally owned and operated, empowering entrepreneurs to operate their business and contribute to their local communities. As the Unity Rd dispensaries achieve sufficient market penetration, Item 9 Labs aims to offer its products in those locations to expand the distribution footprint of its premium product offerings.

 

In March 2020, the World Health Organization categorized Coronavirus Disease 2019 ("COVID-19") as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The extent of the impact of the COVID-19 outbreak on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, its impact on our customers and vendors, and the range of governmental and community reactions to the pandemic, which are uncertain and cannot be fully predicted at this time.

 

Principles of Consolidation

 

The accompanying condensed consolidated financial statements of the Company as of June 30, 2022 have been prepared by us without audit pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and do not include all of the information and notes necessary for a presentation of financial position and results of operations in accordance with US GAAP and should be read in conjunction with our September 30, 2021 audited financial statements filed with the SEC on our Form 10-K on January 13, 2022. It is management's opinion that all material adjustments (consisting of normal recurring adjustments) have been made, which are necessary for a fair financial statement presentation. We derived the September 30, 2021 condensed consolidated balance sheet data from audited financial statements, however, we did not include all disclosures required by US GAAP. The results for the interim period ended June 30, 2022 are not necessarily indicative of the results to be expected for the year ending September 30, 2022.

 

The condensed consolidated financial statements of the Company include the accounts of the Company, and its wholly-owned subsidiaries and a consolidated variable interest entity (“VIE”). Intercompany balances and transactions have been eliminated.

 

Item 9 Labs consolidates a VIE in which the Company is deemed to be the primary beneficiary.  An entity is generally a VIE if it meets any of the following criteria: (i) the entity has insufficient equity to finance its activities without additional subordinated financial support from other parties, (ii) the equity investors cannot make significant decisions about the entity’s operations or (iii) the voting rights of some investors are not proportional to their obligations to absorb the expected losses of the entity or receive the expected returns of the entity and substantially all of the entity’s activities involve or are conducted on behalf of the investor with disproportionately few voting rights. The Company makes significant judgments in determining whether an entity is a VIE and, for each reporting period, the Company assesses whether it is the primary beneficiary of the VIE. Effective February 1, 2022, the Company was deemed the primary beneficiary of Elevated Connections, Inc. The equity in Elevated Connections, Inc. held by its stockholder has been presented on the balance sheet and the statement of operations as a non-controlling interest.

 

Certain prior period balances have been reclassified in the accompanying condensed consolidated financial statements to conform to the current period presentation. These reclassifications had no effect on the prior periods’ net income, net loss or accumulated deficit.

 

 F-6 

 

Accounting Estimates

 

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could materially differ from those estimates. Significant estimates of the Company include but are not limited to accounting for depreciation and amortization, current and deferred income taxes, inventory, accruals and contingencies, carrying value of goodwill and intangible assets, the fair value of common stock and the estimated fair value of stock options and warrants. Due to the uncertainties in the formation of accounting estimates, and the significance of these items, it is reasonably possible that these estimates could be materially changed in the near term.

 

Inventory

 

Inventory is stated at the lower of cost or net realizable value with cost being determined on the first in first out method. Inventory primarily consists of the costs directly related to the production and cultivation of cannabis crops, cannabis oils, and cannabis concentrate products. Inventory is relieved to cost of revenues as products are delivered to dispensaries. Inventory consists primarily of labor, utilities, costs of raw materials, packaging, nutrients and overhead.

The Company routinely evaluates the carrying value of inventory for slow moving and potentially obsolete inventory and, when appropriate, will record an adjustment to reduce inventory to its estimated net realizable value. There were no inventory reserves recorded at June 30, 2022 and September 30, 2021.

 

Licenses

 

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

 

Revenue Recognition

 

Cultivation revenue

 

The core principle of ASC 606 requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASC 606 defines a five-step process to achieve this core principle, including identifying the contract with the customer, identifying the performance obligations in the contract, determining the transaction price, including estimating the amount of variable consideration to include in the transaction price, allocating the transaction price to each separate performance obligation and recognizing revenue when (or as) the performance obligation is satisfied.

 

Substantially all of the Company's revenue is associated with a customer contract that represents an obligation to provide cannabis products that are delivered at a single point in time.  Any costs incurred prior to the period in which the products are delivered are recorded to inventory and recognized as cost of revenues in the period in which the performance obligation is completed. For the three and nine months ended June 30, 2022 and 2021, all of the Company's cultivation revenue was generated from performance obligations completed in the state of Arizona.

 

The Company recognizes revenue once the products are delivered. Revenue is considered earned upon successful delivery of the product to the dispensary as the Company has no further performance obligations at this point in time and collection is reasonably assured. The Company records revenue at the amount it expects to collect, 100% of the wholesale sales revenue. The fees paid for operating under the contract are expensed to cost of revenues.

 

The Company's revenues accounted for under ASC 606 do not require significant estimates or judgments based on the nature of the Company's revenue stream. The sales price is generally fixed at the point of sale and all consideration from the contract is included in the transaction price. The Company's contracts do not include multiple performance obligations, variable consideration, rights of return or warranties.

 

 F-7 

 

Franchising revenue

 

Through OCG, Inc., the Company enters into franchise agreements and consulting agreements. The franchise agreement allows the franchisee to, among other things, establish a franchised outlet under the Company’s Unity Rd. brand. Under the consulting agreements, the Company assists customers with applying for and being awarded a retail cannabis license through the state license application process. The initial franchise fee and the consulting fee are due upon execution of the related agreement. These payments are deferred on the condensed consolidated balance sheet and is recognized into revenue on the condensed consolidated statement of operations when (or as) the performance obligations included in the agreements are satisfied. Deferred revenue had a balance of $560,849 and $775,843 at June 30, 2022 and September 30, 2021, respectively, and is included in deferred revenue on the condensed consolidated balance sheets. Revenue recognized during the three months ended June 30, 2022 and 2021 that was included in deferred revenue at September 30, 2021 and 2020 was $4,998 and $0, respectively. Revenue recognized during the nine months ended June 30, 2022 and 2021 that was included in deferred revenue at September 30, 2021 and 2020 was $214,994 and $0, respectively.

 

Net Loss Per Share

 

Basic net loss per share does not include dilution and is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net loss per share reflects the potential dilution of securities that could share in the losses of an entity. Dilutive securities are not included in the weighted average number of shares when inclusion would be anti-dilutive. The following table summarizes the securities outstanding at June 30, 2022 and 2021 that were excluded from the diluted net loss per share calculation for the three and nine months ended June 30, 2022 and 2021 because the effect of including these potential shares was antidilutive due to the Company’s net loss.

 

   2022  2021
Potentially dilutive common share equivalents          
Options   6,223,462    3,211,709 
Warrants   48,069,687    41,415,000 
Convertible notes   3,510,792    2,707,238 
Potentially dilutive shares outstanding   57,803,941    47,333,947 

 

 

 F-8 

 

Warrants, Conversion Options and Debt Discounts

 

The Company analyzes warrants issued with debt to determine if the warrants are required to be bifurcated and accounted for at fair value at each reporting period. When bifurcation is not required, the Company records a debt discount, based on the relative fair values of the warrants and the debt, with a corresponding charge to equity unless the terms of the warrant require it to be classified as a liability. The warrants and corresponding note discounts are valued using the Black-Scholes valuation model. This model uses estimates of volatility, risk free interest rate and the expected term of the warrants, along with the current market price of the Company's stock, to estimate the value of the outstanding warrants. The Company estimates the expected term using an average of the contractual term and vesting period of the award. The expected volatility is measured using the average historical daily changes in the market price of the Company's common stock over the expected term of the award or, if earlier, since March 20, 2018, the day of the merger between BSSD Group LLC ("BSSD") and Airware Labs Corp, and the risk-free interest rate is equivalent to the implied yield on zero-coupon U.S. Treasury bonds with a remaining maturity equal to the expected term of the awards.

 

The Company also analyzes conversion options embedded with debt to determine if the conversion options are required to be bifurcated and accounted for at fair value at each reporting period or to determine if there is a beneficial conversion feature. At June 30, 2022 and September 30, 2021, none of the conversion options embedded in the Company’s debt were required to be bifurcated.

 

Segment Reporting

 

The Company defines operating segments as components about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performances. The Company allocates its resources and assesses the performance of its sales activities based on the services performed by its subsidiaries. For the three and nine months ended June 30, 2022 and 2021, the Company has identified two segments: the cultivation, production and sale of cannabis and cannabis derived products and technologies (“Cultivation”) and the sales of Unity Rd. franchises to dispensaries (“Franchising”).

 

Business Combination

 

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

  

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

 F-9 

 

Recently Issued Accounting Pronouncements

 

Pending Adoption

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), which provides guidance on measuring credit losses on financial instruments. The amended guidance replaces current incurred loss impairment methodology of recognizing credit losses when a loss is probable with a methodology that reflects expected credit losses and requires a broader range of reasonable and supportable information to assess credit loss estimates. ASU 2016-13 is effective for the Company on October 1, 2023, with early adoption permitted on October 1, 2019. We are assessing the provisions of this amended guidance; however, the adoption of the standard is not expected to have a material effect on our condensed consolidated financial statements.

 

In August 2020, the FASB issued ASU No. 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40). This standard eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, the new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. For public business entities, it is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years using the fully retrospective or modified retrospective method. Early adoption is permitted but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. We are currently evaluating the impact of adoption of this standard on the Company’s condensed consolidated financial statements and disclosures.

 

In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This standard requires contract assets and contract liabilities acquired in a business combination to be recognized in accordance with Topic 606 as if the acquirer had originated the contracts. For public business entities, ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, including interim periods within those years and early adoption is permitted. We are currently evaluating the impact of adoption of this standard on the Company’s condensed consolidated financial statements and disclosures.

 

There have been no other recent accounting pronouncements or changes in accounting pronouncements that have been issued but not yet adopted that are of significance, or potential significance, to us.

 

 

Note 2 - Going Concern

 

The accompanying condensed consolidated financial statements have been prepared assuming the continuation of the Company as a going concern. The Company has not yet established an ongoing source of revenue sufficient to cover its operating costs and has incurred net losses since its inception. These losses, with the associated substantial accumulated deficit, are a direct result of the Company's planned ramp up period as it is pursuing market acceptance and geographic expansion. In view of these matters, realization of a major portion of the assets in the accompanying condensed consolidated balance sheets is dependent upon continued operations of the Company which in turn is dependent upon the Company's ability to meet its financing requirements, and the success of its future operations. The Company operates in a new, developing industry with a variety of competitors. These factors raise substantial doubt about the Company's ability to continue as a going concern.

 

In order to continue as a going concern, the Company will need to generate additional revenue and obtain additional capital to fund its operating losses and service its debt. Management's plans in regard to these matters are described as follows:

 

Sales and Marketing. Historically, the Company has generated the majority of its revenues by providing its products to dispensaries throughout the state of Arizona. The Company's revenues have increased significantly since its inception in May 2017. Management will continue its plans to increase revenues in the Arizona market by providing superior products. Additionally, as capital resources become available, the Company plans to expand into additional markets outside of Arizona, with construction of a cultivation and processing facility nearing completion in Nevada. The Company believes that it will reduce the overall costs of revenues and costs of revenues will increase at a lower rate than revenues in future periods, which will lead to increased profit margins.

 

Financing. To date, the Company has financed its operations primarily with loans from shareholders, private placement financings and sales revenue. Management believes that with continued production efficiencies, production growth, and continued marketing efforts, sales revenue will grow, thus enabling the Company to reverse its negative cash flow from operations and raise additional capital as needed. However, there is no assurance that the Company's overall efforts will be successful.

 

If the Company is unable to generate additional sales growth in the near term and raise additional capital, there is a risk that the Company could default on additional obligations, and could be required to discontinue or significantly reduce the scope of its operations if no other means of financing operations are available. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities or any other adjustment that might be necessary should the Company be unable to continue as a going concern.

 

 F-10 

 

Note 3 – Inventory 

 

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

 

   June 30,  September 30,
   2022  2021
Raw materials and work in process  $1,817,094   $4,291,095 
Finished goods   1,596,924    1,052,375 
Packaging and other   716,761    1,047,881 
   $4,130,779   $6,391,351 

 

 

Note 4 – Acquisitions

 

Oklahoma City dispensary acquisition

 

In January 2022, the Company signed a Co-Management Agreement with a dispensary in Oklahoma for a term of three years. As part of the Co-Management Agreement, the Company purchased substantially all of the assets of a dispensary, excluding cannabis and cannabis related products and licenses, and assumed the dispensary’s lease. The purchase price was $130,000, payable at $32,500 on the effective date and $32,500 each 30, 60 and 90 days after the effective date. In addition, the Company will pay $1,667 per month for 35 months. Finally, the Company paid the seller $65,000 in the Company’s common stock at a 10% discount to the stock’s 10-day volume weighted average. The Company has issued 69,892 shares of common stock related to the Co-Management Agreement. The accrued purchase price balance is $49,274 at June 30, 2022 and is included in accrued expenses on the condensed consolidated balance sheet.

 

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

 

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

 

 

 F-11 

 

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

 

Tangible assets acquired     
      
Cash  $6,143 
Fixed assets   80,287 
Tangible net assets acquired   86,430 
Goodwill   168,570 
      
Consideration paid  $255,000 

 

Adams County acquisition

 

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

 

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

 

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

 

The Herbal Cure pending acquisition

 

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

 

(i) Upon mutual execution and delivery of the Asset Purchase Agreement, the Company shall convey to the Seller a down payment in the amount of $250,000;

 

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

 

(iii) $700,000 shall be financed by the Seller and paid pursuant to the terms and conditions of the Secured Promissory Note (the "Herbal Cure Note"), which interest shall accrue at a rate of 5% per annum, for a term of 18 months commencing on the Closing Date, and payable in even monthly installments until paid in full; and

 

(iv) the Company shall pay the remainder of the purchase price in shares of its common stock on the Closing Date, in such amount of Shares as is the quotient of $1,100,000 divided by the product of the 10 day volume weighted average price of the shares as of the Closing Date, and 85%.

 

At June 30, 2022, the $250,000 down payment was paid and is included in Other Assets on the condensed consolidated balance sheet. At June 30, 2022, this acquisition has not yet been finalized. As such, the effects of this acquisition, which is expected to be accounted for under ASC 805, Business Combinations, have not been included in the Company’s condensed consolidated balance sheet or statement of operations as of and for the three and nine months ended June 30, 2022. The Company can provide no assurance that it will be successful in finalizing this acquisition.

 

Sessions pending acquisition

 

On May 18, 2022, the Company and its wholly owned subsidiary, OCG Management Ontario, Inc., a corporation formed under the laws of the Province of Ontario (“Purchaser”) solely for the purpose of completing this transaction, entered into a Share Purchase Agreement pursuant to which the Purchaser is purchasing all, but not less than all, of the issued and outstanding shares in the capital of Wild Card Cannabis Incorporated, a corporation formed under the laws of the Province of Ontario free and clear of all Liens from the Shareholders.

 

The total purchase price for the Shares is Twelve Million Eight Hundred Thousand Dollars ($12,800,000.00 USD) (the "Purchase Price"), as adjusted, plus the Earnout Payment, if any (collectively, the “Purchase Price”) payable as follows:

  

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

 

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

 

(iii) Four Million One Hundred Thousand Dollars ($4,100,000.00), as adjusted, payable by the delivery of the Company’s common stock, the number of which will be calculated on the basis of a deemed price per common share equal to the 10-Day VWAP of the trading price of the Company’s common stock on the stock exchange upon which the Company’s common stock is listed, with the last day of the First Earnout Period (the date that is 12 months following the Closing Date) as the measurement date less a 15% discount, if actual Net Revenue is respect of the First Earnout Period is greater than or equal to the Target Net Revenue for the First Earnout Period; and

 

(iv) Four Million One Hundred Thousand Dollars ($4,100,000.00), as adjusted, payable by the delivery of the Company’s common stock, the number of which will be calculated on the basis of a deemed price per common share equal to the 10-Day VWAP of the trading price of the Company’s common stock on the stock exchange upon which the Company’s common stock is listed, with the last day of the Second Earnout Period (the date that is 24 months following the Closing Date) as the measurement date less a 15% discount, if actual Net Revenue is respect of the Second Earnout Period is greater than or equal to the Target Net Revenue for the Second Earnout Period.

 

At June 30, 2022, the $156,902 Exclusivity Deposit has been paid and is included in Other Assets on the condensed consolidated balance sheet. At June 30, 2022, this acquisition has not yet been finalized. As such, the effects of this acquisition, which is expected to be accounted for under ASC 805, Business Combinations, have not been included in the Company’s condensed consolidated balance sheet or statement of operations as of and for the three and nine months ended June 30, 2022. The Company can provide no assurance that it will be successful in finalizing this acquisition.

 

 F-12 

 

Note 5 – Variable Interest Entity

 

In January 2022, the Company signed a Co-Management Agreement with a dispensary in Oklahoma for a term of three years. Under the terms of the Co-Management Agreement, the Company purchased substantially all of the assets of a dispensary, excluding cannabis and cannabis related products and licenses, and assumed the dispensary’s lease (see Note 4). Further, under the Co-Management Agreement, the Company is to operate, staff, and otherwise manage the day-to-day operations of the dispensary. The Company shall also pay all claims, costs and liabilities associated with operating the dispensary.

 

The terms of the Co-Management Agreement provide the Company with, in its judgment, the ability to manage and make decisions that most significantly affect the operations of Elevated Connections and to absorb losses that could potentially be significant to Elevated Connections. As such, the Company has consolidated Elevated Connections effective February 1, 2022. The purpose of Elevated Connections, as a licensed dispensary, is to hold the cannabis and cannabis related products and licenses of the dispensary.

 

The assets of the VIE cannot be used to settle obligations of the Company or its wholly owned subsidiaries. However, liabilities recognized as a result of consolidating the VIE does represent additional claims on the Company’s general assets.

 

The following table presents the carrying values of the assets and liabilities of the entity that is a VIE and consolidated by the Company at June 30, 2022.

 

   June 30,
Assets  2022
Current assets     
Inventory  $27,773 
Total assets  $27,773 
      
Liabilities     
Current liabilities     
Income tax payable  $7,948 
Total liabilities  $7,948 

 

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

 

   Three months ended June 30,  Nine months ended June 30,
   2022  2022
Revenues, net  $40,245   $73,582 
Cost of revenue   21,111    44,128 
Gross profit   19,134    29,454 
Income tax expense   4,624    7,948 
Net income  $14,510   $21,506 

 

 

 F-13 

 

Note 6 – Goodwill and Intangible Assets

 

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

 

   Gross Carrying  Accumulated  Accumulated   
   Amount  Amortization  Impairment  Net
June 30, 2022                    
Finite lived intangible assets:                    
Trade names and trademarks  $8,570,848   $1,140,172   $     $7,430,676 
Customer relationships   290,000    290,000             
Websites and other intellectual property   2,470,000    1,144,470    955,223    370,307 
Franchise and consulting agreements   3,970,000    919,170          3,050,830 
Total finite lived intangible assets   15,300,848    3,493,812    955,223    10,851,813 
Indefinite lived intangible assets:                    
Licenses   8,370,853                8,370,853 
Total intangible assets  $23,671,701   $3,493,812   $955,223   $19,222,666 
                     
                     
   Gross Carrying  Accumulated  Accumulated   
    Amount    Amortization    Impairment    Net 
September 30, 2021                    
Finite lived intangible assets:                    
Trade names and trademarks  $8,570,848   $497,356   $     $8,073,492 
Customer relationships   290,000    290,000             
Websites and other intellectual property   2,470,000    946,488    955,223    568,289 
Franchise and consulting agreements   3,970,000    656,667          3,313,333 
Total finite lived intangible assets   15,300,848    2,390,511    955,223    11,955,114 
Indefinite lived intangible assets:                    
Licenses   6,703,981                6,703,981 
Total intangible assets  $22,004,829   $2,390,511   $955,223   $18,659,095 

 

 

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

 

 

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

 

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

 

 F-14 

 

Note 7 - Property and Equipment, Net

 

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

 

   June 30,  September 30,
   2022  2021
Cultivation and manufacturing equipment  $551,045   $506,271 
Computer equipment and software   266,427    266,427 
Leasehold improvements   49,667       
Buildings and improvements   2,811,340    2,785,781 
    3,678,479    3,558,479 
Accumulated Depreciation   (696,052)   (479,320)
    2,982,427    3,079,159 
Land   3,455,563    380,584 
Construction on progress   19,869,222    7,418,105 
Property and Equipment, Net  $26,307,212   $10,877,848 

 

During the nine months ended June 30, 2022, the Company completed the purchase of 44 acres of land from a related party for $3.0 million plus expenses. The land-owner is one of the original members of BSSD and a current employee of the Company.

 

Construction in progress relates to multiple capital projects ongoing during the three and nine months ended June 30, 2022, including the construction of the Nevada facility and the expansion of the Arizona facility. Construction in progress also includes interest and fees on debt that is directly related to the financing of the Company’s capital projects.

 

Depreciation expense for the three months ended June 30, 2022 and 2021 was $71,285 and $35,965, respectively. Depreciation expense for the nine months ended June 30, 2022 and 2021 was $217,363 and $100,535, respectively.

 

 

Note 8 – Debt

 

   Convertible Notes
                         
   Effective   Maturity   Annual Interest    Balance at   Balance at   Conversion
   Date  Date   Rate    

June 30, 2022

   

September 30, 2021

   Price
 C-2   3/23/2020   9/23/2020    15%   1,100,000    1,100,000    See C-2 
 C-3   8/15/2011   8/15/2012    8%   20,000    20,000    0.50 
 C-5   3/19/2021   9/19/2021    10%         80,000    2.50 
 C-7   9/29/2021   9/29/2022    10%   250,000    250,000    1.67 
 C-8   9/29/2021   9/29/2022    10%   500,000    500,000    1.67 
 C-9   10/1/2021   9/29/2022    10%    750,000          1.67 
 C-10    10/29/2021   4/29/2022    15%    750,000          1.50 
 C-11   2/21/2022   8/31/2022    24%   250,000          1.10 
                   3,620,000    1,950,000      
      Less: unamortized discounts   (353,821)   (672,606)      
                  $3,266,179   $1,277,394      

  

(C-2) Convertible Viridis Note

 

On March 23, 2020, the Company borrowed proceeds from a related party, Viridis I9 Capital LLC (“Viridis”), in the amount of $1.1 million. The note is convertible at the lesser of a) $1.00 per share or, b) 20% discount to the ten day average closing price of the Company’s common stock, immediately prior to the conversion date. All principal and interest were due on the maturity date. The lender has granted a payment forbearance for the note and all unpaid principal and interest, accrued at the default interest rate of 15% per annum, will be paid at maturity, which has been postponed to a date that has not yet been determined. At June 30, 2022 the Viridis note was in default. The Viridis note remains in default as of this filing, though the parties are negotiating a long-term arrangement.

 

 F-15 

 

(C-9) Convertible Tysadco Note

 

On October 1, 2021, the Company entered into a convertible note agreement. Up to fifty percent (50%) of the outstanding and unpaid principal amount is convertible into common stock. The note included warrants to purchase a total of 825,000 shares of the Company’s common stock for $3 per share, with a 4 year term. Further, the Company issued 67,365 shares of common stock, valued at $112,500 as an inducement to the lenders to enter into the note agreements. The debt included a beneficial conversion feature after consideration of the relative fair values of the warrants and shares of common stock. The debt, shares of common stock and warrants were recorded at their relative fair values, along with the beneficial conversion feature. The resulting discount of $597,606 and an additional $75,000 discount related to a one-time interest charge of 10% of the original principal amount, is amortized to interest expense over the term of the debt. The one-time interest charge was accrued at June 30, 2022.

 

(C-10) Convertible Gaines Note

 

On October 29, 2021, the Company entered into a convertible note agreement. The outstanding and unpaid principal and accrued interest is convertible, in whole, into shares of the Company’s common stock. The notes included warrants to purchase a total of 750,000 shares of the Company’s common stock for $3 per share, with a 2 year term. Further, the Company issued 75,000 shares of common stock, valued at $116,250 as an inducement to the lender to enter into the note agreement. The debt included a beneficial conversion feature after consideration of the relative fair values of the warrants and shares of common stock. The debt, shares of common stock and warrants were recorded at their relative fair values, along with the beneficial conversion feature. The resulting discount of $561,272, which also included debt issuance costs of $44,582, is amortized to interest expense over the term of the debt. This convertible note is currently due on demand and interest is paid monthly.

 

(C-11) Convertible Goldstein Note

 

On February 21, 2022, the Company entered into a convertible note agreement. The outstanding and unpaid principal and accrued interest is convertible, in whole, into shares of the Company’s common stock. The Company issued 25,000 shares of common stock, valued at $25,000 as an inducement to the lender to enter into the note agreement. The debt included a beneficial conversion feature after consideration of the relative fair value of the shares of common stock. The debt and shares of common stock were recorded at their relative fair values, along with the beneficial conversion feature. The resulting discount of $50,000 is amortized to interest expense over the term of the debt.

 

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

 

Year ended   
June 30,  Amount
 2023   $3,620,000 
      3,620,000 
 Less: unamortized discount    (353,821)
     $3,266,179 

 

 

 F-16 

 

   Notes Payable
                   
   Effective  Maturity  Annual Interest  Balance at  Balance at   
   Date  Date 

Rate

 

June 30, 2022

 

September 30, 2021

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

 

 

(f) Viridis AZ

 

On September 13, 2018, the Company entered into a Loan and Revenue Participation Agreement with Viridis Group I9 Capital LLC ("Viridis"), a related party, in which Viridis agreed to loan the Company up to $1.2 million for the expansion of the Company's Arizona property. In exchange for the loan, Viridis was to be repaid in the form of waterfall revenue participation schedules. Viridis was to receive 5% of the Company's gross revenues from the Arizona operations until the loan was repaid, 2% until repaid 200% of the amount loaned, and 1% of gross revenues in perpetuity or until a change in control. The loan was originally collateralized with a Deed of Trust on the Company's 5-acre parcel in Coolidge, AZ and its two 10,000 square foot buildings. In August 2019, Viridis agreed to subordinate its first priority Deed of Trust and move into a 2nd position. At that time, the loan was amended to include 6% annualized interest.

 

On May 1, 2020, under a troubled debt restructuring, the Company renegotiated the $1,200,000 note payable. As part of the restructuring, the Company issued 1,555,556 warrants exercisable into the Company's common stock. The warrants have an exercise price of $1.00 and a term of 5 years. Accrued interest in the amount of $186,370 was added to the principal balance of the note, making the total principal $1,386,370. Interest only payments of $11,553 shall be paid monthly until November 1, 2020 at which time monthly principal and interest payments of $28,144 are required for 36 months, with a balloon payment of all outstanding principal and interest due upon the note's maturity. The note also entitles Viridis to a gross revenue participation of the Arizona Operations equal to 1% of the gross sales (up to $20,000 monthly) upon the maturity of the note and for the subsequent 5 year period. The debt and warrants were recorded at their relative fair values. The resulting discount is amortized to interest expense over the term of the debt. The lender has granted a payment forbearance for the note and all unpaid principal and interest, accrued at the default interest rate of 12% per annum, will be added to the balloon payment at maturity. 

 

In August 2021, the Viridis AZ and Viridis NV debt was modified to subordinate these notes to the Pelorus Notes (see (q) and (r)). As of the date of these condensed consolidated financial statements, the terms of this modification have not been finalized. Based on the expected modification terms, this modification was accounted for as an extinguishment of the debt during the year ended September 30, 2021.

 

 F-17 

 

(h) Viridis (unsecured)

 

The Company's subsidiary, BSSD Group, LLC borrowed $269,000 from Viridis, a related party, in December 2019. This note bears annualized interest at 15%. On May 1, 2020, under a troubled debt restructuring, the Company renegotiated the $269,000 note payable. Accrued interest in the amount of $14,666 was added to the principal balance of the note, making the total principal $283,666. As part of the restructuring, the Company issued 400,000 warrants exercisable into the Company's common stock. The warrants have an exercise price of $.05 and a term of 5 years. Payments of principal and interest in the amount of $9,833 are due monthly, with a balloon payment of all outstanding principal and interest is due upon the note's maturity. The debt and warrants were recorded at their relative fair values. The resulting discount is amortized to interest expense over the term of the debt. The lender has granted a payment forbearance for the note and all unpaid principal and interest, accrued at the default interest rate of 18% per annum, will be added to the balloon payment at maturity.

 

  (l) Upwise Capital

 

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

 

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

 

(o) OCG Officers Debt

 

As part of the OCG transaction in March 2021, the Company assumed the debt that OCG, Inc. owed to its officers. Principal and interest payments are due monthly with a balloon payment of all outstanding principal and interest due at maturity.

 

(p) Stockbridge Amended Debt

 

In February 2021, the Company and Stockbridge Enterprises, a related party, under a trouble debt restructuring, agreed to restructure and settle its outstanding notes. The total outstanding balance of $1,660,590, including accrued interest, were to be repaid under a new promissory note, calling for a down payment of $300,000 (paid at time of signing), $120,000 monthly payments for 11 months with the remaining balance of $40,590 payable on February 1, 2022. This agreement was amended to extend the maturity date to March 31, 2022 and starting with the October 1, 2021 payment, the loan payments are interest only at an interest rate of 15% per annum until January 25, 2022. Principal payments in the amount of $50,000 are due on January 25, 2022, February 15, 2022 and March 15, 2022, with a final payment of the remaining principal and accrued interest due on March 31, 2022. Upon closing of an equity raise of at least $750,000, the Company will repay the outstanding balance plus any accrued interest immediately. As part of the amendment, the Company issued 164,744 warrants to purchase the Company’s common stock. The warrants have a two-year period and an exercise price of $1.00. The resulting discount of $58,352 was fully amortized to interest expense during the six months ended March 31, 2022.

 

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

 

(s) Viridis $500,000

 

On September 30, 2021, the Company borrowed $500,000 from Viridis Group I9 Capital LLC, a related party. The proceeds of the debt were used to make a payment on the outstanding unpaid payroll tax liability. The debt is collateralized by restricted common stock in the amount of twice the balance of the debt. It is anticipated that the note will include warrants to purchase a total of 500,000 shares of the Company’s common stock for $0.60 per share, with a five-year term. As of the date of these condensed consolidated financial statements, the terms of these warrants have not been finalized. The debt and anticipated warrants were recorded at their relative fair values. The resulting discount is amortized to interest expense over the term of the debt. The lender has granted a payment forbearance for the note and all unpaid principal and interest, accrued at the default interest rate of 18% per annum beginning January 1, 2022, will be paid at maturity, which has been postponed to a date that has not yet been determined.

 

 F-18 

 

(t) Chessler note

 

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

 

(u) Lendspark

 

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

 

(v) Upwise Capital 2

 

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

 

(w) Viridis working capital loans

 

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

 

(x) Non-convertible Gaines Note

 

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

 

(y) Nebrina Adams County Note

 

Effective with the close of the Adams County acquisition (see Note 4), the Company entered into a note for $200,000 with the seller as part of the purchase price. The note is payable in six installments on the last day of each three-month period following the Closing Date.

 

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

 

Year ended   
June 30,  Amount
 2023   $27,563,901 
 2024    1,862,175 
 2025       
      29,426,076 
 Less: unamortized discount    (2,886,822)
 Less: imputed interest    (557,885)
      25,981,369 
 Less: current portion    (24,532,509)
     $1,448,860 

 

 

 F-19 

 

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

             
  

Three months ended

June 30,

 

Nine months ended

June 30, 2022

   2022  2021  2022  2021
Amortization of debt discounts  $1,440,535   $316,320   $4,932,259   $564,622 
Stated interest paid or accrued   1,508,210    301,933    4,073,665    1,217,726 
Finance charges and other interest   22,021    11,012    25,016    23,671 
    2,970,766    629,265    9,030,940    1,806,019 
Less: interest capitalized to construction in progress   (1,345,611)         (5,098,022)      
   $1,625,155   $629,265   $3,932,918   $1,806,019 

 

 

Note 9 - Concentrations

 

For the three and nine months ended June 30, 2022 and 2021, substantially all of the Company's revenue was generated from a single customer. Given the agreement with the license holder, although the Company’s products are distributed to numerous dispensaries throughout Arizona, all sales are made through the license holder. The Company's wholly owned subsidiary provides cannabis products to this customer under a three-year Cultivation Management Services Agreement that commenced on April 1, 2020. Provisions of the agreement require 30-day written notice to terminate except for the following circumstances, in which case the agreement is cancellable with no notice: (i) uncured default; (ii) gross negligence, intentional, or willful misconduct by either party; (iii) federal or state enforcement action against either party; (iv) any change or revocation of state or local law that has the effect of prohibiting the legal operation of the Cultivation Facility; (v) the dispensary license renewal is not approved; (vi) the dispensary fails to maintain its dispensary license in good standing with the regulators resulting in the revocation of the dispensary license. One of our license holder’s customers that the Company’s products are distributed to accounts for 33% of our cultivation revenue for the nine months ended June 30, 2022. Should our products no longer be distributed to this customer of our license holder, it would have a material adverse effect on our operations.

 

 

Note 10 - Commitments and Contingencies

 

The production and possession of cannabis is prohibited on a national level by the Controlled Substances Act, though the state of Arizona allows these activities to be performed at licensed facilities such as BSSD. If the federal government decides to change its policy on the enforcement of the Controlled Substances Act, it would have a material adverse effect on our business.

 

The Company entered into a 60 month lease with VGI Citadel LLC, a related party, to rent office space for its corporate headquarters which began in June 2019. The monthly lease payments were $6,478 for the first twelve months and include all utilities and an estimated amount for common area maintenance and real estate taxes. The monthly lease payments increase to $6,653, $6,828, $7,003, and $7,178 for years two through five, respectively. Rent expense for the three months ended June 30, 2022 and 2021 on this lease was $20,782 and $20,617, respectively. Rent expense for the nine months ended June 30, 2022 and 2021 on this lease was $64,939 and $61,454, respectively. Interest was imputed using a discount rate of 20%. The lease does not include renewal options.

 

In February 2022, the Company assumed a lease to rent approximately 3,100 square feet of retail space in Oklahoma City, Oklahoma as part of the Oklahoma City acquisition disclosed in Note 4. The lease calls for base rent payments of $21 per square foot ($5,483), plus a prorated share of taxes, insurance and common area maintenance expenses, per month and increasing each year by 3% through the end of the lease term on February 28, 2029. The lease may be extended for two additional 5 year periods. Rent expense for the three and nine months ended June 30, 2022 on this lease was $22,129 and $36,406, respectively. There was no rent expense on this lease during the three and nine months ended June 30, 2021. Interest was imputed using a discount rate of 18%.

 

In March 2022, the Company assumed a lease to rent approximately 2,650 square feet of retail space in Adams County, Colorado as part of the Adams County acquisition disclosed in Note 4. The lease calls for base rent payments of $15,450, plus a prorated share of operating costs of the building, per month and escalate each year to $15,913 in the final year which ends on February 1, 2024. The lease may be extended for one additional 3 year period. Rent expense for the three and nine months ended June 30, 2022 on this lease was $52,822 and $68,870, respectively. There was no rent expense on this lease during the three and nine months ended June 30, 2021. Interest was imputed using a discount rate of 18%.

 

In September 2021, the Company signed a seven-year lease to rent approximately 3,000 square feet of retail space in Biddeford, Maine. The lease calls for base rent payments of $6,604, plus taxes and operating expenses, per month for the first year and escalate each year to $7,886 per month in year seven. The lease may be extended for two terms of 5 years each. The commencement of this lease is contingent upon the issuance and receipt of a license and city approval. The agreement will terminate if the contingency is not met. At June 30, 2022, the contingency has not been met, however, control over the use of the leased premises has been received by the Company. As such, the Company has recorded the right of use asset and liability to the condensed consolidated balance sheet. Rent expense for the three and nine months ended June 30, 2022 on this lease was $21,781 and $48,197, respectively. There was no rent expense on this lease during the three and nine months ended June 30, 2021. Interest was imputed using a discount rate of 18%.

 F-20 

 

The future lease payments are as follows.

 

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

 

In October 2021, the Company entered into a commercial lease agreement to rent 12,000 square feet located in Denver, Colorado. The lease has a term of five years with escalating monthly base rent beginning at $6,354 and escalating each year to $7,295 in year five. Commencement of the lease is contingent upon the Company receiving an approved retail license within 120 days from October 22, 2021. The agreement will terminate if the contingency is not met. As of June 30, 2022, the contingency has not been met and the Company is currently considering its options in regards to this agreement. The future minimum rental payments under this lease have not been included in the Company’s right of use asset and liability at June 30, 2022 or the future lease payments schedule above.

 

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

 

There are no material pending legal proceedings in which the Company or any of its subsidiaries is a party or in which any director, officer or affiliate of the Company, any owner of record or beneficially of more than 5% of any class of its voting securities, or security holder is a party adverse to us or has a material interest adverse to the Company.

 

 

Note 11 - Related Party Transactions

 

As discussed in Note 7, the Company completed the purchase of 44 acres of land from a related party for $3.0 million plus expenses. The land-owner is one of the original members of BSSD and a current employee of the Company.

 

As discussed in Note 8, the Company has entered into various loan agreements with Viridis or its related entities. Two members of Viridis serve on the Company’s board of directors and one of these members also serves as the Company’s Chief Executive Officer.

 

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

 

 F-21 

 

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

 

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

 

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

 

 

Note 12 - Stockholders' Equity

 

Unit Offering

 

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

 

Warrants

 

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

 

   Common Shares Issuable Upon Exercise of  Weighted Average  Weighted Average Contractual  Aggregate
   Warrants  Exercise Price  Term in Years  Intrinsic Value
Balance of warrants at September 30, 2021   46,095,000    2.08   3.9   14,243,000 
                     
Warrants granted   1,974,687    2.68    2.8    —   
Exercised   —      —      —      —   
Forfeited/Cancelled   —      —      —      —   
                     
Balance of warrants at June 30, 2022   48,069,687   $2.10   $3.7   $1,375,000 

 

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

 

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

 

  

Nine months ended

   June 30, 2022
Expected stock price volatility   92% - 130% 
Risk-free interest rate   0.10% - 0.30% 
Expected term (years)   1.0 - 2.0 
Expected dividend yield   0%
Black-scholes value   $0.34 - $0.89 

 

 

 F-22 

 

Stock Options

 

On June 21, 2019, the Company’s shareholders voted to approve the 2019 Equity Incentive Plan (the “2019 Plan”). Pursuant to the 2019 Plan, the maximum aggregate number of Shares available under the Plan through awards is the lesser of: (i) 6,000,000 shares, increased each anniversary date of the adoption of the plan by 2 percent of the then-outstanding shares, or (b) 10,000,000 shares. The maximum contractual term of the award is 10 years. The vesting period for options outstanding at June 30, 2022 ranges from vesting immediately to three years.

 

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

 

   Common Shares Issuable Upon Exercise of Options  Weighted Average Exercise Price  Weighted Average Remaining Contractual Term in Years  Aggregate Intrinsic Value (1)
Balance of Options at September 30, 2021   5,217,315   1.23    8.9    2,633,375 
                     
Options granted   1,161,582    1.55    6.7    15,800 
Exercised   (41,104)   0.87    8.3    19,730 
Forfeited/Cancelled   (114,331)   0.94    —      —   
                     
Balance of Options at June 30, 2022   6,223,462   $1.29    7.9   $67,175 
                     
Exercisable at June 30, 2022   2,456,774   $1.33    7.3   $33,588 
Unvested at June 30, 2022   3,766,688   $1.27