Forward Looking Statements
You should read the following discussion of our financial condition and results
of operations together with our audited consolidated financial statements and
notes to such financial statements included elsewhere in this Form 10-K. The
following discussion contains forward-looking statements that involve risks and
uncertainties. The forward-looking statements are not historical facts, but
rather are based on current expectations, estimates, assumptions and projections
about our industry, business and future financial results. Our actual results
could differ materially from the results contemplated by these forward-looking
statements due to a number of factors, including those discussed under "Item 1A.
Risk Factors" and other sections in this 10-K.
Overview
Item 9 Labs produces premium cannabis and cannabis related products in a rapidly
growing market. We currently offer more than 300 products that we group in the
following categories: flower; concentrates; distillates and hardware. Our
product offerings will continue to grow as we develop new products to meet the
needs of the end users. We make our products available to consumers through
licensed dispensaries in Arizona. Item 9 Labs' products are now carried in more
than 70 dispensaries throughout the state of Arizona.
We believe our past and future success is dependent upon our ongoing ability to
understand the needs and desires of the consumers, and we develop and offer
products that meet those needs.
Our objective is to leverage our assets (tangible and intangible) to fuel the
growth of our share of the Arizona cannabis market, as well as expand the
geographical reach of our products into markets outside of Arizona, with the
ultimate goal of providing comfortable cannabis health solutions to a larger
population in a manner that will create value for our shareholders.
We expanded our assets in November 2018 with the acquisition of the majority of
the assets of AZ DP Consulting LLC. The acquisition was treated as a business
combination for financial reporting purposes. The acquisition was valued at
$9,270,000, with $1,500,000 in cash and $7,770,000 (3 million shares valued at
$2.59/share) of the Company's restricted common stock. As part of the
acquisition, the owner of AZ DP Consulting LLC, Sara Gullickson, came aboard
Item 9 Labs Corp. as CEO. We acquired numerous web domains, including
dispensarypermits.com and dispensarytemplates.com, marijuana business templates,
trade names and customer lists. The consulting side of the business provides
dispensary application services to its clients, and through the acquisition,
provides Item 9 Labs Corp. with synergistic partnerships for growth into new
markets. Through nine months of operating the business, we concluded that the
assets, as recorded at the acquisition date were impaired. The impairment is
included in the results of operations in the year ended September 30, 2019,
totaling $5,758,827. In November 2019, Ms. Gullickson resigned as CEO. As part
of her resignation, she and the Company mutually agreed on an amendment to her
employment agreement in which she would cancel and return 2,300,000 shares of
the common stock she obtained in the acquisition in exchange for a reduction in
the duration of her non-compete agreement from three years to four months.
In March 2020, the World Health Organization categorized Coronavirus Disease
2019 ("COVID-19") as a pandemic, and the President of the United States declared
the COVID-19 outbreak a national emergency. The services we provide are
currently designated an essential critical infrastructure business under the
President's COVID-19 guidance, the continued operation of which is vital for
national public health, safety and national economic security. The extent of the
impact of the COVID-19 outbreak on our operational and financial performance
will depend on certain developments, including the duration and spread of the
outbreak, its impact on our customers and vendors, and the range of governmental
and community reactions to the pandemic, which are uncertain and cannot be fully
predicted at this time. As of January 12, 2021, the Company has not experienced
any material negative impact from the pandemic, though it is unknown what will
occur going forward.
Though it was deemed necessary to record an impairment in fiscal year 2019,
dispensarypermits.com is an essential tool in our future expansion. As indicated
in the Company's Form 8-K released on December 14, 2020, Item 9 Labs and OCG
Inc. have reached an agreement to merge. OCG Inc. and its Unity Rd. dispensary
franchise model will be a strong addition to Item 9 Labs, creating synergies
throughout all verticals of the Company. The parties are awaiting completion of
conditions precedent to closing, which is anticipated to occur in February 2021.
On December 13, 2020, the Company and I9 Acquisition Sub Inc. ("Merger Sub"),
entered into an Agreement and Plan of Merger (the "Agreement") with OCG Inc., a
Colorado corporation ("Target"), pursuant to which the Merger Sub will be merged
with and into the Target in a reverse triangular merger with the Target
continuing as the surviving entity as a wholly-owned direct subsidiary of the
Company ("Merger"). OCG Inc. owns the award-winning dispensary franchise
concept, Unity Rd. Unity Rd. will be the retail vertical of the Company, will be
supplied with premium Item 9 Labs products, and gives the Company a less capital
intensive method of expanding into other markets.Our Arizona cannabis operations
saw significant expansion as well, both in our physical and geographic
footprint. Our physical footprint expanded with the addition of a 2nd 10,000
square foot facility in the 4th quarter of fiscal year 2019, more than doubling
our cultivation and processing space for Arizona. As the Company methodically
expanded our operational capacity by more than 100% in fiscal year 2020, we were
also able to significantly increase efficiencies within the cultivation and
processing operations. The Arizona expansion will continue in fiscal year 2021,
as we work towards tripling output in the first half of the year, prior to
beginning construction on phase 1 of our construction plan to build additional
cultivation space. Phase 1 totals over 80,000 square feet of cultivation and
processing space, and the remaining five phases will add over 500,000 square
feet of cultivation and processing space.
Item 9 Labs Corp. continued its expansion plans into other states during the
year as well as the Company acquired (pending regulatory approval) cultivation
and processing licenses in Nye County, Nevada which will be paired with our
Nevada facility. In 2019, we broke ground on our 20,000 square foot cultivation
and processing facility in Nevada. The facility is approximately 65% complete.
With financing plans in process, we anticipate recommencing construction in the
coming months as we aim to commence operations in Nevada in the fourth quarter
of 2021 or first quarter of 2022.
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Results of Operations
Year Ended September 30,
2020 2019
Revenues, net $ 8,121,733 $ 4,933,960
Cost of services 4,825,959 2,556,189
Gross profit 3,295,774 2,377,771
Operating expenses 8,721,724 12,518,810
Loss from operations (5,425,950 ) (10,141,039 )
Other income (expense), net (6,959,691 ) 192,401
Net loss, before income tax (12,385,641 ) (9,948,638 )
Income tax provision (benefit) (85,984 ) -
Net loss $ (12,299,657 ) $ (9,948,638 )
Revenues, net
Revenues, net for the year ended September 30, 2020 were $8,121,733 compared to
the revenue for the year ended September 30, 2019 of $4,933,960, an increase of
$3,187,773 or 65%. This increase was primarily due to an overall increase in
monthly sales as production and demand for our products grew. Management
anticipates revenues to continue to grow as the revenue trends are positive
month over month. The demand for our products is greater than the supply we are
able to produce. We increased production 100% during the year ended September
30, 2020. We have nearly doubled monthly production subsequent to year end and
have plans in place to double production capacity again by April 2021 under the
same operational footprint.
Costs of Revenues
Costs of revenues consist primarily of labor, materials, supplies and utilities.
Costs of revenues as a percentage of revenues was 59% for the year ended
September 30, 2020 compared to 52% for the period ended September 30, 2019. This
increase was due to an increase in costs as a percentage of revenue towards the
end of fiscal year 2019, due to inefficiencies encountered while commencing
operations in our second building. We were able to increase operational
efficiency throughout fiscal year 2020, and management believes costs of
revenues will increase at a lower rate than revenues in future periods, which
will lead to higher profit margins than these historical figures illustrate.
Management is also focused on reducing costs. Through bulk purchasing,
increasing efficiencies in production and investments in equipment, we believe
that we will continue reducing the overall costs of revenues.
Gross Profit
Gross profit for the year ended September 30, 2020 was $3,295,774 compared to
$2,377,771 for the year ended September 30, 2019. The increase was due to the
ramp up in operations and continued improvement in the operating capacity of the
Company's cultivation and processing facilities. With the Company's continued
increase in capacity and focus on efficiencies and reducing costs, management
expects gross profit to continue to grow going forward.
Operating Expenses
Total operating expenses for the year ended September 30, 2020 were $8,721,724,
compared to $12,518,810 for the year ending September 30, 2019, a decrease of
$3,797,086 or 30%. Operating expenses as a percentage of gross profit decreased
from 526% to 265% for the years compared. Management believes this ratio will
decrease going forward as the expectation is that revenues will continue to grow
at a higher rate than operating expenses. $907,556 of the Company's operating
expenses for the year ended September 30, 2020 were depreciation of fixed assets
and amortization of other intangible assets, and $450,018 is a provision for bad
debt, which management does not believe the latter to be indicative of future
results. Additionally, $1,817,910 of the Company's operating expenses in fiscal
year 2020 were paid through the issuance of shares of common stock of the
Company and employee stock options. After removing impairment, the Company's
operating expenses as a percentage of sales decreased from 137% in 2019 to 106%
in 2020. Payroll and employee related expenses remained consistent at
approximately 50% of revenues for 2019 and 2020, though the 2020 payroll was
offset in a decrease in the same ratios compared to professional fees and
marketing expenses as the Company utilized more in-house resources in 2020
compared to 2019. $5,758,827 of the Company's operating expenses for the year
ended September 30, 2019 were a loss on impairment of goodwill and other
intangible assets, and $376,430 is a provision for bad debt, both items that
management does not believe to be indicative of future results. Additionally,
$1,067,617 of the Company's operating expenses in 2019 were paid through the
issuance of shares of common stock of the Company.
Other Income (Expense), net
Other expenses consist primarily of interest expense of $6,959,705 and $342,718
for the years ended September 30, 2020 and 2019, respectively. Nearly 70% of the
interest expense in fiscal year 2020 is from the amortization of debt discounts,
and beneficial conversion amounts related to recording convertible debt with
warrant features based on relative fair values.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources
Our primary need for liquidity is to fund working capital requirements of our
business, capital expenditures, acquisitions, debt service, and for general
corporate purposes. Our primary source of liquidity is funds generated by
financing activities and from private placements. Our ability to fund our
operations, to make planned capital expenditures, to make planned acquisitions,
to make scheduled debt payments, and to repay or refinance indebtedness depends
on our future operating performance and cash flows, which are subject to
prevailing economic conditions and financial, business and other factors, some
of which are beyond our control.
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States,
which contemplate continuation of the Company as a going concern. The Company
has not yet established an ongoing source of revenue sufficient to cover its
operating costs and has incurred net losses since its inception. These losses,
with the associated substantial accumulated deficit, are a direct result of the
Company's planned ramp up period as it is pursuing market acceptance and
geographic expansion. In view of these matters, realization of a major portion
of the assets in the accompanying consolidated balance sheets is dependent upon
continued operations of the Company which in turn is dependent upon the
Company's ability to meet its financing requirements, and the success of its
future operations. The Company operates in a new, developing industry with a
variety of competitors. These factors raise substantial doubt about the
Company's ability to continue as a going concern. As a result, the Company's
independent registered public accounting firm included an emphasis-of-matter
paragraph with respect to the accompanying consolidated financial statements,
expressing uncertainty regarding the Company's assumption that it will continue
as a going concern.
In order to continue as a going concern, the Company will need to generate
additional revenue and obtain additional capital to fund its operating losses
and service its debt. Management's plans in regard to these matters are
described as follows:
Sales and Marketing. Historically, the Company has generated the majority of its
revenues by providing its products to dispensaries throughout the state of
Arizona. The Company's revenues have increased significantly since its inception
in May 2017 and continue to grow as of the date of these consolidated financial
statements. Management will continue its plans to increase revenues in the
Arizona market by providing top quality products. Additionally, as capital
resources become available, the Company will expand into additional markets
outside of Arizona, with construction of a cultivation and processing facility
well underway in Nevada.
Financing. To date, the Company has financed its operations primarily with loans
from shareholders, private placement financings and sales revenue. Management
believes that with continued production efficiencies, production growth, and
continued marketing efforts, sales revenue will grow significantly, thus
enabling the Company to reverse its negative cash flow from operations and raise
additional capital as needed. However, there is no assurance that the Company's
overall efforts will be successful.
If the Company is unable to generate significant sales growth in the near term
and raise additional capital, there is a risk that the Company could default on
additional obligations and could be required to discontinue or significantly
reduce the scope of its operations if no other means of financing operations are
available. The consolidated 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.
As of September 30, 2020, the Company had $84,677 of cash and negative working
capital of ($7,396,258) (current assets minus current liabilities), compared
with $574,943 of cash and restricted cash and ($4,174,962) of negative working
capital as of September 30, 2019. The decrease of $3,221,296 in our working
capital and $490,266 in cash was primarily due to investments in expanding
operations totaling $961,854 for acquisitions, property and equipment, license
fees and maintaining current operations. This was offset by the issuance of debt
of $2,119,000. The Company is an early-stage growth company. It is generating
cash from sales and is investing its capital reserves in current operations and
new acquisitions that will generate additional earnings in the long term. The
Company expects that its cash on hand and cash flows from operations, along with
private and/or public financing, will be adequate to meet its capital
requirements and operational needs for the next 12 months, although no assurance
can be given that private and/or public financing can be obtained on terms
acceptable to the Company, or at all.
20
Cash Flows
The following table summarizes the sources and uses of cash for each of the
periods presented:
Year Ended September 30,
2020 2019
Net cash used in operating activities $ (1,141,416 ) $ (2,393,428 )
Net cash used in investing activities (886,854 ) (7,842,612 )
Net cash provided by financing activities 1,538,004 9,136,717
Net increase (decrease) in cash and cash equivalents $ (490,266 ) $ (1,099,323 )
Operating Activities
During the year ended September 30, 2020, operating activities used $1,141,416
of cash and cash equivalents, primarily resulting from a net loss of $12,299,657
offset by net cash provided by operating assets and liabilities of $3,096,439.
There was significant non-cash activity that contributed to the net loss
totaling $8,061,802 including depreciation and amortization of $979,158,
provision for bad debt of $450,018, amortization of debt discounts of
$2,240,617, amortization of beneficial conversion of $2,562,099, and
compensation paid in the form of stock and stock options of $1,729,910. Cash
provided by changes in operating assets and liabilities was primarily due to an
increase in accrued interest of $1,371,606, $900,661 in accounts payable, and
accrued expenses of $1,428,847, offset by a decrease in deferred costs of
$210,576, and prepaid expenses and other current assets of $293,496.
During the year ended September 30, 2019, operating activities used $2,393,428
of cash and cash equivalents, primarily resulting from a net loss of $9,948,638
and net cash used in operating assets and liabilities of $260,815. Cash used by
changes in operating assets and liabilities was primarily due to an increase in
deferred costs of $1,317,816 and accounts receivable of $339,644 offset by an
increase in accounts payable of $351,036, accrued payroll of $40,827, and
accrued interest of $663,827.
Investing Activities
During the year ended September 30, 2020, investing activities used $886,854 of
cash and cash equivalents, consisting primarily of payments totaling $167,152 in
purchases of property and equipment, $555,738 paid for acquisitions, and
$238,964 in license fees offset by $75,000 in cash received on notes receivable.
During the year ended September 30, 2019, investing activities used $7,842,612
of cash and cash equivalents, consisting primarily of payments totaling
$6,006,764 in purchases of property and equipment, $400,000 in deposits made on
a land acquisition, and $1,500,000 in acquisition outlays, offset by $115,000 in
cash received on notes receivable.
Financing Activities
During the year ended September 30, 2020, financing activities provided
$1,538,004 of cash and cash equivalents, which includes cash proceeds from notes
payable of $2,119,000, offset by debt payments of $580,996.
During the year ended September 30, 2019, financing activities provided
$9,136,717 of cash and cash equivalents, which included proceeds from the sale
of common stock of $5,885,003 and cash proceeds from notes payable of
$3,251,714.
Anticipated Capital Requirements
We estimate that our capital requirements to implement our expansion plan over
the next 18 months will be approximately $25,000,000 as described in the table
below. These estimates may change significantly depending on the nature of our
future business activities, expansion rollout, identification of suitable
acquisition targets, and our ability to raise capital necessary to conduct the
aforementioned activities. We further anticipate incurring additional costs and
expenses for accounting, legal, and other miscellaneous fees relating to
compliance with SEC requirements.
Estimated
Description Expenses
Legal, Accounting and Other Registration Expenses $ 350,000
Costs Associated with Being a Public Company
240,000
Trade Shows and Travel 50,000
Website Development 40,000
Rent 170,000
Advertising and Marketing 600,000
Staffing 2,750,000
General Working Capital 400,000
Cash Reserves 1,500,000
Business Acquisitions and Construction 18,000,000
License Applications 900,000
Total $ 25,000,000
Given that our cash needs are strongly driven by our growth requirements, we
also intend to maintain a cash reserve for other risk contingencies that may
arise.
We intend to meet our cash requirements for the next 18 months through the use
of the cash we have on hand and through business operations, future equity
financing, debt financing or other sources, which may result in further dilution
in the equity ownership of our shares. Subsequent to year end, through December
29, 2020, we have raised $5,667,350 through an $8,500,000 private placement of
our common stock. We have executed a letter of intent and are currently in the
diligence process for a construction loan of up to $21 million. We currently do
not have any other arrangements in place to complete any private placement
financings and there is no assurance that we will be successful in completing
any such financings on terms that will be acceptable to us.
21
Off-Balance Sheet Arrangements
We are not currently a party to, or otherwise involved with, any off-balance
sheet arrangements that have or are reasonably likely to have a current or
future material effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity
with U.S. Generally Accepted Accounting Principles ("GAAP") and the Company's
discussion and analysis of its financial condition and operating results require
the Company's management to make judgments, assumptions and estimates that
affect the amounts reported in its consolidated financial statements and
accompanying notes. Note 1, "Description of Business and Summary of Significant
Accounting Policies," of the Notes to Consolidated Financial Statements included
in this Form 10-K, describes the significant accounting policies and methods
used in the preparation of the Company's consolidated financial statements.
Management bases its estimates on historical experience and on various other
assumptions it believes to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets
and liabilities. Actual results may differ from these estimates, and such
differences may be material.
Management believes the Company's critical accounting policies and estimates are
those related to revenue recognition, valuation of warrants, intangible assets
subject to amortization, goodwill, equity-based compensation and income taxes.
Management considers these policies critical because they are both important to
the portrayal of the Company's financial condition and operating results, and
they require management to make judgments and estimates about inherently
uncertain matters. The Company's management has reviewed these critical
accounting policies and related disclosures.
Principles of Consolidation - The consolidated financial statements include the
accounts of the Company, its wholly owned subsidiaries and variable interest
entities in which the Company is the primary beneficiary. Intercompany balances
and transactions have been eliminated.
Use of Estimates - The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenue and expenses during the reporting period. Actual results could
materially differ from those estimates. Significant estimates of the Company
include, but are not limited to, accounting for depreciation and amortization,
current and deferred income taxes, deferred costs, accruals and contingencies,
carrying value of goodwill and intangible assets, collectability of notes
receivable, the fair value of common stock and the estimated fair value of stock
options and warrants. Due to the uncertainties in the formation of accounting
estimates, and the significance of these items, it is reasonably possible that
these estimates could be materially changed in the near term.
Fair Value of Financial Instruments - The carrying value of the Company's
financial instruments, consisting of cash and cash equivalents, accounts
receivable, accounts payable, and accrued expenses approximate fair value due to
their short term to maturity. The Company's long-term receivable resulting from
the sale of Airware, notes receivable and notes payable were discounted to its
estimated fair value.
Revenue - The majority of the Company's revenue is associated with a customer
contract that represents an obligation to perform services that are delivered at
a single point in time. Any costs incurred prior to the period in which the
services are performed to completion are deferred and recognized as cost of
services in the period in which the performance obligations are completed. For
the year ended September 30, 2020, substantially all of the Company's revenue
was generated for performance obligations completed in the State of Arizona and
in 2019, 90% of the Company's revenues was generated for performance obligations
completed in the State of Arizona.
Intangible Assets Subject to Amortization - Intangible assets include trade
name, customer relationships, website, and intellectual property obtained
through a business acquisition. Intangible assets acquired in a business
combination are recognized at fair value using generally accepted valuation
methods deemed appropriate for the type of intangible assets acquired.
Intangible assets with finite lives are amortized over their estimated useful
life and are reported net of accumulated amortization, separately from goodwill.
Goodwill - Goodwill represents the excess of the purchase price paid for the
acquisition of a business over the fair value of the net tangible and intangible
assets acquired. Goodwill is not subject to amortization and is tested annually
for impairment, or more frequently if events or changes in circumstances
indicate that the carrying value of goodwill may not be recoverable.
Income Taxes - The Company accounts for income taxes under FASB ASC 740, Income
Taxes. Deferred income tax assets and liabilities are determined based upon
differences between financial reporting and tax bases of assets and liabilities,
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. The Company has federal and state
net operating loss carryforwards in excess of $30,000,000, though a portion of
those losses will likely be disallowed due to the merger with BSSD Group, LLC
and none of the carryforwards can be utilized until the Company is profitable.
Due to these facts, the Company has decided to reserve for 100% of any deferred
tax asset it may be entitled to.
The Company files income tax returns in the U.S. federal jurisdiction and the
State of Arizona. The Company is subject to U.S. federal, state, and local
income tax examinations by tax authorities. All periods beginning on or after
January 1, 2015 are open to examination by taxing authorities. The Company
believes it has no tax positions for which the ultimate deductibility is highly
uncertain.
Stock-Based Compensation - The Company follows the guidelines in FASB
Codification Topic ASC 718-10 "Compensation-Stock Compensation", which requires
the measurement and recognition of compensation expense for all share-based
payment awards made to employees and directors including employee stock options
and employee stock purchases related to an Employee Stock Purchase Plan based on
the estimated fair values.
Warrants and Debt Discounts - The Company bifurcates the value of warrants
issued with debt. This bifurcation results in the establishment of a debt
discount, based on the relative fair values of the warrants and the debt, with a
corresponding charge to equity unless the terms of the warrant require it to be
classified as a liability. The warrants and corresponding note discounts are
valued using the Black-Scholes valuation model. This model uses estimates of
volatility, risk free interest rate and the expected term of the warrants, along
with the current market price of the Company's stock, to estimate the value of
the outstanding warrants. The Company estimates the expected term using an
average of the contractual term and vesting period of the award. The expected
volatility is measured using the average historical daily changes in the market
price of the Company's common stock over the expected term of the award and the
risk-free interest rate is equivalent to the implied yield on zero-coupon U.S.
Treasury bonds with a remaining maturity equal to the expected term of the
awards.
Earnings (Loss) Per Share - Basic earnings per share does not include dilution
and is computed by dividing loss available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution of securities that could
share in the earnings of an entity. Dilutive securities are not included in the
weighted average number of shares when inclusion would be anti-dilutive.
At September 30, 2020, there were 22,024,419 shares underlying convertible notes
payable, warrants and options.
22
Recently Issued Accounting Pronouncements
Adopted
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The update
improves financial reporting about leasing transactions by requiring a lessee to
record on the balance sheet the assets and liabilities for the rights and
obligations created by lease terms of more than 12 months. We adopted ASU
2016-02 effective October 1, 2019. Results for reporting periods after October
1, 2019 are presented under Topic 842, while prior periods have not been
adjusted. The Company elected the package of practical expedients permitted
under the transition guidance which among other things, allowed the Company to
carryforward the historical lease classification and to not separate lease
components from non-lease components, if any. The most significant change was
related to the recognition of a right-of-use asset and lease liability on our
consolidated balance sheet for our real estate operating lease. The impact on
our results of operations and cash flows has not been material.
In January 2017, the FASB issued ASU 2017-01, Business Combination (Topic 805).
The update clarifies the definition of a business to assist entities with
evaluating whether transactions should be accounted for as acquisitions of
assets of businesses. The Company adopted ASU 2017-01 on January 1, 2020 which
impacted how the acquisition from February 2020 has been reported.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260). The
update changes the classification analysis of certain equity-linked financial
instruments (or embedded features) which contain down round features. The
Company adopted ASU 2017-11 on January 1, 2020 which impacted how warrants
relating to debt was recorded.
Pending Adoption
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses
(Topic 326), which provides guidance on measuring credit losses on financial
instruments. The amended guidance replaces current incurred loss impairment
methodology of recognizing credit losses when a loss is probable with a
methodology that reflects expected credit losses and requires a broader range of
reasonable and supportable information to assess credit loss estimates. ASU
2016-13 is effective for us on October 1, 2023, with early adoption permitted on
October 1, 2019. We are assessing the provisions of this amended guidance;
however, the adoption of the standard is not expected to have a material effect
on our consolidated financial statements.
In August 2020, the FASB issued ASU No. 2020-06, Debt - Debt with Conversion and
Other options (Subtopic 470-20) and Derivatives and Hedging - Contracts in
Entity's Own Equity (Subtopic 815-40). The amendment is meant to simplify the
accounting for convertible instruments by removing certain separation models in
subtopic 470-20 for convertible instruments. The amendment also changed the
method used to calculate dilutes EPS for convertible instruments and for
instruments that may be settled in cash. The amendment is effective for years
beginning after December 15, 2021, including interim periods for those fiscal
years. We are currently evaluating the impact of adoption of this standard on
the Company's consolidated financial statements and related 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.
Seasonality
We do not expect our sales to be impacted by seasonal demands for our products
and services. Also, due to the fact we use indoor grow space, seasonality should
not have any impact on our cultivation operations.
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