STEM HOLDINGS, INC. Cautionary Note Regarding Forward-Looking Information and Factors That May Affect Future Results
This annual report on Form 10-K contains forward-looking statements regarding
our business, financial condition, results of operations and prospects.
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We caution that these factors could cause our actual results of operations and financial condition to differ materially from those expressed in any forward-looking statements we make and that investors should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. New factors emerge from time to time, and it is not possible for us to predict all such factors. Further, we cannot assess the impact of each such factor on our results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
The following discussion should be read in conjunction with our audited financial statements and the related notes that appear elsewhere in this annual report on Form 10-K.
RESULTS OF OPERATIONS
The following comparative analysis on results of operations was based primarily
on the comparative consolidated financial statements, footnotes and related
information for the periods identified below and should be read in conjunction
with the audited consolidated financial statements and the notes to those
statements for the years ended
Years Ended September 30, Change
($ in thousands) 2021 2020 $ %
Gross Revenue $ 41,784 $ 16,371 $ 25,413 155 %
Discounts and returns (6,015 ) (2,397 ) (3,618 ) 151 %
Net Revenue 35,769 13,974 21,795 156 %
Cost of goods sold (28,183 ) (10,306 ) (17,877 ) 173 %
Consulting fees (2,978 ) (2,546 ) (432 ) 17 %
Professional fees (3,537 ) (2,526 ) (1,011 ) 40 %
General and administration (16,445 ) (8,262 ) (8,183 ) 99 %
Impairment of intangible assets (52,490 ) - (52,490 ) 100 %
Other income (expenses), net 3,492 (1,574 ) 5,066 322 %
Loss from equity method investees (234 ) (253 ) 19 (8 )%
Net loss $ (64,606 ) $ (11,493 ) $ (53,113 ) 462 %
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Revenues
In years ended
In 2020 and 2021, the Company's revenue was generated in the states of
Cost of Revenues
Cost of revenues for the year ended
Operating Expenses Consulting Fees
Consulting fees for the years ended
Professional Fees
Professional fees for the years ended
General and Administrative
General and administrative expenses for the years ended
Impairment of Property and Equipment and Intangibles
Impairment expenses related to property and equipment totaled approximately
The Company did not incur impairment expense for the year ended
Other Income (Expense)
Other income for the year ended
Loss from Equity Method Investees
Related to the year ended
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Below is a presentation of Non-Generally Accepted Accounting Principles
("non-GAAP") presentation of Earnings Before Interest Taxes Depreciation and
Amortization ("EBITDA") for the years ended
Earnings Before Interest Taxes Depreciation and Amortization ("EBITDA"):
Years Ended September 30,
($ in thousands) 2021 2020
Revenue $ 41,784 $ 16,371
Discounts and returns (6,015 ) (2,397 )
Cost of goods sold 28,183 10,306
Consulting fees 2,978 2,546
Professional fees 3,537 2,526
General and administration 16,445 8,262
Impairment of intangible assets 52,490 -
Other income (expenses), net 3,492 (1,574 )
Loss from equity method investees 234 253
Net loss- Generally Accepted Accounting Principles
("GAAP") (64,606 ) (11,493 )
Add Backs:
Interest 1,881 2,434
Taxes - -
Depreciation and amortization 5,389 2,366
EBITDA (non-GAAP) (57,336 ) (6,693 )
Other Add Backs:
Stock-based compensation 2,082 2,073
Impairment of intangible assets 52,490 -
Change in fair value of derivative liability (577 ) 190
Change in fair value of warrant liability (2,401 ) (1,065 )
Foreign currency translation adjustment (91 ) 15
Adjusted EBITDA (non-GAAP) $ (5,833 ) $ (5,480 ) LIQUIDITY AND CAPITAL RESOURCES
On
Subsequent to
Going Concern
On
These audited consolidated financial statements have been prepared on a going concern basis, which assumes that the Company will be able to realize its assets and discharge its liabilities in the normal course of business.
While the recreational use of cannabis is legal under the laws of certain
States, where the Company has and is working towards further finalizing the
acquisition of entities or investment in entities that directly produce or sell
cannabis, the use and possession of cannabis is illegal under United States
Federal law for any purpose, by way of Title II of the Comprehensive Drug Abuse
Prevention and Control Act of 1970, otherwise known as the Controlled Substances
Act of 1970 (the "ACT"). Cannabis is currently included under Schedule 1 of the
Act, making it illegal to cultivate, sell or otherwise possess in
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On
On
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On
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The sheer size of the cannabis industry, in addition to various level of
legalization at the State and local governments, suggests that a largescale
enforcement operation would possibly create unwanted political backlash for the
These conditions raise substantial doubt as to the Company's ability to continue as a going concern. Should the United States Federal Government choose to begin enforcement of the provisions under the Act, the Company through its wholly owned subsidiaries could be prosecuted under the Act and the Company may have to immediately cease operations and/or be liquidated upon their closing of the acquisition or investment in entities that engage directly in the production and or sale of cannabis.
Management believes that the Company has access to capital resources through potential public or private issuances of debt or equity securities. However, if the Company is unable to raise additional capital, it may be required to curtail operations and take additional measures to reduce costs, including reducing its workforce, eliminating outside consultants, and reducing legal fees to conserve its cash in amounts sufficient to sustain operations and meet its obligations. These matters raise substantial doubt about the Company's ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments that might become necessary should the Company be unable to continue as a going concern.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles
generally accepted in
The Company's financial position, results of operations and cash flows are impacted by the accounting policies the Company has adopted. In order to get a full understanding of the Company's financial statements, one must have a clear understanding of the accounting policies employed. A summary of the Company's critical accounting policies follows:
Impairment of Long-Lived Assets
The Company reviews the carrying value of its long-lived assets, which include property and equipment, for indicators of impairment whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. The Company considers the following to be some examples of important indicators that may trigger an impairment review: (i) significant under-performance or losses of assets relative to expected historical or projected future operating results; (ii) significant changes in the manner or use of assets or in the Company's overall strategy with respect to the manner or use of the acquired assets or changes in the Company's overall business strategy; (iii) significant negative industry or economic trends; (iv) increased competitive pressures; (v) a significant decline in the Company's stock price for a sustained period of time; and (vi) regulatory changes. The Company evaluates assets for potential impairment indicators at least annually and more frequently upon the occurrence of such events. The Company does not test for impairment in the year of acquisition of properties, as long as those properties are acquired from unrelated third parties.
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The Company assesses the recoverability of its long-lived assets by comparing the projected undiscounted net cash flows associated with the related long-lived asset or group of long-lived assets over their remaining estimated useful lives against their respective carrying amounts. In cases where estimated future net undiscounted cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of the asset or asset group. Fair value is generally determined using the assets expected future discounted cash flows or market value, if readily determinable. If long-lived assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter than originally estimated, the net book values of the long-lived assets are depreciated and amortized prospectively over the newly determined remaining estimated useful lives.
An impairment expense of
Capitalization of Project Costs
The Company's policy is to capitalize all costs that are directly identifiable with a specific property, would be capitalized if the Company had already acquired the property, and when the property, or an option to acquire the property, is being actively sought after, and either funds are available or will likely become available to exercise their option. All amounts shown capitalized prior to acquisition of a property are included under the caption of Project Costs within the "Prepaid expenses and other current assets" line item in the consolidated balance sheet.
Equity Method Investments
Investments in unconsolidated affiliates are accounted for under the equity method of accounting, as appropriate. The Company accounts for investments in limited partnerships or limited liability corporations, whereby the Company owns a minimum of 5.0% of the investee's outstanding voting stock, under the equity method of accounting. These investments are recorded at the amount of the Company's investment and adjusted each period for the Company's share of the investee's income or loss, and dividends paid.
During the years ended
Asset Acquisitions
The Company has adopted ASU 2017-01, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as businesses acquisitions. As a result of adopting ASU 2017-01, acquisitions of real estate and cannabis licenses do not meet the definition of a business combination and were deemed asset acquisitions, and the Company therefore capitalized these acquisitions, including its costs associated with these acquisitions.
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Intangible Assets. Intangible assets deemed to have finite lives are amortized on a straight-line basis over their estimated useful lives, where the useful life is the period over which the asset is expected to contribute directly, or indirectly, to our future cash flows. Intangible assets are reviewed for impairment on an interim basis when certain events or circumstances exist. For amortizable intangible assets, impairment exists when the carrying amount of the intangible asset exceeds its fair value. At least annually, the remaining useful life is evaluated.
An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset that is amortized over the remaining useful life of that asset, if any. Subsequent reversal of impairment losses is not permitted.
During the year ended
Business Combinations
The Company applies the provisions of ASC 805 in the accounting for
acquisitions. ASC 805 requires the Company to recognize separately from goodwill
the assets acquired, and the liabilities assumed at their acquisition date fair
values.
Contingent Consideration
The Company accounts for "contingent consideration" according to FASB ASC 805, "Business Combinations" ("FASB ASC 805"). Contingent consideration typically represents the acquirer's obligation to transfer additional assets or equity interests to the former owners of the acquiree if specified future events occur or conditions are met. FASB ASC 805 requires that contingent consideration be recognized at the acquisition-date fair value as part of the consideration transferred in the transaction. FASB ASC 805 uses the fair value definition in Fair Value Measurements, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As defined in FASB ASC 805, contingent consideration is (i) an obligation of the acquirer to transfer additional assets or equity interests to the former owners of an acquiree as part of the exchange for control of the acquiree, if specified future events occur or conditions are met or (ii) the right of the acquirer to the return of previously transferred consideration if specified conditions are met.
43 Warrant Liability
The Company accounts for certain common stock warrants outstanding as a liability at fair value and adjusts the instruments to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company's consolidated statements of operations. The fair value of the warrants issued by the Company has been estimated using a Black Scholes model.
Embedded Conversion Features
The Company evaluates embedded conversion features within convertible debt to determine whether the embedded conversion feature(s) should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in the statement of operations. If the conversion feature does not require recognition of a bifurcated derivative, the convertible debt instrument is evaluated for consideration of any beneficial conversion feature ("BCF") requiring separate recognition. When the Company records a BCF, the intrinsic value of the BCF is recorded as a debt discount against the face amount of the respective debt instrument (offset to additional paid-in capital) and amortized to interest expense over the life of the debt.
Income Taxes
The provision for income taxes is determined in accordance with ASC 740, "Income
Taxes". The Company files a consolidated
The Company recognizes uncertain tax positions based on a benefit recognition model. Provided that the tax position is deemed more likely than not of being sustained, the Company recognizes the largest amount of tax benefit that is greater than 50.0% likely of being ultimately realized upon settlement. The tax position is derecognized when it is no longer more likely than not of being sustained. The Company classifies income tax related interest and penalties as interest expense and selling, general and administrative expense, respectively, on the consolidated statements of operations.
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44 Revenue Recognition
The Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (Topic 606), the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
Revenue for the Company's product sales has not been adjusted for the effects of a financing component as the Company expects, at contract inception, that the period between when the Company's transfers control of the product and when the Company receives payment will be one year or less. Product shipping and handling costs are included in cost of product sales.
Effective
The following policies reflect specific criteria for the various revenue streams of the Company:
Cannabis Dispensary, Cultivation and Production
Revenue is recognized upon transfer of retail merchandise to the customer upon sale transaction, at which time its performance obligation is complete. Revenue is recognized upon delivery of product to the wholesale customer, at which time the Company's performance obligation is complete. Terms are generally between cash on delivery to 30 days for the Company's wholesale customers.
The Company's sales environment is somewhat unique, in that once the product is sold to the customer (retail) or delivered (wholesale) there are essentially no returns allowed or warranty available to the customer under the various state laws.
Delivery
1) Identify the contract with a customer
The Company sells retail products directly to customers. In these sales there is no formal contract with the customer. These sales have commercial substance and there are no issues with collectability as the customer pays the cost of the goods at the time of purchase or delivery.
2) Identify the performance obligations in the contract
The Company sells its products directly to consumers. In this case these sales represent a performance obligation with the sales and any necessary deliveries of those products.
3) Determine the transaction price
The sales that are done directly to the customer have no variable consideration or financing component. The transaction price is the cost that those goods are being sold for plus any additional delivery costs.
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4) Allocate the transaction price to performance obligations in the contract
For the goods that the Company sells directly to customers, the transaction price is allocated between the cost of the goods and any delivery fees that may be incurred to deliver to the customer.
5) Recognize revenue when or as the Company satisfies a performance obligation
For the sales of the Company's own goods the performance obligation is complete once the customer has received the product.
Leases
The Company recognizes rental revenue from tenants, including rental abatements, lease incentives and contractual fixed increases attributable to operating leases, on a straight-line basis over the term of the related leases when collectability is reasonably assured.
The Company makes estimates of the collectability of its tenant receivables related to base rents, straight-line rent, and other revenues. In the current fiscal year, the Company began significant rental operations. The Company considers such things as historical bad debts, tenant creditworthiness, current economic trends, facility operating performance, lease structure, developments relevant to a tenant's business, and changes in tenants' payment patterns in its analysis of accounts receivable and its evaluation of the adequacy of the allowance for doubtful accounts. Specifically, for straight-line rent receivables, the Company's assessment includes an estimation of a tenant's ability to fulfill its rental obligations over the remaining lease term.
On
Our lease agreements generally do not provide an implicit borrowing rate;
therefore, an internal incremental borrowing rate is determined based on
information available at lease commencement date for purposes of determining the
present value of lease payments. We used the incremental borrowing rate on
Under Topic 842, operating lease expense is generally recognized evenly over the
term of the lease. Lease costs were
Lease Costs
Year Ended
September 30,
2021
Components of total lease costs:
Operating lease expense $ 839
Total lease costs $ 839
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Lease positions as of
ROU lease assets and lease liabilities for our operating leases were recorded in the consolidated condensed balance sheet as follows:
September 30,
2021
Assets
Right of use asset $ 4,562
Total assets $ 4,562
Liabilities
Operating lease liabilities - short term $ 685
Operating lease liabilities - long term 3,963
Total lease liability $ 4,648
Lease Terms and Discount Rate
Weighted average remaining lease term (in years) - operating lease 9 Weighted average discount rate - operating lease
12.18 %
Cash Flows
Year Ended
September 30,
2021 Cash paid for amounts included in the measurement of lease liabilities: ROU amortization
$ 839
Cash paydowns of operating liability $ (839 )
Supplemental non-cash amounts of lease liabilities arising
from obtaining:
ROU asset $ 4,562
Lease Liability $ 4,648
The future minimum lease payments under the leases are as follows:
2022$ 1,228 2023 1,088 2024 797 2025 687 2026 653 Thereafter 4,676 Total future minimum lease payments 9,129 Less: Lease imputed interest (4,481 ) Total$ 4,648 47 Disaggregation of Revenue
In the year ended
The following table illustrates our revenue by type related to the years ended
September 30,
2021 2020
Revenue
Wholesale $ 5,270 $ 3,832
Retail 35,805 12,389
Rental 17 35
Other 692 115
Total revenue 41,784 16,371
Discounts and returns (6,015 ) (2,397 )
Net Revenue $ 35,769 $ 13,974
Geographical Concentrations
As of
Cost of Goods Sold
Cost of sales represents costs directly related to manufacturing and distribution of the Company's products. Primary costs include raw materials, packaging, direct labor, overhead, shipping and handling and the depreciation of manufacturing equipment and production facilities. Manufacturing overhead and related expenses include salaries, wages, employee benefits, utilities, maintenance, and property taxes. The Company recognizes the cost of sales as the associated revenues are recognized.
Fair Value of Financial Instruments
As defined in the authoritative guidance, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
To estimate fair value, the Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable.
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The authoritative guidance establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities ("Level 1" measurements) and the lowest priority to unobservable inputs ("Level 3" measurements). The three levels of the fair value hierarchy are as follows:
Level 1 - Observable inputs such as quoted prices in active markets at the measurement date for identical, unrestricted assets or liabilities.
Level 2 - Other inputs that are observable, directly, or indirectly, such as quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 - Unobservable inputs for which there is little or no market data and which the Company makes its own assumptions about how market participants would price the assets and liabilities.
In instances in which multiple levels of inputs are used to measure fair value, hierarchy classification is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Stock-based Compensation
The Company accounts for share-based payment awards exchanged for services at the estimated grant date fair value of the award. Stock options issued under the Company's long-term incentive plans are granted with an exercise price equal to no less than the market price of the Company's stock at the date of grant and expire up to ten years from the date of grant. These options generally vest on the grant date or over a one-year period.
The Company estimates the fair value of stock option grants using the Black-Scholes option pricing model and the assumptions used in calculating the fair value of stock-based awards represent management's best estimates and involve inherent uncertainties and the application of management's judgment.
Expected Term - The expected term of options represents the period that the Company's stock-based awards are expected to be outstanding based on the simplified method, which is the half-life from vesting to the end of its contractual term.
Expected Volatility - The Company computes stock price volatility over expected terms based on its historical common stock trading prices.
Risk-Free Interest Rate - The Company bases the risk-free interest rate on the
implied yield available on U. S.
Expected Dividend - The Company has never declared or paid any cash dividends on its common shares and does not plan to pay cash dividends in the foreseeable future, and, therefore, uses an expected dividend yield of zero in its valuation models.
Effective
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Earnings (Loss) per Share
ASC 260, Earnings Per Share, requires dual presentation of basic and diluted earnings per share ("EPS") with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.
Basic net loss per share of common stock excludes dilution and is computed by
dividing net loss by the weighted average number of shares of common stock
outstanding during the period. Diluted net loss per share of common stock
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity unless inclusion of such shares would be anti-dilutive. Since the Company
has only incurred losses, basic and diluted net loss per share is the same.
Securities that could potentially dilute loss per share in the future that were
not included in the computation of diluted loss per share as of
Potentially dilutive share-based instruments:
2021 2020
Convertible notes 3,696,311 5,763,210
Options to purchase common stock 7,140,447 5,572,916
Unvested restricted stock awards - 2,471,317
Warrants to purchase common stock 62,965,833 5,053,078
73,802,591 18,860,521
Advertising Costs
The Company follows the policy of charging the cost of advertising to expense as
incurred. Advertising expense was
Related parties
Parties are related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal with if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests.
Segment reporting
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group in deciding how to allocate resources and in assessing performance. The Company's chief operating decision-maker is its chief executive officer. The Company currently operates in one segment.
Recently issued and adopted accounting pronouncements
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OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements.
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