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EVIO, INC. - Quarter Report: 2017 December (Form 10-Q)

evio_10q.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended December 31, 2017

 

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: 000-12350

 

EVIO, INC.

 (Exact name of registrant as specified in its charter)

 

Colorado

 

47-1890509

(State of Incorporation)

 

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

 

62930 O. B. Riley Rd, Suite 300, Bend, OR

 

97703

(Address of principal executive offices)

 

(Zip Code)

 

(541) 633-4568

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

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

 

Large accelerated filer

¨

Non-accelerated filer

¨

Accelerated filer

¨

Smaller reporting company

x

Emerging growth company

x

 

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

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding as of February 13, 2018

Common stock, par value $0.0001 per share 

 

13,957,528

 

 
 
 
 

EVIO, INC.

FORM 10-Q

December 31, 2017

 

TABLE OF CONTENTS

 

PART I -- FINANCIAL INFORMATION

 

Item 1.

Consolidated Financial Statements (Unaudited)

 

3

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

27

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

33

 

Item 4.

Control and Procedures

 

33

 

PART II -- OTHER INFORMATION

 

Item 1.

Legal Proceedings

 

34

 

Item 1A.

Risk Factors

 

34

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

34

 

Item 3.

Defaults Upon Senior Securities

 

34

 

Item 4.

Mine Safety Disclosures

 

34

 

Item 5.

Other Information

 

34

 

Item 6.

Exhibits

 

35

 

 
2
 
Table of Contents

 

PART I -- FINANCIAL INFORMATION

 

ITEM 1 –FINANCIAL STATEMENTS

 

EVIO, INC. 

CONSOLIDATED BALANCE SHEETS 

 

 

 

December 31,
2017

 

 

September 30,
2017

 

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash

 

$ 221,820

 

 

$ 121,013

 

Accounts receivable, net of allowance of $77,850 and $74,782

 

 

202,643

 

 

 

229,564

 

Prepaid expenses

 

 

149,685

 

 

 

169,557

 

Other current assets

 

 

33,952

 

 

 

7,438

 

Note receivable, current portion

 

 

100,000

 

 

 

100,000

 

Subscription receivable

 

 

148,000

 

 

 

-

 

Total current assets

 

 

856,100

 

 

 

627,572

 

 

 

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $260,983 and $213,447, respectively

 

 

506,489

 

 

 

547,073

 

Security deposits

 

 

92,892

 

 

 

92,892

 

Note receivable, net of current portion

 

 

1,200,000

 

 

 

1,200,000

 

Intangible assets, net of accumulated amortization, net of accumulated amortization of $228,439 and $189,475

 

 

553,296

 

 

 

592,260

 

Goodwill

 

 

2,958,137

 

 

 

2,958,137

 

 

 

 

 

 

 

 

 

 

Total assets

 

$ 6,166,914

 

 

$ 6,017,934

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$ 835,985

 

 

$ 773,053

 

Client deposits

 

 

78,577

 

 

 

119,281

 

Deferred revenue

 

 

33,300

 

 

 

40,800

 

Interest payable

 

 

184,845

 

 

 

133,697

 

Capital lease obligation, current

 

 

40,526

 

 

 

37,990

 

Derivative liability

 

 

-

 

 

 

294,637

 

Convertible notes payable, net of discounts of $33,998 and $208,680, respectively

 

 

1,068,402

 

 

 

1,212,720

 

Loans payable, current, net of discounts of $73,568 and $127,662

 

 

1,438,450

 

 

 

1,503,545

 

Loans payable, related party, current

 

 

243,355

 

 

 

312,855

 

Total current liabilities

 

 

3,923,440

 

 

 

4,428,578

 

 

 

 

 

 

 

 

 

 

Capital lease obligation, net of current portion

 

 

40,850

 

 

 

52,777

 

Loans payable, net of current portion

 

 

56,385

 

 

 

59,832

 

Loans payable, related party, net of current portion, net of discounts of $35,471 and $42,044, respectively

 

 

1,235,523

 

 

 

1,251,306

 

Total liabilities

 

 

5,256,198

 

 

 

5,792,493

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

Series A Convertible Preferred Stock, Par Value $0.0001; 1,850,000 authorized; 0 shares issued and outstanding at December 31, 2017 and September 30, 2017, respectively

 

 

-

 

 

 

-

 

Series B Convertible Preferred Stock, Par Value $0.0001; 5,000,000 authorized; 5,000,000 shares issued and outstanding at December 31, 2017 and September 30, 2017, respectively

 

 

500

 

 

 

500

 

Series C Convertible Preferred Stock, Par Value $0.0001; 500,000 authorized; 500,000 shares issued and outstanding at December 31, 2017 and September 30, 2017, respectively

 

 

50

 

 

 

50

 

Series D Convertible Preferred Stock, Par Value $.0001; 1,000,000 authorized; 744,772 and 832,500 shares issued and outstanding at December 31, 2017 and September 30, 2017, respectively

 

 

74

 

 

 

83

 

Common Stock, Par Value $.0001, 1,000,000,000 authorized; 13,890,028 and 10,732,922 issued and outstanding at December 31, 2017 and September 30, 2017, respectively

 

 

1,389

 

 

 

1,073

 

Additional paid in capital

 

 

9,337,432

 

 

 

7,657,982

 

Accumulated deficit

 

 

(8,578,963 )

 

 

(7,592,371 )

Total stockholders’ equity

 

 

760,482

 

 

 

67,317

 

Non-controlling interest

 

 

150,234

 

 

 

158,124

 

Total equity

 

 

910,716

 

 

 

225,441

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$ 6,166,914

 

 

$ 6,017,934

 

 

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

 

 
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EVIO, INC. 

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS 

 

 

 

Three months ended
December 31,

 

 

 

2017

 

 

2016

 

Revenues

 

 

 

 

 

 

 

 

Testing services

 

$ 887,349

 

 

$ 568,578

 

Consulting services

 

 

59,516

 

 

 

99,878

 

Total revenue

 

 

946,865

 

 

 

668,456

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

 

 

 

 

 

 

Testing services

 

 

696,658

 

 

 

559,277

 

Consulting services

 

 

10,492

 

 

 

12,500

 

Depreciation and amortization

 

 

29,113

 

 

 

18,302

 

Total cost of revenue

 

 

736,263

 

 

 

590,079

 

 

 

 

 

 

 

 

 

 

Gross margin

 

 

210,602

 

 

 

78,377

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

820,275

 

 

 

435,158

 

Depreciation and amortization

 

 

57,387

 

 

 

34,535

 

Total operating expenses

 

 

877,662

 

 

 

469,693

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(667,060 )

 

 

(391,316 )

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

Interest expense, net of interest income

 

 

(284,651 )

 

 

(323,422 )

Loss on settlement of debt and account payable

 

 

(56,093 )

 

 

-

 

Gain (loss) on change in fair market value of derivative liabilities

 

 

13,322

 

 

 

(106,243 )

Total other income (expense)

 

 

(327,422 )

 

 

(429,665 )

 

 

 

 

 

 

 

 

 

Net loss

 

$ (994,482 )

 

$ (820,981 )

Income (loss) attributable to non-controlling interest

 

 

(7,890 )

 

 

4,736

 

Net loss attributable to EVIO, Inc.

 

$ (986,592 )

 

$ (825,717 )

 

 

 

 

 

 

 

 

 

Basic and diluted loss per common share

 

$ (0.08 )

 

$ (0.09 )

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

11,713,103

 

 

 

8,833,481

 

 

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

 

 
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EVIO, INC. 

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS 

 

 

 

Three months ended
December 31,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities

 

 

 

 

 

 

Net loss

 

$ (994,482 )

 

$ (820,981 )

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Stock based compensation

 

 

79,151

 

 

 

166,924

 

Common stock issued for services

 

 

179,552

 

 

 

-

 

Loss on settlement of debt

 

 

52,343

 

 

 

-

 

Loss on settlement of account payable

 

 

3,750

 

 

 

-

 

(Gain) loss on derivative liability

 

 

(13,322 )

 

 

106,243

 

Amortization of debt discount

 

 

231,321

 

 

 

293,316

 

Depreciation and amortization expense

 

 

86,500

 

 

 

52,837

 

Allowance for doubtful accounts

 

 

3,067

 

 

 

-

 

Reduction of security deposit for rent expense

 

 

-

 

 

 

2,095

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

23,854

 

 

 

(210,271 )

Prepaid expenses

 

 

81,477

 

 

 

(11,876 )

Other current asset

 

 

(26,514 )

 

 

40,000

 

Security deposits

 

 

-

 

 

 

(4,190 )

Accounts payable and accrued liabilities

 

 

77,932

 

 

 

221,243

 

Interest payable

 

 

71,189

 

 

 

28,420

 

Deferred revenue

 

 

(7,500 )

 

 

-

 

Customer deposits

 

 

(40,704 )

 

 

128,549

 

Net cash used in operating activities

 

 

(192,386 )

 

 

(7,691 )

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Net cash paid in acquisitions of subsidiaries

 

 

-

 

 

 

(6,930 )

Purchase of equipment

 

 

(6,952 )

 

 

(26,314 )

Net cash used in investing activities

 

 

(6,952 )

 

 

(33,244 )

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Repayments of capital leases

 

 

(9,391 )

 

 

-

 

Proceeds from issuance of common stock

 

 

350,000

 

 

 

-

 

Proceeds from the issuance of series D preferred stock

 

 

-

 

 

 

114,500

 

Proceeds from convertible notes, net of original issue discounts and fees

 

 

-

 

 

 

70,000

 

Payment on loan payable

 

 

(2,636 )

 

 

(31,687 )

Proceeds from notes payable - related party

 

 

-

 

 

 

80,000

 

Payments on notes payable - related party

 

 

(37,828 )

 

 

(97,481 )

Net cash provided by financing activities

 

 

300,145

 

 

 

135,332

 

 

 

 

 

 

 

 

 

 

Net cash increase for period

 

 

100,807

 

 

 

94,397

 

Cash balance, beginning of period

 

 

121,013

 

 

 

57,486

 

Cash balance, end of period

 

$ 221,820

 

 

$ 151,883

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$ 30,553

 

 

$ -

 

Cash paid for income tax

 

$ -

 

 

$ -

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Conversion of convertible note and accrued interest into common stock

 

$ 336,884

 

 

$ 316,457

 

Reclassification of derivative liability to additional paid in capital

 

$ 281,315

 

 

$ 889,509

 

Settlement of account payable for common stock

 

$ 18,750

 

 

$ -

 

Common stock issued for settlement of note payable

 

$ 162,000

 

 

$ -

 

Common stock issued for settlement of related party note payable

 

$ 62,500

 

 

$ -

 

Common stock issued for subscription receivable

 

$ 148,000

 

 

$ -

 

Equipment financed through capital leases

 

$ -

 

 

$ 105,120

 

Debt discount from derivative liability

 

$ -

 

 

$ 198,300

 

Conversion of Series A Preferred stock to common stock

 

$ -

 

 

$ 4,388

 

Acquisition of Greenstyle Consulting assets through issuance of preferred shares, cash and note payable

 

$ -

 

 

$ 260,000

 

Acquisition of GreehHaus through issuance of preferred shares and note payable

 

$ -

 

 

$ 800,000

 

 

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

 

 
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EVIO, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017

 

Note 1 – NATURE OF ACTIVITIES AND CONTINUANCE OF BUSINESS

 

EVIO, INC., a Colorado corporation and its subsidiaries (“the Company”) provide analytical testing and advisory services to the emerging legalized cannabis industry. EVIO, Inc. was originally incorporated in the State of New York, December 12, 1977 under the name 3171 Holding Corporation. On February 22, 1979, the name was changed to Electronomic Industries Corp. and on February 23, 1983 the name was changed to Quantech Electronics Corp. The Company was reincorporated in the State of Colorado on December 15, 2003. On August 29, 2014, the Company completed a reverse merger with Signal Bay Research, Inc., a Nevada Corporation, and assumed its operations. In September 2014, the Company changed its name from Quantech Electronics Corp. to Signal Bay, Inc. then to EVIO, INC. in September 2017. The Company has selected September 30 as its fiscal year end. The Company is domiciled in the State of Colorado, and its corporate headquarters are located in Bend, Oregon.

 

As a part of and prior to the consummation of the reverse merger, William Waldrop and Lori Glauser, principals of Signal Bay Research, Inc., purchased 80% of the issued and outstanding common stock from WB Partners. The merger between the Company and Signal Bay Research was finalized and closed contemporaneously with the share purchase. As part of this share purchase, Mr. Waldrop and Ms. Glauser became the officers and directors of the Company. Immediately after the reverse, WB Partners owned less than 5% of the common stock. The company filed a Form 10-12G on November 25, 2014, and was determined to be a shell company by the SEC as per the Form 10-12G/A which went effective on January 24, 2015. On January 29, 2015, the company filed an 8-K stating it entered into a material agreement and was no longer a shell company.

 

After the reverse merger, Signal Bay Research, Inc. continues to operate as a wholly owned subsidiary providing compliance, research and advisory services for EVIO, Inc.

 

Signal Bay Services was formed on January 25, 2015, as the management services division of EVIO.

 

On September 17, 2015, the Company entered into a share exchange agreement with CR Labs, Inc., an Oregon Corporation, pursuant to which the Company acquired 80% of the outstanding common stock of CR Labs, Inc.

 

EVIO Labs OR Inc. was formed on April 4, 2016 to become the holding company for all laboratory operations in Oregon. 

 

EVIO Labs Eugene, LLC was formed on May 23, 2016, as a wholly owned subsidiary of EVIO Inc. Subsequently on May 24, 2016, EVIO Labs Eugene acquired all of the assets of Oregon Analytical Services, LLC, inclusive of client lists, equipment, trade names and personnel.

 

On June 1, 2016, the Company entered into a share purchase agreement to purchase 80% of the outstanding common stock of Smith Scientific Industries, Inc. d/b/a Kenevir Research in Medford, OR. 

 

On October 19, 2016, the Company entered into a Membership Interest Purchase Agreement to purchase 100% of the ownership of GreenHaus Analytical Labs, LLC (“GreenHaus”). GreenHaus is a full-service cannabis testing laboratory.

 

On October 26, 2016, the Company entered in to an Asset Purchase Agreement with Green Style Consulting, LLC which was closed on November 1, 2016 (“GreenStyle”). GreenStyle is a full-service cannabis testing laboratory.

 

The Company entered in to an Membership Interest Purchase Agreement with Viridis Analytics MA, LLC (“Viridis”) which was closed on August 1, 2017. Viridis is a full-service cannabis testing laboratory.

 

 
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Going Concern

 

The Company’s financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, the Company has negative working capital, recurring losses, and does not have an established source of revenues sufficient to cover its operating costs. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plan described in the preceding paragraph and eventually attain profitable operations. The accompanying financial statements do not include any adjustments that may be necessary if the Company is unable to continue as a going concern.

 

In the coming year, the Company’s foreseeable cash requirements will relate to continual development of the operations of its business, maintaining its good standing and making the requisite filings with the Securities and Exchange Commission, and the payment of expenses associated with operations and business developments. The Company may experience a cash shortfall and be required to raise additional capital.

 

Historically, it has mostly relied upon internally generated funds such as shareholder loans and advances to finance its operations and growth. Management may raise additional capital by retaining net earnings or through future public or private offerings of the Company’s stock or through loans from private investors, although there can be no assurance that it will be able to obtain such financing. The Company’s failure to do so could have a material and adverse effect upon it and its shareholders. 

 

Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation:

 

The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s most recent Annual Financial Statements filed with the SEC on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim period presented have been reflected herein. The results of operations for the interim period are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosures contained in the audited consolidated financial statements for the most recent fiscal period, as reported in the Form 10-K, have been omitted

 

Principles of Consolidation 

 

The Company prepares its financial statements on the accrual basis of accounting. The accompanying consolidated financial statements include the accounts of the Company and its wholly and partially owned subsidiaries, all of which have a fiscal year end of September 30. All significant intercompany accounts, balances and transactions have been eliminated in the consolidation.

 

The Company consolidates its subsidiaries in accordance with ASC 810, and specifically ASC 810-10-15-8 which states, the usual condition for a controlling financial interest is ownership of a majority voting interest, and, therefore, as a general rule ownership by one reporting entity, directly or indirectly, or over 50% of the outstanding voting shares of another entity is a condition pointing toward consolidation. 

 

Use of Estimates

 

The preparation of financial statements in accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. A change in managements’ estimates or assumptions could have a material impact on the Company’s financial condition and results of operations during the period in which such changes occurred. Actual results could differ from those estimates. The Company’s financial statements reflect all adjustments that management believes are necessary for the fair presentation of their financial condition and results of operations for the periods presented.

 

 
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Financial Instruments

 

Level 1 - applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

 

Level 2 - applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

 

Level 3 - applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

 

The Company’s financial instruments consist principally of cash, accounts payable, and accrued liabilities. Pursuant to ASC 820 and 825, the fair value of cash is determined based on “Level 1” inputs, which consist of quoted prices in active markets for identical assets. The recorded values of all other financial instruments approximate their current fair values because of their nature and respective maturity dates or durations.

 

The following table sets forth by level with the fair value hierarchy the Company’s financial assets and liabilities measured at fair value on December 31, 2017:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

$ -

 

 

$ -

 

 

$ -

 

 

$ -

 

 

The following table sets forth by level with the fair value hierarchy the Company’s financial assets and liabilities measured at fair value on September 30, 2017:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

$ -

 

 

$ -

 

 

$ 294,637

 

 

$ 294,637

 

 

Recently Issued Accounting Pronouncements

 

In January 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment”. The amendments in this update simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. This update is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 31, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing after January 1, 2017. The Company notes that this guidance applies to its reporting requirements and will implement the new guidance accordingly in performing goodwill impairment testing; however, the Company does not believe this update will have a material impact on the consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” which revises the definition of a business. This update is effective for annual periods beginning after December 15, 2017, including interim periods within those years. Early adoption is permitted. The Company notes that this guidance will impact its acquisitions beginning October 1, 2018.

 

In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing” (“ASU 2016-1O”). The amendments in this update clarify the following two aspects to Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. The entity first identifies the promised goods or services in the contract and reduces the cost and complexity. An entity evaluates whether promised goods and services are distinct. Topic 606 includes implementation guidance on determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time). The Company evaluated the impacts of ASU 2016-10 and determined it did not have an impact on the Company’s revenue recognition practices.

 

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our financial statements upon adoption

 

Net Income (Loss) Per Share

 

Basic loss per share is computed by dividing net income, or loss, by the weighted average number of shares of common stock outstanding for the period. Diluted earnings (loss) per share is computed by dividing net income, or loss, by the weighted average number of shares of common stock outstanding for the period. There were 9,519,430 and 9,675,627 potentially dilutive common shares outstanding as of December 31, 2017 and 2016. Because of the net losses incurred during the three months ended December 31, 2017 and 2016, the impacts of dilutive instruments would have been anti-dilutive for the period presented and have been excluded from the diluted loss per share calculations.

 

 
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Accounts Receivable and Allowance for Doubtful Accounts

 

Accounts receivable are recorded at their original invoice amounts. We regularly review collectability and establish an allowance for uncollectible amounts as necessary based on our experience with historical collectability. There was an allowance for uncollectible accounts receivable of $77,850 and $74,782 as of December 31, 2017 and September 30, 2017, respectively.

 

Notes Receivable

 

The Company accounts investments for notes receivable in accordance with ASC 320. On September 6, 2017, the Company entered in a note receivable with an unrelated entity for $1,300,000. The note is due on September 6, 2024 and carries interest at a rate of 8% per annum. The note requires minimum principal payments of $100,000 plus accrued interest on each anniversary date with the unpaid principal and interest being due on September 6, 2024. The Company evaluated the collectability of the note receivable as of December 31, 2017 and September 30, 2017 and determined the full balance is collectible and no reserve for write off was recorded. As of December 31, 2017 and September 30, 2017, there was $1,300,000 of principal, of which $100,000 was current and $1,200,000 was long term. Additionally, there was $33,052 and $6,838 of interest due as of December 31, 2017 and September 30, 2017 which is included in other current assets.

 

Goodwill and Other Intangible Assets

 

Goodwill and indefinite-lived intangible assets are not amortized but are evaluated for impairment annually or more often if indicators of a potential impairment are present. Our annual impairment tests are conducted at the beginning of the fourth quarter. We use a two-step process to quantitatively evaluate goodwill for impairment. In the first step, we compare the fair value of each reporting unit with the carrying amount of the reporting unit, including goodwill. If the estimated fair value of the reporting unit is less than the carrying amount of the reporting unit, we complete a second step to determine the amount of the goodwill impairment that we should record. In the second step, we determine an implied fair value of the reporting unit’s goodwill by allocating the reporting unit’s fair value to all of its assets and liabilities other than goodwill (including any unrecognized intangible assets). We compare the resulting implied fair value of the goodwill to the carrying amount and record an impairment charge for the difference. We test individual indefinite-lived intangible assets by comparing the estimated fair value with the book values of each asset.

 

The Company recognizes an acquired intangible apart from goodwill whenever the intangible arises from contractual or other legal rights, or whenever it can be separated or divided from the acquired entity and sold, transferred, licensed, rented or exchanged, either individually or in combination with a related contract, asset or liability. Such intangibles are amortized on a straight-line basis over their estimated useful lives unless the estimated useful life is determined to be indefinite. The Company’s intangible assets consist of client lists (amortized over five years), websites and domain names (amortized over 15 years) and testing licenses (amortized over 5 years).

 

Stock-Based Compensation

 

The Company applies Topic 718 “Share-Based Payments” (“Topic 718”) to share-based compensation, which requires the measurement of the cost of services received in exchange for an award of an equity instrument based on the grant-date fair value of the award. Compensation cost is recognized when the event occurs. The Black-Scholes option-pricing model is used to estimate the fair value of options granted.

 

The Company accounts for equity-based transactions with non-employees under the provisions of ASC Topic No. 505-50, “Equity-Based Payments to Non-Employees” (“Topic No. 505-50”). Topic No. 505-50 establishes that equity-based payment transactions with non-employees shall be measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.

 

 
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Non-Controlling Interest

 

The Company reports the non-controlling interest in its majority owned subsidiaries in the consolidated balance sheets within the stockholders’ deficit section, separately from the Company’s stockholders’ deficit. Non-controlling interest represents the non-controlling interest holders’ proportionate share of the equity of the Company’s majority-owned subsidiaries. Non-controlling interest is adjusted for the non-controlling interest holders’ proportionate share of the earnings or losses and other comprehensive income (loss) and the non-controlling interest continues to be attributed its share of losses even if that attribution results in a deficit non-controlling interest balance.

 

Related Parties

 

The registrant follows subtopic 850-10 of the FASB Accounting Standards Codification for the identification of related parties and disclosure of related party transactions.

 

Pursuant to Section 850-10-20 the Related parties include (a) affiliates of the registrant; (b) entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825–10–15, to be accounted for by the equity method by the investing entity; (c) trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; (d) principal owners of the registrant; (e) management of the registrant; (f) other parties with which the registrant may deal 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; and (g) Other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.

 

The financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of consolidated or combined financial statements is not required in those statements. The disclosures shall include: (a) the nature of the relationship(s) involved; (b) description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements; (c) the dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period; and (d) amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.

 

Capital Leases

 

The Company accounts for capital leases in accordance with ACS 840-30. During the year ended September 30, 2017, the Company entered into three separate long-term leases for equipment that contain a $1 buyout option upon lease termination. The Company determined these were capital leases based on the minimum buy out price and capitalized the net present value of the leases with totaled $116,800 as equipment.

 

As of September 30, 2017, there was a total of $111,501 of future payments due through December 2019 of which $20,734 are financing charges leaving a total principal balance of $90,967 as of September 30, 2017. Of this amount, $37,990 was current and $52,777 was long term as of September 30, 2017.

 

As of December 31, 2017, there was a total of $97,427 of future payments due through December 2019 of which $16,051 are financing charges leaving a total principal balance of $81,376 as of December 31, 2017. Of this amount, $40,526 was current and $40,850 was long term as of December 31, 2017.

 

Future annual payments required under the capital leases through termination are as follows:

 

Year ended September 30,

 

Principal

 

 

Interest

 

 

Total

 

2018

 

$ 31,307

 

 

$ 10,399

 

 

$ 41,706

 

2019

 

 

39,214

 

 

 

5,354

 

 

 

44,568

 

2020

 

 

10,855

 

 

 

298

 

 

 

11,153

 

Total

 

$ 81,376

 

 

$ 16,051

 

 

$ 97,427

 

 

 
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Concentration of Credit Risk

 

Instruments that potentially subject the Company to concentration of credit risk consist principally of cash deposits, notes receivable and accounts receivable. As of December 31, 2017 and September 30, 2017, the Company did not hold cash at any financial institution in excess of the amount insured by the Federal Deposit Insurance Corporation (“FDIC”) of up to $250,000. As of December 31, 2017 and September 30, 2017, the Company had a note receivable totaling $1,300,000 due from a single entity.

 

As of September 30, 2017, the Company had total accounts receivable net of allowances of $229,564. Three separate clients comprised a total of 41% of this balance as follows:

 

 

 

Balance

 

 

Percent
of Total

 

Customer 1

 

$ 42,878

 

 

 

14 %

Customer 2

 

 

45,635

 

 

 

15 %

Customer 3

 

 

37,540

 

 

 

12 %

All others

 

 

178,294

 

 

 

59 %

Total

 

 

304,347

 

 

 

100 %

Allowance for doubtful accounts

 

 

(74,783 )

 

 

 

 

Net accounts receivable

 

$ 229,564

 

 

 

 

 

 

As of December 31, 2017, the Company had total accounts receivable net of allowances of $202,643. Two separate clients comprised a total of 28% of this balance as follows:

 

 

 

Balance

 

 

Percent
of Total

 

Customer 1

 

$ 34,248

 

 

 

12 %

Customer 2

 

 

45,635

 

 

 

16 %

All others

 

 

200,610

 

 

 

72 %

Total

 

 

280,493

 

 

 

 

 

Allowance for doubtful accounts

 

 

(77,850 )

 

 

 

 

Net accounts receivable

 

$ 202,643

 

 

 

 

 

 

Property and Equipment

 

Property and equipment are carried at cost. Expenditures for maintenance and repairs are expensed in the period incurred. Renewals and betterments that materially extend the life of the assets are capitalized. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in income for the period.

 

Depreciation is computed for financial statement purposes on a straight-line basis over estimated useful lives of the related assets and the modified accelerated cost recovery system for federal income tax purposes. The estimated useful lives of depreciable assets are:

 

 

Estimated

 

Useful Lives

 

Laboratory and Computer Equipment

 

5 years

Furniture and Fixtures

 

7 years

Software

 

3 years

Domains

 

15 years

 

 
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The Company’s property and equipment consisted of the following as of December 31, 2017 and September 30, 2017:

 

 

 

December 31,
2017

 

 

September 30,
2017

 

Furniture and Equipment

 

$ 147,022

 

 

$ 146,870

 

Laboratory Equipment

 

 

445,871

 

 

 

439,071

 

Software

 

 

58,333

 

 

 

58,333

 

Leasehold Improvements

 

 

41,081

 

 

 

41,081

 

Vehicles

 

 

75,165

 

 

 

75,165

 

Total

 

 

767,472

 

 

 

760,520

 

Accumulated depreciation

 

 

(260,983 )

 

 

(213,447 )

Net value

 

$ 506,489

 

 

$ 547,073

 

 

The Company capitalized a total of $116,800 of equipment purchased through capital leases as disclosed in Note 2 – Summary of Significant Accounting Policies and recorded depreciation expense of $9,733 and $3,244 on that equipment during the three months ended December 31, 2017 and 2016, respectively.

 

Note 3 – INTANGIBLE ASSETS

 

The Company’s intangible assets consist of customer lists, testing licenses, favorable leases and websites. The components of intangible assets as of December 31, 2017 and September 30, 2017 consist of:

 

 

 

December 31,
2017

 

 

September 30,
2017

 

Customer list

 

$ 480,670

 

 

$ 480,670

 

License

 

 

256,000

 

 

 

256,000

 

Favorable lease

 

 

3,100

 

 

 

3,100

 

Website

 

 

41,965

 

 

 

41,965

 

Total

 

 

781,735

 

 

 

781,735

 

Accumulated amortization

 

 

(228,439 )

 

 

(189,475 )

Net value

 

$ 553,296

 

 

$ 592,260

 

 

The Company estimates amortization to be recorded on existing intangible assets through the year ended September 30, 2022 to be:

 

For the years ended September 30,

 

Amortization

 

2018

 

$ 122,755

 

2019

 

 

149,651

 

2020

 

 

149,651

 

2021

 

 

107,476

 

2022

 

 

9,722

 

Thereafter

 

 

24,041

 

Total

 

$ 533,296

 

 

 
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Note 4 – RELATED PARTY TRANSACTIONS

 

Through September 30, 2017, the Company received loans from its Chief Operating Officer totaling $106,000 and made repayments totaling $21,795 leaving a balance due as of September 30, 2017 of $84,205. The advances are non-interest bearing and due on demand. There was $84,205 due as of December 31, 2017 and September 30, 2017, and is included in the accompanying consolidated balance sheets as a current portion of notes payable to related parties.

 

During the three months ended December 31, 2017 and 2016, the Company incurred total expenses of $12,317 and $14,548, respectively, for management consulting services performed by Newport Commercial Advisors, an entity fully owned and controlled by our Chief Executive Officer. There was not a balance payable to Newport Commercial Advisors as of December 31, 2017 or September 30, 2017.

 

During the year ended September 30, 2017, the Company received loans from its Chief Executive Officer totaling $80,100 and made repayments totaling $75,650. There were no additional advances or repayments made during the three months ended December 31, 2017. The loans are non-interest bearing and due on demand. There was $4,450 due as of December 31, 2017 and September 30, 2017.

 

During the year ended September 30, 2017 the Company made repayments to Eric Ezrine, a shareholder of CR Labs, on an outstanding note payable totaling $13,139. The loans carry an interest rate of 0% per annum. There was $130 due as of December 31, 2017 and September 30, 2017. Additionally, the Company entered into a severance agreement with Mr. Ezrine whereby it agreed to make payments totaling $44,500 through August 2018. The Company made repayments of $22,050 during the year ended September 30, 2017 and $4,000 during the three months ended December 31, 2017. There was $18,450 and $22,450 accrued as of December 31, 2017 and September 30, 2017, respectively.

 

On May 24, 2016, the Company executed an asset purchase agreement with Sara Lausmann, managing member owner of Oregon Analytical Services, LLC, for $972,500. The terms of the purchase required the issuance of 200,000 shares of Series C Preferred Stock, valued at $80,000, $72,500 in a short-term loan and $700,000 in a long-term note. Through the year ended September 30, 2017, the Company repaid a total of $82,630 to Sara Lausmann, Vice President Client Services. The Company made additional repayments of $15,500 during the three months ended December 31, 2017. The total amount outstanding is $674,370 and $689,870 as of December 31, 2017 and September 30, 2017, respectively. As of December 31, 2017 and September 30, 2017, $74,370 and $89,870 and $600,000 and $600,000 are included in the accompanying consolidated balance sheets as current and long-term portions of notes payable to related party, respectively. The notes carry interest at a rate of 5% per annum and had accrued interest totaling $55,908 and $47,409 due as of December 31, 2017 and September 30, 2017, respectively.

 

On June 1, 2016, the Company executed a share purchase agreement with Anthony Smith, for the purchase of 80% of Smith Scientific Industries for $636,000. The terms of the purchase required the issuance of 300,000 shares of Series C Preferred Stock, valued at $135,000 and $336,000 in a promissory note. During the year ended September 30, 2017, the Company repaid $50,000 to Anthony Smith, our Chief Science Officer. There were no repayments made during the three months ended December 31, 2017. The note carries interest at a rate of 5% per annum. There was $261,000 of principal due as of December 31, 2017 and September 30, 2017 and $22,135 and $18,846 of accrued interest due as of December 31, 2017 and September 30, 2017, respectively.

 

On October 19, 2016, the Company assumed a $194,512 payable due to Henry Grimmett, and officer of Greenhaus and current Director of the Company, with its acquisition of Greenhaus Analytical Services, LLC. The note bears interest at 0% per annum and requires repayments of $25,000 quarterly. During the year ended September 30, 2017, the Company made repayments totaling $25,100. Additionally, during the three months ended December 31, 2017, the Company agreed to issue 125,000 shares of common stock valued at $62,500 for the settlement of $50,000 of principal resulting in a loss on the settlement of debt of $15,000. There was a total of $119,412 and $169,412 due as of December 31, 2017 and September 30, 2017 of which $50,000 is current and $69,412 is long term.

 

On October 19, 2016, the Company entered into a $340,000 note payable as part of its acquisition of Greenhaus Analytical Services, LLC. At the time of issuance, the note carried a debt discount of $55,277. The note carries interest at a rate of 6% per annum and matures on October 16, 2020. There was $340,000 of principal, an unamortized debt discount of $38,563 and $42,044 and $24,648 and $19,506 of accrued interest due as of December 31, 2017 and September 30, 2017, respectively.

 

 
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On November 1, 2016, the Company entered into a $50,000 note payable, that contained a premium of $7,416 based on fair value, to Green Style Consulting, LLC. The Green Style Consulting, LLC Managing Member is our General Manager Northern California, who was hired by the Company concurrent to the asset purchase. The note carries interest at a rate of 5% per annum and matures on October 31, 2018. During the year ended September 30, 2017 and the three months ended December 31, 2017, the Company made repayments of $6,090 and $18,328. There was $25,582 and $43,910 of principal, $3,093 and $4,028 of unamortized note premium and $2,452 and $2,055 of accrued interest due as of December 31, 2017 and September 30, 2017, respectively.

 

On October 19, 2016, the Company entered into an asset purchase agreement with Green Style Consulting LLC requiring a future share of net profits generated by Green Style Consulting. The fair value of these future net profits were estimated to be $15,809. There have been no monthly net profits to distribute from the time of acquisition to December 31, 2017 and as such no repayments have been made. There was $15,809 accrued and included in accounts payable and accrued liabilities for future payments related to this earn out as of December 31, 2017 and September 30, 2017.

 

Through September 30, 2016, the Company borrowed a total of $16,200 from our Chief Science Officer to fund operations. The loans are non-interest bearing, due on demand and as such are included in current liabilities. During the year ended September 30, 2017 and the three months ended December 31, 2017, the Company made repayments totaling $7,000 and $4,000, respectively. There was $5,200 and $9,200 due as of December 31, 2017 and September 30, 2017, respectively.

 

Note 5 – STOCKHOLDERS’ EQUITY

 

Series A Convertible Preferred Stock

 

The Company designated 1,850,000 shares of Series A Convertible Preferred Stock (“Series A Preferred Stock”) with a par value of $0.0001 per share. Initially, there will be no dividends due or payable on the Series A Preferred Stock. Any future terms with respect to dividends shall be determined by the Board consistent with the Corporation’s Certificate of Incorporation. Any and all such future terms concerning dividends shall be reflected in an amendment to this Certificate, which the Board shall promptly file or cause to be filed.

 

All shares of the Series A Preferred Stock shall rank (i) senior to the Corporation’s Common Stock and any other class or series of capital stock of the Corporation hereafter created, (ii) pari passu with any class or series of capital stock of the Corporation hereafter created and specifically ranking, by its terms, on par with the Series A Preferred Stock and (iii) junior to any class or series of capital stock of the Corporation hereafter created specifically ranking, by its terms, senior to the Series A Preferred Stock, in each case as to distribution of assets upon liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary.

 

The Series A Preferred shall have no liquidation preference over any other class of stock.

 

Except as otherwise required by law, holders of Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock or any other class or series of preferred stock) for the taking of any corporate action.

 

Conversion at the Option of the Holder. From 12 months from the date of issuance, each holder of shares of Series A Preferred Stock may, at any time and from time to time, convert (an “Optional Conversion”) each of its shares of Series A Preferred Stock into fully paid and nonassessable shares of Common Stock at a rate equal to 4.9% of the Common Stock.

 

For a period of 18 months after the Preferred is convertible, the conversion price of the Series A Preferred will be subject to adjustment to prevent dilution in the event that the Company issues additional shares at a purchase price less than the applicable conversion price. The conversion price will be subject to adjustment on a weighted basis that takes into account issuances of additional shares. At the expiration of the antidilution period, the conversion rate in Section VI (A) above shall be equal to a conversion rate equal to 4.9% on the Common Stock. For example, if on the date of expiration of the antidilution clause there are 500,000,000 shares of Common Stock issued and outstanding then each Series A Preferred Stock shall convert at a rate of 13.24 common shares for each 1 Series Preferred Share.

 

The Company has evaluated the Series A Preferred Stock in accordance with ASC 815 and has determined their conversion options were for equity and ASC 815 does not apply.

 

 
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The Company has evaluated the Series A Preferred Stock in accordance with FASB ASC Subtopic 470-20, and has determined that there is no beneficial conversion feature that must be accounted.

 

All 1,840,000 outstanding Series A Convertible Stock was converted into 438,753 shares of common stock during the year ended September 30, 2017.

 

The Company has 0 shares of Series A Convertible Stock issued and outstanding as of December 31, 2017 and September 30, 2017.

 

Series B Convertible Preferred Stock

 

The Company designated 5,000,000 shares of Series B Convertible Preferred Stock (“Series B Preferred Stock”) with a par value of $0.0001 per share.

 

Initially, there will be no dividends due or payable on the Series B Preferred Stock. Any future terms with respect to dividends shall be determined by the Board consistent with the Corporation’s Certificate of Incorporation. Any and all such future terms concerning dividends shall be reflected in an amendment to this Certificate, which the Board shall promptly file or cause to be filed.

 

All shares of the Series B Preferred Stock shall rank (i) senior to the Corporation’s Common Stock and any other class or series of capital stock of the Corporation hereafter created, (ii) pari passu with any class or series of capital stock of the Corporation hereafter created and specifically ranking, by its terms, on par with the Series B Preferred Stock and (iii) junior to any class or series of capital stock of the Corporation hereafter created specifically ranking, by its terms, senior to the Series B Preferred Stock, in each case as to distribution of assets upon liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary.

 

The Series B Preferred shall have no liquidation preference over any other class of stock.

 

Each holder of outstanding shares of Series B Preferred Stock shall be entitled to the number of votes equal to one Common Share. Except as provided by law, or by the provisions establishing any other series of Preferred Stock, holders of Series B Preferred Stock and of any other outstanding series of Preferred Stock shall vote together with the holders of Common Stock as a single class.

 

Each holder of shares of Series B Preferred Stock may, at any time and from time to time, convert (an “Optional Conversion”) each of its shares of Series B Preferred Stock into one (1) fully paid and nonassessable shares of Common Stock.

 

The Company has evaluated the Series B Preferred Stock in accordance with ASC 815 and has determined their conversion options were for equity and ASC 815 does not apply.

 

The Company has evaluated the Series B Preferred Stock in accordance with FASB ASC Subtopic 470-20, and has determined that there is no beneficial conversion feature that must be accounted.

 

The Company has 5,000,000 shares of Series B Convertible Stock issued and outstanding as of December 31, 2017 and September 30, 2017.

 

Series C Convertible Preferred Stock

 

The Company designated 500,000 shares of Series C Convertible Preferred Stock (“Series C Preferred Stock”) with a par value of $0.0001 per share.

 

Initially, there will be no dividends due or payable on the Series C Preferred Stock. Any future terms with respect to dividends shall be determined by the Board consistent with the Corporation’s Certificate of Incorporation. Any and all such future terms concerning dividends shall be reflected in an amendment to this Certificate, which the Board shall promptly file or cause to be filed.

 

 
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All shares of the Series C Preferred Stock shall rank (i) senior to the Corporation’s Common Stock and any other class or series of capital stock of the Corporation hereafter created, (ii) pari passu with any class or series of capital stock of the Corporation hereafter created and specifically ranking, by its terms, on par with the Series B Preferred Stock and (iii) junior to any class or series of capital stock of the Corporation hereafter created specifically ranking, by its terms, senior to the Series B Preferred Stock, in each case as to distribution of assets upon liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary.

 

In any liquidation, dissolution, or winding up of the Corporation, the holders of the Series C Preferred Stock shall be entitled to receive (a) in preference to the holders of the Common Stock (b) on a pari passu basis to any sum that the holders of the Series B Preferred Stock shall be entitled to receive, but (c) subordinate in preference to any sum that the holders of any shares of any other series of the Corporation’s Preferred Stock shall be entitled, an amount equal to $1 per share (subject to appropriate adjustment in the event of any stock dividend, forward stock split, or other similar recapitalization). After payment of such sums, (i) the holders of the Series A Preferred Stock and (ii) the holders of the Common Stock, shall be entitled to receive any remaining assets of the Corporation on a pro rata, as-converted basis assuming conversion of the Series A Preferred Stock into Common Stock at the then- current Conversion Rate.

 

Each holder of outstanding shares of Series C Preferred Stock shall be entitled to the number of votes equal to five (5) Common Shares. Except as provided by law, or by the provisions establishing any other series of Preferred Stock, holders of Series B Preferred Stock and of any other outstanding series of Preferred Stock shall vote together with the holders of Common Stock as a single class.

 

Each holder of shares of Series C Preferred Stock may, at any time and from time to time, convert (an “Optional Conversion”) each of its shares of Series C Preferred Stock into five (5) fully paid and nonassessable shares of Common Stock; provided, however, that any Optional Conversion must involve the issuance of at least 100 shares of Common Stock.

 

In the event of a forward or reverse split, the conversion ratio shall be modified on a pro rata basis to align with the forward or reverse split.

 

The Company has evaluated the Series C Preferred Stock in accordance with ASC 815 and has determined their conversion options were for equity and ASC 815 does not apply.

 

The Company has evaluated the Series C Preferred Stock in accordance with FASB ASC Subtopic 470-20, and has determined that there is no beneficial conversion feature that must be accounted.

 

During the year ended September 30, 2016, the Company issued 300,000 shares of Series C Preferred Stock for the acquisition of Smith Scientific Industries, Inc. and 200,000 shares of Series C Preferred Stock for the acquisition of the assets of Oregon Analytical Services.

 

There were 500,000 shares of Series C Convertible Stock issued and outstanding as of December 31, 2017 and September 30, 2017.

 

Series D Convertible Preferred Stock

 

The Company designated 1,000,000 shares of Series D Convertible Preferred Stock (“Series D Preferred Stock”) with a par value of $0.0001 per share.

 

Initially, there will be no dividends due or payable on the Series D Preferred Stock. Any future terms with respect to dividends shall be determined by the Board consistent with the Corporation’s Certificate of Incorporation. Any and all such future terms concerning dividends shall be reflected in an amendment to this Certificate, which the Board shall promptly file or cause to be filed.

 

All shares of the Series D Preferred Stock shall rank (i) senior to the Corporation’s Common Stock and any other class or series of capital stock of the Corporation hereafter created, (ii) pari passu with any class or series of capital stock of the Corporation hereafter created and specifically ranking, by its terms, on par with the Series B Preferred Stock and (iii) junior to any class or series of capital stock of the Corporation hereafter created specifically ranking, by its terms, senior to the Series B Preferred Stock, in each case as to distribution of assets upon liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary.

 

As originally issued, in any liquidation, dissolution, or winding up of the Corporation, the holders of the Series D Preferred Stock shall be entitled to receive (a) in preference to the holders of the Common Stock (b) on a pari passu basis to any sum that the holders of the Series B Preferred Stock shall be entitled to receive, but (c) subordinate in preference to any sum that the holders of any shares of any other series of the Corporation’s Preferred Stock shall be entitled, an amount equal to $1 per share (subject to appropriate adjustment in the event of any stock dividend, forward stock split, or other similar recapitalization). After payment of such sums, (i) the holders of the Series A Preferred Stock and (ii) the holders of the Common Stock, shall be entitled to receive any remaining assets of the Corporation on a pro rata, as-converted basis assuming conversion of the Series A Preferred Stock into Common Stock at the then- current Conversion Rate. On July 31, 2017, the Company amended its articles of incorporation such that the Series D Preferred Stock shall have no liquidation preference over any other class of stock.

 

 
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Each holder of outstanding shares of Series D Preferred Stock shall be entitled to the number of votes equal to two hundred fifty (250) Common Shares. Except as provided by law, or by the provisions establishing any other series of Preferred Stock, holders of Series B Preferred Stock and of any other outstanding series of Preferred Stock shall vote together with the holders of Common Stock as a single class.

 

Each holder of shares of Series D Preferred Stock may, at any time and from time to time, convert (an “Optional Conversion”) each of its shares of Series D Preferred Stock into 2.5 fully paid and nonassessable shares of Common Stock; provided, however, that any Optional Conversion must involve the issuance of at least 500 shares of Common Stock.

 

In the event of a forward or reverse split, the conversion ratio shall be modified on a pro rata basis to align with the forward or reverse split.

 

The Company has evaluated the Series D Preferred Stock in accordance with ASC 815 and has determined their conversion options were for equity and ASC 815 does not apply.

 

The Company has evaluated the Series D Preferred Stock in accordance with FASB ASC Subtopic 470-20, and has determined that there is no beneficial conversion feature that must be accounted.

 

During the year ended September 30, 2016, the Company issued 48,000 shares of Series D Preferred Stock for cash proceeds of $48,000. During the year ended September 30, 2017, the Company issued 114,500 shares of Series D Preferred Stock for cash proceeds of $114,500 and 670,000 shares of Series D Preferred Stock, valued at $670,000, in conjunction with certain acquisitions.

 

During the three months ended December 31, 2017, the Company accepted three separate conversion notices from Series D Preferred Stockholders resulting in a total of 219,320 shares of common stock being issued for the conversion of 87,728 shares of Series D Preferred Stock.

 

There were 744,772 and 832,500 shares of Series D Convertible Stock issued and outstanding as December 31, 2017 and September 30, 2017, respectively.

 

Common Stock

 

During the year ended September 30, 2017, the Company effected a 1:100 reverse stock split. The effects of the split have been reflected retroactively in the financial statements for all periods presented.

 

On September 5, 2017, the Company amended its articles of incorporation to reduce the number of authorized common shares from 3,000,000,000 to 1,000,000,000.

 

During the year ended September 30, 2017, the Company issued 333,949 common shares valued at $537,515 for services; 438,753 common shares for the conversion of 1,840,000 shares of Series A Preferred Stock; 112,000 common shares for cash proceeds of $112,000; 93,691 common shares valued at $211,071 under its employee equity incentive plan; 10,000 common shares for the settlement of $11,400 of accounts payable; 1,755 common share due to the rounding impacts of the 1:100 reverse stock split; 1,142,892 common shares for the conversion of $765,050 of outstanding principal on convertible notes payable; 53,304 for the conversion of $30,975 of convertible accrued interest; 40,935 common shares for the settlement of non-convertible debt totaling $46,666 and 5,000 common shares valued at $7,651 as a settlement. All conversions of outstanding principal and accrued interest on convertible notes payable were done so at contractual terms.

 

During the three months ended December 31, 2017, the Company issued 239,750 common shares valued at $241,157 for services; 219,320 common shares for the conversion of 87,728 shares of Series D Preferred Stock; 875,000 common shares for cash proceeds of $350,000; 370,000 common shares in exchange for a subscription receivable totaling $148,000; 15,000 common shares valued at $16,165 under its employee equity incentive plan under which a total expense of $6,562 was recorded; 37,500 common shares for the settlement of $15,000 of accounts payable; 900,793 common shares for the conversion of $319,000 of outstanding principal on convertible notes payable; 50,743 for the conversion of $17,884 of convertible accrued interest; 324,000 common shares for the settlement of non-convertible debt and interest totaling $122,157 and 125,000 common shares for the settlement of non-convertible related party debt totaling $50,000. All conversions of outstanding principal and accrued interest on convertible notes payable were done so at contractual terms. The $148,000 of subscriptions receivable were collected in January 2018 and are included in current assets as of December 31, 2017 as a result.

 

There were 13,890,028 and 10,732,927 shares of common stock issued and outstanding at December 31, 2017 and September 30, 2017, respectively.

 

 
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Note 6 – LOANS PAYABLE

 

The Company had the following loans payable outstanding as of December 31, 2017 and September 30, 2017:

 

 

 

December 31,
2017

 

 

September 30,
2017

 

On March 16, 2017, the Company executed notes payable for the purchase of three vehicles. The notes carry interest at 6.637% annually and mature on March 31, 2023.

 

$ 68,403

 

 

$ 71,039

 

 

 

 

 

 

 

 

 

 

On August 1, 2017, the Company entered into a note payable totaling $500,000 for the acquisition of Viridis (see note 3). The note carries interest at 8% annually and is due on July 1, 2018.

 

 

500,000

 

 

 

500,000

 

 

 

 

 

 

 

 

 

 

On September 6, 2017, the Company entered into a note payable totaling $1,000,000 for the purchase of an outstanding note receivable. The note carries interest at 8% annually and is due on July 6, 2018.

 

 

1,000,000

 

 

 

1,000,000

 

 

 

 

 

 

 

 

 

 

On August 31, 2017, the Company executed a note payable for $120,000 of which $20,000 was an original issue discount resulting in cash proceeds of $100,000. The note carries interest at 8% annually and is due on March 3, 2018.

 

 

-

 

 

 

120,000

 

 

 

 

1,568,403

 

 

 

1,691,039

 

Less: unamortized original issue discounts

 

 

(73,568 )

 

 

(127,662 )

Total loans payable

 

 

1,494,835

 

 

 

1,563,377

 

Less: current portion of loans payable

 

 

1,438,450

 

 

 

1,503,545

 

 

 

 

 

 

 

 

 

 

Long-term portion of loans payable

 

$ 56,385

 

 

$ 59,832

 

 

As of December 31, 2017 and September 30, 2017, the Company accrued interest of $42,453 and $12,625, respectively.

 

Note 7 – CONVERTIBLE DEBT

 

The Company has entered into convertible notes payable that convert to common stock of the Company at variable conversion prices. As further discussed in Note 8 – Derivative Liabilities, the Company analyzed the conversion features of the agreements for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the embedded conversion features should be classified as a derivative because the exercise price of these convertible notes are subject to a variable conversion rate. In accordance with AC 815, the Company has bifurcated the conversion feature of the note and recorded a derivative liability.

 

The following table summarizes all convertible notes outstanding as of September 30, 2017:

 

Holder

 

Issue Date

 

Due Date

 

Principal

 

 

Unamortized Debt Discount

 

 

Carrying
Value

 

 

Accrued
Interest

 

Noteholder 1

 

3/2/2017

 

3/2/2018

 

$ 125,000

 

 

$ (38,112 )

 

$ 86,888

 

 

$ 5,671

 

Noteholder 1

 

7/14/2017

 

7/14/2018

 

 

275,600

 

 

 

(11,795 )

 

 

263,805

 

 

 

4,712

 

Noteholder 1

 

8/14/2017

 

8/14/2018

 

 

275,600

 

 

 

(13,068 )

 

 

262,532

 

 

 

2,839

 

Noteholder 4

 

3/2/2017

 

3/2/2018

 

 

69,000

 

 

 

(50,009 )

 

 

18,991

 

 

 

7,187

 

Noteholder 4

 

6/5/2017

 

3/2/2018

 

 

125,000

 

 

 

(70,833 )

 

 

54,167

 

 

 

3,205

 

Noteholder 4

 

7/14/2017

 

7/14/2018

 

 

275,600

 

 

 

(11,795 )

 

 

263,805

 

 

 

4,470

 

Noteholder 4

 

8/14/2017

 

8/14/2018

 

 

275,600

 

 

 

(13,068 )

 

 

262,532

 

 

 

2,597

 

 

 

 

 

 

 

$ 1,421,400

 

 

$ (208,680 )

 

$ 1,212,720

 

 

$ 30,681

 

 

 
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The following table summarizes all convertible notes outstanding as of December 31, 2017:

 

Holder

 

Issue Date

 

Due Date

 

Principal

 

 

Unamortized Debt Discount

 

 

Carrying
Value

 

 

Accrued
Interest

 

Noteholder 1

 

7/14/2017

 

7/14/2018

 

$ 275,600

 

 

$ (7,862 )

 

$ 267,738

 

 

$ 10,247

 

Noteholder 1

 

8/14/2017

 

8/14/2018

 

 

275,600

 

 

 

(9,137 )

 

 

266,463

 

 

 

8,378

 

Noteholder 4

 

7/14/2017

 

7/14/2018

 

 

275,600

 

 

 

(7,862 )

 

 

267,738

 

 

 

10,247

 

Noteholder 4

 

8/14/2017

 

8/14/2018

 

 

275,600

 

 

 

(9,137 )

 

 

266,463

 

 

 

8,378

 

 

 

 

 

 

 

$ 1,102,400

 

 

$ (33,998 )

 

$ 1,068,402

 

 

$ 37,250

 

 

Noteholder 1

 

On March 2, 2017, the Company sold and issued a Convertible Promissory Note to an unrelated party, for the principal amount of $125,000 resulting in cash proceeds to the Company of $125,000 pursuant to the terms of a Securities Purchase Agreement of even date therewith. The Note, together with accrued interest at the annual rate of 8%, is due on March 2, 2018. The Note is convertible into the Company’s common stock commencing 180 days from the date of issuance at a conversion price equal to 65% of the lowest trade price of the Company’s common stock for the twenty prior trading days including the date of conversion. During the three months ended December 31, 2017, the holder elected to convert a total of $125,000 of principal in exchange for 325,562 common shares. There was $0 and $125,000 of principal and $0 and $7,397 of accrued interest due at December 31, 2017 and September 30, 2017, respectively.

 

On July 14, 2017, the Company sold and issued a Convertible Promissory Note to an unrelated party, for the principal amount of $275,600 of which $15,600 was an original issue discount and $10,000 was paid directly to third parties resulting in cash proceeds to the Company of $250,000 pursuant to the terms of a Securities Purchase Agreement of even date therewith. The Note, together with accrued interest at the annual rate of 8%, is due on July 14, 2018. The Note is convertible into the Company’s common stock commencing 180 days from the date of issuance at a conversion price equal to 75% of the lowest trade price of the Company’s common stock for the fifteen prior trading days including the date of conversion. There was $275,600 of principal and $10,247 and $4,712 of accrued interest due at December 31, 2017 and September 30, 2017, respectively.

 

On August 14, 2017, the Company sold and issued a Convertible Promissory Note to an unrelated party, for the principal amount of $275,600 of which $15,600 was an original issue discount and $10,000 was paid directly to third parties resulting in cash proceeds to the Company of $250,000 pursuant to the terms of a Securities Purchase Agreement of even date therewith. The Note, together with accrued interest at the annual rate of 8%, is due on August 14, 2018. The Note is convertible into the Company’s common stock commencing 180 days from the date of issuance at a conversion price equal to 75% of the lowest trade price of the Company’s common stock for the fifteen prior trading days including the date of conversion. There was $275,600 of principal and $8,378 and $2,839 of accrued interest due at December 31, 2017 and September 30, 2017, respectively.

 

Noteholder 4

 

On March 2, 2017, the Company sold and issued a Convertible Promissory Note to an unrelated party, for the principal amount of $125,000 resulting in cash proceeds to the Company of $125,000 pursuant to the terms of a Securities Purchase Agreement of even date therewith. The Note, together with accrued interest at the annual rate of 8%, is due on March 2, 2018. The Note is convertible into the Company’s common stock commencing 180 days from the date of issuance at a conversion price equal to 65% of the lowest trade price of the Company’s common stock for the twenty prior trading days including the date of conversion. During the year ended September 30, 2017, the holder elected to convert a total of $56,000 of principal in exchange for 111,538 shares of common stock. Additionally, during the three months ended December 31, 2017, the holder elected to convert a total of $69,000 of principal in exchange for 219,258 shares of common stock. There was $0 and $69,000 of principal and $0 and $7,187 of accrued interest due at December 31, 2017 and September 30, 2017, respectively.

 

 
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On March 2, 2017, the Company sold a Convertible Promissory Note to an unrelated party, for the principal amount of $125,000 resulting in cash proceeds to the Company of $125,000 pursuant to the terms of a Securities Purchase Agreement of even date therewith which was funded on June 5, 2017. The Note, together with accrued interest at the annual rate of 8%, is due on March 2, 2018. The Note is convertible into the Company’s common stock upon funding at a conversion price equal to 65% of the lowest trade price of the Company’s common stock for the fifteen prior trading days including the date of conversion. During the three months ended December 31, 2017, the holder elected to convert a total of $125,000 or principal in exchange for 355,973 shares of common stock. There was $0 and $125,000 of principal and $0 and $3,205 of accrued interest due at December 31, 2017 and September 30, 2017, respectively.

 

On July 14, 2017, the Company sold and issued a Convertible Promissory Note to an unrelated party, for the principal amount of $275,600 of which $15,600 was an original issue discount and $10,000 was paid directly to third parties resulting in cash proceeds to the Company of $250,000 pursuant to the terms of a Securities Purchase Agreement of even date therewith. The Note, together with accrued interest at the annual rate of 8%, is due on July 14, 2018. The Note is convertible into the Company’s common stock commencing 180 days from the date of issuance at a conversion price equal to 75% of the lowest trade price of the Company’s common stock for the fifteen prior trading days including the date of conversion. There was $275,600 of principal and $10,247 and $4,712 of accrued interest due at December 31, 2017 and September 30, 2017, respectively.

 

On August 14, 2017, the Company sold and issued a Convertible Promissory Note to an unrelated party, for the principal amount of $275,600 of which $15,600 was an original issue discount and $10,000 was paid directly to third parties resulting in cash proceeds to the Company of $250,000 pursuant to the terms of a Securities Purchase Agreement of even date therewith. The Note, together with accrued interest at the annual rate of 8%, is due on August 14, 2018. The Note is convertible into the Company’s common stock commencing 180 days from the date of issuance at a conversion price equal to 75% of the lowest trade price of the Company’s common stock for the fifteen prior trading days including the date of conversion. There was $275,600 of principal and $8,378 and $2,896 of accrued interest due at December 31, 2017 and September 30, 2017 respectively.

 

Note 8 – DERIVATIVE LIABILITY

 

As of December 31, 2017 and September 30, 2017, Company had a derivative liability balance of $0 and $294,637 on the balance sheets and recorded a gain of $13,322 and loss of $106,243 from derivative liability fair value adjustments during the three months ended December 31, 2017. The derivative liability activity comes from convertible notes payable as follows:

 

As discussed in Note 7 – Convertible Notes Payable, the Company issued a $125,000 Convertible Promissory Notes to an unrelated party that matures on March 2, 2018. The note bears interest at a rate of 8% per annum and can be convertible into the Company’s common shares six months after issuance, at the holder’s option, at the conversion rate equal to a 35% discount from the lowest trading price in the fifteen trading days prior to conversion. The Company analyzed the conversion feature of the agreement for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the embedded conversion features should be classified as a derivative because the exercise price of these convertible notes are subject to a variable conversion rate. In accordance with AC 815, the Company has bifurcated the conversion feature of the note and recorded a derivative liability.

 

The embedded derivative for the note is carried on the Company’s balance sheet at fair value. The derivative liability is marked-to-market each measurement period and any unrealized change in fair value is recorded as a component of the income statement and the associated fair value carrying amount on the balance sheet is adjusted by the change. The Company fair values the embedded derivative using the Black-Scholes option pricing model. The aggregate fair value of the derivative at the issuance date of the note was $107,768 which was recorded as a derivative liability on the balance sheet. The Company recorded a debt discount of $107,768 which was up to the face value of the convertible note.

 

During the year ended September 30, 2017 and three months ended December 31, 2017, the noteholder elected to convert a total of $56,000 and $69,000 of principal. At December 31, 2017, the Company marked-to-market the fair value of the derivative liabilities related to notes and determined an aggregate fair value of $0 and recorded a $3,312 gain from change in fair value and $63,225 due to conversion for the three months ended December 31, 2017. The fair value of the embedded derivatives for the notes was determined using a Monte Carlo simulation model based on the following assumptions: (1) expected volatility of 110%, (2) risk-free interest rate of 1.3%, and (3) expected life of 0.26 of a year.

 

 
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As discussed in Note 7 – Convertible Notes Payable, the Company issued a $125,000 Convertible Promissory Notes to an unrelated party that matures on March 2, 2018. The note bears interest at a rate of 8% per annum and can be convertible into the Company’s common shares six months after issuance, at the holder’s option, at the conversion rate equal to a 35% discount from the lowest trading price in the fifteen trading days prior to conversion. The Company analyzed the conversion feature of the agreement for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the embedded conversion features should be classified as a derivative because the exercise price of these convertible notes are subject to a variable conversion rate. In accordance with AC 815, the Company has bifurcated the conversion feature of the note and recorded a derivative liability.

 

The embedded derivative for the note is carried on the Company’s balance sheet at fair value. The derivative liability is marked-to-market each measurement period and any unrealized change in fair value is recorded as a component of the income statement and the associated fair value carrying amount on the balance sheet is adjusted by the change. The Company fair values the embedded derivative using the Black-Scholes option pricing model. The aggregate fair value of the derivative at the issuance date of the note was $107,785 which was recorded as a derivative liability on the balance sheet. The Company recorded a debt discount of $107,785 which was up to the face value of the convertible note.

 

During the three months ended December 31, 2017, the noteholder elected to convert a total of $125,000 of principal. At December 31, 2017, the Company marked-to-market the fair value of the derivative liabilities related to notes and determined an aggregate fair value of $0 and recorded a $4,043 gain from change in fair value and $111,758 due to conversion for the three months ended December 31, 2017. The fair value of the embedded derivatives for the notes was determined using a Monte Carlo simulation model based on the following assumptions: (1) expected volatility of 111%, (2) risk-free interest rate of 1.3%, and (3) expected life of 0.25 of a year.

 

As discussed in Note 7 – Convertible Notes Payable, the Company issued a $125,000 Convertible Promissory Notes to an unrelated party that matures on March 2, 2018. The note bears interest at a rate of 8% per annum and can be convertible into the Company’s common shares six months after issuance, at the holder’s option, at the conversion rate equal to a 35% discount from the lowest trading price in the fifteen trading days prior to conversion. The Company analyzed the conversion feature of the agreement for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the embedded conversion features should be classified as a derivative because the exercise price of these convertible notes are subject to a variable conversion rate. In accordance with AC 815, the Company has bifurcated the conversion feature of the note and recorded a derivative liability.

 

The embedded derivative for the note is carried on the Company’s balance sheet at fair value. The derivative liability is marked-to-market each measurement period and any unrealized change in fair value is recorded as a component of the income statement and the associated fair value carrying amount on the balance sheet is adjusted by the change. The Company fair values the embedded derivative using the Black-Scholes option pricing model. The aggregate fair value of the derivative at the issuance date of the note was $157,523 which was recorded as a derivative liability on the balance sheet. The Company recorded a debt discount of $125,000 which was up to the face value of the convertible note with the excess fair value at initial measurement of $32,523 being recognized as a loss on derivative fair value measurement.

 

During the three months ended December 31, 2017, the noteholder elected to convert a total of $125,000 of principal. At December 31, 2017, the Company marked-to-market the fair value of the derivative liabilities related to notes and determined an aggregate fair value of $0 and recorded a $5,967 gain from change in fair value and $106,332 due to conversion for the three months ended December 31, 2017. The fair value of the embedded derivatives for the notes was determined using a Monte Carlo simulation model based on the following assumptions: (1) expected volatility of 113%, (2) risk-free interest rate of 1.3%, and (3) expected life of 0.18 of a year.

 

The following table summarizes the derivative liabilities included in the balance sheet at September 30, 2017:

 

Fair Value of Embedded Derivative Liabilities:

 

 

 

Balance, September 30, 2016

 

$ 775,246

 

Initial measurement of derivative liabilities

 

 

1,312,384

 

Change in fair market value

 

 

(195,907

Write off due to conversion

 

 

(1,597,086 )

Balance, September 30, 2017

 

$ 294,637

 

 

 
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The following table summarizes the derivative liabilities included in the balance sheet at December 31, 2017:

 

Fair Value of Embedded Derivative Liabilities:

 

 

 

Balance, September 30, 2017

 

$ 294,637

 

Initial measurement of derivative liabilities

 

 

-

 

Change in fair market value

 

 

(13,322 )

Write off due to conversion

 

 

(281,315 )

Balance, December 31, 2017

 

$ -

 

 

The following table summarizes the loss on derivative liability included in the income statement for the three months ended December 31, 2017 and 2016, respectively.

 

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

Day one loss due to derivatives on convertible debt

 

$ -

 

 

$ 287,714

 

Change in fair value of derivatives

 

 

(13,322 )

 

 

(181,471 )

Total derivative expense (gain)

 

$ (13,322 )

 

$ 106,243

 

 

Note 9 – INDUSTRY SEGMENTS

 

This summary reflects the Company’s current segments, as described below.

 

Corporate

 

The parent Company provides overall management and corporate reporting functions for the entire organization.

 

Consulting

 

The Company provides advisory, licensing and compliance services to the cannabis industry. Consulting clients are located in states that have state managed medical and/or recreational programs. EVIO assists these companies with license applications, business planning, state compliance and ongoing operational support.

 

Testing Services

 

The Company provides analytical testing services to the cannabis industry under the EVIO Labs brand. As of December 31, 2017, EVIO Labs has six operating labs. EVIO Labs clients are located in Oregon, California and Massachusetts and consist of growers, processors and dispensaries. Operating under the rules of the appropriate state regulating body, EVIO Labs certifies products have been tested and are free from pesticides and other containments before resale to patients and consumers.

 

Three months ended December 31, 2017

 

Corporate

 

 

Consulting
Services

 

 

Testing
Services

 

 

Total
Consolidated

 

Revenue

 

$ -

 

 

$ 59,516

 

 

$ 887,349

 

 

$ 946,865

 

Segment income (loss) from operations

 

 

(195,286 )

 

 

(356,585 )

 

 

(115,189 )

 

 

(667,060 )

Total assets

 

 

297,459

 

 

 

1,534,332

 

 

 

4,335,123

 

 

 

6,166,914

 

Capital expenditures

 

 

-

 

 

 

(1,038 )

 

 

(5,914 )

 

 

(6,952 )

Depreciation and amortization

 

 

-

 

 

 

5,974

 

 

 

80,526

 

 

 

86,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended December 31, 2016

 

Corporate

 

 

Consulting
Services

 

 

Testing
Services

 

 

Total
Consolidated

 

Revenue

 

$ -

 

 

$ 99,878

 

 

$ 568,578

 

 

$ 668,456

 

Segment income (loss) from operations

 

 

(215,342 )

 

 

12,365

 

 

 

(188,339 )

 

 

(391,316 )

Total assets

 

 

50,562

 

 

 

143,370

 

 

 

3,684,608

 

 

 

3,878,540

 

Capital expenditures

 

 

-

 

 

 

(1,038 )

 

 

(25,276 )

 

 

(26,314 )

Depreciation and amortization

 

 

-

 

 

 

5,974

 

 

 

46,863

 

 

 

52,837

 

 

 
22
 
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Note 10 – STOCK OPTIONS AND WARRANTS

 

The following table summarizes all stock option and warrant activity for the year ended September 30, 2017 and the three months ended December 31, 2017:

 

 

 

Shares

 

 

Weighted-

Average

Exercise Price

Per Share

 

Outstanding, September 30, 2016

 

 

315,000

 

 

$ 0.449

 

Granted

 

 

380,000

 

 

 

1.295

 

Exercised

 

 

-

 

 

 

-

 

Forfeited

 

 

(40,000 )

 

 

1.075

 

Expired

 

 

-

 

 

 

-

 

Outstanding, September 30, 2017

 

 

655,000

 

 

$ 0.902

 

 

 

 

Shares

 

 

Weighted-

Average

Exercise Price

Per Share

 

Outstanding, September 30, 2017

 

 

655,000

 

 

$ 0.902

 

Granted

 

 

75,000

 

 

 

0.65

 

Exercised

 

 

-

 

 

 

-

 

Forfeited

 

 

-

 

 

 

-

 

Expired

 

 

-

 

 

 

-

 

Outstanding, December 31, 2017

 

 

730,000

 

 

$ 0.876

 

 

The following table discloses information regarding outstanding and exercisable options and warrants at September 30, 2017:

 

 

 

 

Outstanding

 

 

Exercisable

 

Exercise Prices

 

 

Number of
Option Shares

 

 

Weighted
Average
Exercise Price

 

 

Weighted
Average
Remaining Life (Years)

 

 

Number of
Option Shares

 

 

Weighted
Average
Exercise Price

 

$

0.400

 

 

 

150,000

 

 

$ 0.400

 

 

 

3.88

 

 

 

75,000

 

 

$ 0.400

 

$

0.500

 

 

 

155,000

 

 

$ 0.500

 

 

 

3.88

 

 

 

77,500

 

 

$ 0.500

 

$

1.260

 

 

 

270,000

 

 

$ 1.260

 

 

 

4.75

 

 

 

-

 

 

$ 1.260

 

$

1.386

 

 

 

60,000

 

 

$ 1.386

 

 

 

4.75

 

 

 

-

 

 

$ 1.386

 

$

1.300

 

 

 

10,000

 

 

$ 1.300

 

 

 

4.05

 

 

 

2,500

 

 

$ 1.300

 

$

1.666

 

 

 

10,000

 

 

$ 1.666

 

 

 

4.84

 

 

 

-

 

 

 

1.666

 

Total

 

 

 

655,000

 

 

$ 0.902

 

 

 

4.33

 

 

 

155,000

 

 

$ 0.465

 

 

 
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In determining the compensation cost of the stock options granted, the fair value of each option grant has been estimated on the date of grant using the Black-Scholes option pricing model. The assumptions used in these calculations are summarized as follows:

 

 

 

September 30,
2017

 

Expected term of options granted

 

5 years

 

Expected volatility

 

 

2.68 %

Risk-free interest rate

 

 

1.89 %

Expected dividend yield

 

 

0 %

 

The following table discloses information regarding outstanding and exercisable options and warrants at December 31, 2017:

 

 

 

 

Outstanding

 

 

Exercisable

 

Exercise Prices

 

 

Number of
Option Shares

 

 

Weighted
Average

Exercise Price

 

 

Weighted
Average
Remaining Life (Years)

 

 

Number of
Option Shares

 

 

Weighted
Average
Exercise Price

 

$

0.400

 

 

 

150,000

 

 

$ 0.400

 

 

 

3.62

 

 

 

75,000

 

 

$ 0.400

 

$

0.500

 

 

 

155,000

 

 

$ 0.500

 

 

 

3.62

 

 

 

77,500

 

 

$ 0.500

 

$

0.650

 

 

 

75,000

 

 

$ 0.650

 

 

 

4.82

 

 

 

-

 

 

$ 0.650

 

$

1.260

 

 

 

270,000

 

 

$ 1.260

 

 

 

4.50

 

 

 

-

 

 

$ 1.260

 

$

1.386

 

 

 

60,000

 

 

$ 1.386

 

 

 

4.50

 

 

 

-

 

 

$ 1.386

 

$

1.300

 

 

 

10,000

 

 

$ 1.300

 

 

 

3.80

 

 

 

5,000

 

 

$ 1.300

 

$

1.666

 

 

 

10,000

 

 

$ 1.666

 

 

 

4.59

 

 

 

-

 

 

 

1.666

 

Total

 

 

 

730,000

 

 

$ 0.876

 

 

 

4.08

 

 

 

157,500

 

 

$ 0.478

 

 

In determining the compensation cost of the stock options granted, the fair value of each option grant has been estimated on the date of grant using the Black-Scholes option pricing model. The assumptions used in these calculations are summarized as follows:

 

 

 

December 31,
2017

 

Expected term of options granted

 

4.98 years

 

Expected volatility

 

 

256 %

Risk-free interest rate

 

 

2.01 %

Expected dividend yield

 

 

0 %

 

The Company recognized stock option expense of $72,587 and $17,208 during the three months ended December 31, 2017 and 2016, respectively. There was $434,347 of unrecognized stock based compensation expense as of December 31, 2017.

 

 
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Note 11 – COMMITMENTS AND CONTINGENCIES

 

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.

 

During the year ended September 30, 2017, the Company purchased a software license for $200,000 in cash. The Company relied on the representation of the seller regarding the assignability of the license. However, independent verification of the assignability was not obtained. As a result, the Company recognized a $200,000 impairment loss on the write off of the asset. There have been no additional amounts accrued for potential losses related to the assignability of the license.

 

The Company has entered into various office and laboratory leases as well as a long term operating lease. Future minimum rental payments under the terms of the lease are:

 

Year ending September 30,

 

 

 

2018

 

 

258,915

 

2019

 

 

303,811

 

2020

 

 

265,392

 

2021

 

 

203,742

 

2022

 

 

118,410

 

Total

 

$ 1,150,270

 

 

Note 12 – SUBSEQUENT EVENTS

 

Employment Agreements

 

On December 27, 2017, the Company entered into employment agreements with its Chief Executive Officer, Chief Operating Officer, President and amended the agreement of its Chief Science Officer. Each agreement is effective January 1, 2018.

 

The agreement with our Chief Executive Officer carries a three year term with a base salary of $150,000 annually plus a car allowance of $750 monthly. Additionally, 750,000 stock options were granted with an exercise price of $0.80 which will vest quarterly over a two year period.

 

The agreement with our Chief Operating Officer carries a three year term with a base salary of $150,000 annually plus a car allowance of $500 monthly. Additionally, 450,000 stock options were granted with an exercise price of $0.80 which will vest quarterly over a two year period.

 

The agreement with our Chief Science Officer carries a three year term with a base salary of $120,000 annually plus a car allowance of $350 monthly. Additionally, 250,000 stock options were granted with an exercise price of $0.80 which will vest quarterly over a two year period.

 

The agreement with our newly appointed President carries a two year term. Under the terms of the agreement, total compensation will be $24,000 cash annually plus a total of 450,000 common shares which vest quarterly over a two year period.

 

 
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Common Stock Issuances

 

The Company made the following issuances of common stock subsequent to December 31, 2017:

 

 

· 17,500 common shares valued at $23,800 for the vesting of restricted stock grants for consultants

 

 

 

 

· 50,000 common shares valued at $68,000 subject to vesting requirements of an employment agreement with our President. The agreement requires a total of 450,000 common shares be issued which vest in quarterly amounts of 50,000 shares from January 2018 to December 2018 then 62,500 quarterly for January 2019 to December 2019 so that a total of 450,000 common shares are earned over the course of two years.

 

Acquisitions

 

On January 1, 2018, the Company completed its acquisition of C3 Labs, LLC (“C3 Labs”). In consideration of a 60% ownership, the Company issued a $500,000 convertible note payable which carries no interest and matures on June 30, 2018. Upon maturation, the note will convert to common stock of the Company at $0.75 per share. Additionally, the Company issued a $100,000 note payable due on March 31, 2018.

 

The Company has been granted two options to purchase additional interest of C3 Labs subject to the following terms and conditions.

 

(a) 30% Option. Effective as of Closing and terminating the date three (3) years from the Closing Date, the C3 Members hereby collectively grant EVIO the right to ratably purchase from the C3 Members an aggregate of 30% of the Interests in C3 LABS following the issuance of 60% of the Interests to EVIO. EVIO may exercise its option by providing C3 LABS and the C3 Members written notice of its intent to exercise the option. The C3 Members shall have three (3) days following the date of such notice to execute assignments of Interests totaling 30% of the then outstanding membership interests in C3 LABS in favor of EVIO California. If EVIO should elect to exercise its option within nine (9) months from the Closing Date, the exercise price for the 30% of Interests shall be $450,000.00, to be paid in cash or EVIO’s common stock, as agreed by the C3 Members. If EVIO does not exercise the option within nine (9) months from the Closing Date, the exercise price shall be set by mutual agreement between the parties or, if no such agreement can be reached, as determined by an independent third-party valuation by an appraiser agreed to by the parties.

 

(b) 10% Option. Effective as of three (3) years after the Closing Date and terminating the date twenty four (24) months therefrom, the C3 Members hereby collectively grant EVIO the right to ratably purchase from the C3 Members an aggregate of 10% of the then outstanding Interests in C3 LABS (comprising the remaining Interests not owned by EVIO). EVIO may exercise its option by providing C3 LABS and the C3 Members written notice of its intent to exercise the option. The C3 Members shall have three (3) days following the date of such notice to execute assignments of Interests totaling 10% of the then outstanding membership interests in C3 LABS in favor of EVIO. Upon notice of its intent to exercise the option granted hereby, the exercise price shall be set by mutual agreement between the parties or, if no such agreement can be reached, as determined by an independent third-party valuation by an appraiser agreed to by the parties. 

 

Convertible Debenture Issuance

 

On January 30, 2018, the Company issued a total of 5,973 units of 8% unsecured convertible debentures. Each unit consists of one convertible debenture with a principal face value of $1,000 and 250 warrants. The gross proceeds were $5,973,000.

 

Each warrant shall entitle the holder thereof to purchase one additional common share of the Company at an exercise price of $0.80 per warrant for a period of 24 months.

 

The convertible debentures have a maturity date of 36 months from issuance. Simple interest shall be paid at a rate of 8% per annum. It shall be paid quarterly in arrears until maturity or until conversion.

 

The principal amount of the debentures and any accrued interest thereon are convertible at the option of the holder into common shares of the Company at any time at a conversion price of $0.60 per share.

 

In addition to the warrants associated with the convertible debentures, the Company issued an additional 597,300 warrants to purchase common stock of the Company as offering costs. This represents an equivalent of 6% of the fully converted debentures. The warrants are exerciseable at $0.60 per share.

 

 
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ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Certain matters discussed herein are forward-looking statements. Such forward-looking statements contained herein involve risks and uncertainties, including statements as to:

 

 

·

our future operating results;

 

·

our business prospects;

 

·

our contractual arrangements and relationships with third parties;

 

·

the dependence of our future success on the general economy;

 

·

our possible financings; and

 

·

the adequacy of our cash resources and working capital.

 

These forward-looking statements can generally be identified as such because the context of the statement will include words such as we “believe,” “anticipate,” “expect,” “estimate” or words of similar meaning. Similarly, statements that describe our future plans, objectives or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties which are described in close proximity to such statements and which could cause actual results to differ materially from those anticipated as of the date of this report. Shareholders, potential investors and other readers are urged to consider these factors in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included herein are only made as of the date of this report, and we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the notes thereto, included elsewhere in this report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to those differences include those discussed below and elsewhere in this report, particularly in the “Risk Factors” section.

 

Critical Accounting Policies and Estimates. 

 

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations section discusses our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources.

 

 
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Business of Registrant

 

EVIO, INC., a Colorado corporation, and its subsidiaries (“EVIO”, the “Company”, the “Registrant”, “we”, “our”, or “us”) provide analytical testing and advisory services to the emerging legalized cannabis industry.

 

EVIO, INC. was originally incorporated in the State of New York, December 12, 1977 under the name 3171 Holding Corporation. On February 22, 1979 the name was changed to Electronomic Industries Corp. and on February 23, 1983 the name was changed to Quantech Electronics Corp. The Company was reincorporated in the State of Colorado on December 15, 2003. On August 29, 2014, the Company completed a reverse merger with Signal Bay Research, Inc., a Nevada Corporation, and took over its operations. In September 2014, the Company changed its name from Quantech Electronics Corp. to Signal Bay, Inc. then to EVIO, INC. during August 2017. The Company has selected September 30 as its fiscal year end. The Company is domiciled in the State of Colorado, and its corporate headquarters is located in Bend, Oregon.

 

EVIO Consulting Services provides advisory and research services to cannabis companies including regulatory licensing and compliance, industry research, operational support, educational services and operating services for current and prospective licensed cannabis businesses.

 

EVIO, Inc. d/b/a EVIO Labs is the wholly owned analytical laboratory division of the Company. EVIO Labs consists of six operating companies, CR Labs, Inc. d/b/a EVIO Labs Bend, EVIO Labs Eugene LLC, Smith Scientific Industries, Inc. d/b/a EVIO Labs Medford, Greenhaus Analytical Services LLC d/b/a EVIO Labs Portland, EVIO California and Viridis Analytics MA d/b/a EVIO Labs MA all of which provide compliance testing services. Tests include identification of compounds and contaminants including cannabinoid potency and terpene profiling, as well as screening for residual solvents, pesticides, and hazardous microbiological growth., of cannabis products.

 

The subsidiaries of EVIO, Inc. are as follows:

 

Trade Name (dba)

Company Name

State of Incorporation

Ownership %

Acquisition Month

EVIO Labs Bend (dba)

CR Labs, Inc.

Oregon

80%

September 2015

EVIO Labs Eugene

EVIO Labs Eugene, LLC

Oregon

100%

May 2016

EVIO Labs Medford (dba)

Smith Scientific Industries, LLC

Oregon

80%

June 2016

EVIO Labs Yuba City (dba)

EVIO California, Inc.

California

100%

October 2016

EVIO Labs Portland (dba)

Greenhaus Analytical Labs

Oregon

100%

October 2016

EVIO Labs MA

Viridis Analytics

Massachusetts

100%

August 2017

 

In addition to the wholly owned subsidiaries, the Company has entered into license agreements with independent testing laboratories in Florida and Colorado. Under the terms of the agreements, the independent laboratories are granted non-transferable and non-exclusive rights to use the Company’s trademarks, trade-name and testing methodologies. 

 

 
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RESULTS OF OPERATIONS

 

Three Months Ended December 31, 2017 and 2016

 

Revenues and Costs of Revenues

 

 

 

 

 

 

 

 

 

Percentage of Revenue

 

 

 

2017

 

 

2016

 

 

Change

 

 

2017

 

 

2016

 

Testing services

 

$ 887,349

 

 

$ 568,578

 

 

$ 318,771

 

 

 

94 %

 

 

85 %

Consulting services

 

 

59,516

 

 

 

99,878

 

 

 

(40,362 )

 

 

6 %

 

 

15 %

Total revenue

 

 

946,865

 

 

 

668,456

 

 

 

278,409

 

 

 

100 %

 

 

100 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Testing services

 

$ 696,658

 

 

$ 559,277

 

 

$ 137,381

 

 

 

74 %

 

 

84 %

Consulting services

 

 

10,492

 

 

 

12,500

 

 

 

(2,008 )

 

 

1 %

 

 

2 %

Depreciation

 

 

29,113

 

 

 

18,302

 

 

 

10,811

 

 

 

3 %

 

 

3 %

Total cost of revenue

 

 

736,263

 

 

 

590,079

 

 

 

146,184

 

 

 

78 %

 

 

88 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

$ 210,602

 

 

$ 78,377

 

 

$ 132,225

 

 

 

22 %

 

 

12 %

 

Revenues for the three months ended December 31, 2017 were $946,865 compared to $668,456 for the three months ended December 31, 2016. The increase in revenues during the three months ended December 31, 2017 is the result of increased testing services resulting from acquisitions completed after the three months ended December 31, 2016, partially offset by decreased advisory services performed in the current period as compared to the prior period.

 

Cost of revenues for the three months ended December 31, 2017 were $736,263 compared to $590,079 for the three months ended December 31, 2016. The increase in the cost of revenues during the three months ended December 31, 2017 is the result of the increased direct costs associated with providing testing services and increased costs of revenue associated with performing additional testing. Gross profit for the three months ended December 31, 2017 was $210,602 compared to $78,377 during the three months ended December 31, 2016. The Company experienced an increase of $132,225 in gross profit primarily attributable to the Company’s ability to leverage fixed overhead costs in costs of revenue.

 

Operating Expenses

 

 

 

 

 

 

 

 

 

Percentage of Revenue

 

 

 

2017

 

 

2016

 

 

Change

 

 

2017

 

 

2016

 

Selling, general and administrative

 

$ 820,275

 

 

$ 435,158

 

 

$ 385,117

 

 

 

87 %

 

 

65 %

Depreciation and amortization

 

 

57,387

 

 

 

34,535

 

 

 

22,852

 

 

 

6 %

 

 

5 %

 

 

$ 877,662

 

 

$ 469,693

 

 

$ 407,969

 

 

 

93 %

 

 

70 %

 

 
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Total operating expenses during the three months ended December 31, 2017 were $877,662 compared to $469,693 during the three months ended December 31, 2016. The Company experienced an increase of $407,969 or 87% in selling, general and administrative expenses during the three months ended December 31, 2017 compared to the three months ended December 31, 2016 due to increased business size due to acquisitions and organic growth that has occurred during the period of January 1, 2017 to October 1, 2017. Additionally, total stock based compensation included in selling, general and administrative expenses was $258,703 during the three months ended December 31, 2017 compared to $166,924 during the same period in 2016. There was an increase of $22,852 in depreciation and amortization which was driven by the amortization of intangible assets and equipment associated with the acquisition completed during the period from January 1, 2017 to October 1, 2017.

 

Other Expenses (Income)

 

 

 

 

 

 

 

 

 

Percentage of Revenue

 

 

 

2017

 

 

2016

 

 

Change

 

 

2017

 

 

2016

 

Interest expense, net of interest income

 

$ 284,651

 

 

$ 323,422

 

 

$ (38,771 )

 

 

30 %

 

 

48 %

Loss on settlement of debt

 

 

56,093

 

 

 

-

 

 

 

56,093

 

 

 

6 %

 

 

0 %

(Gain) loss on change in fair market value of derivative liabilities

 

 

(13,322 )

 

 

106,243

 

 

 

(119,565 )

 

 

-1%

 

 

 

16 %

 

 

$ 327,422

 

 

$ 429,665

 

 

$ (102,243 )

 

 

35 %

 

 

64 %

 

Total other income (expense) was a net expense of $327,422 during the three months ended December 31, 2017 compared to a net expense of $429,665 during the three months ended December 31, 2016. The decrease in net expense of $102,243 is from the decrease in the loss on fair market value of derivatives of $119,565 combined with an increase in interest income of $26,214 which was present during the current period and not prior and a decrease in interest expense of $61,995 from the recognition of debt discounts associated with convertible and non-convertible notes payable.

 

Net Loss

 

 

 

 

 

 

 

 

 

Percentage of Revenue

 

 

 

2017

 

 

2016

 

 

Change

 

 

2017

 

 

2016

 

Net loss

 

$ (994,482 )

 

$ (820,981 )

 

$ (173,501 )

 

 

-105%

 

 

 

-123%

 

 

Net loss during the three months ended December 31, 2017 was $994,482 compared to $820,981 during the three months ended December 31, 2016. The increase in net loss is directed from the increase in other expenses partially offset by an increase in revenues and gross margins as described above.

 

 Liquidity and Capital Resources

 

The Company had cash on hand of $221,820 as of December 31, 2017, current assets of $856,100 and current liabilities of $3,923,440 creating a working capital deficit of $3,067,340. Current assets consisted of cash totaling $221,820, accounts receivable net of allowances totaling $202,643, prepaid expenses totaling $149,685, other current assets of $33,952, current portions of a note receivable of $100,000 and subscription receivables totaling $148,000. Current liabilities consisted of accounts payable and accrued liabilities of $835,985, client deposits of $78,577, deferred revenue of $33,300, convertible notes payable net of discounts of $1,068,402, current capital lease obligations of $40,526, interest payable of $184,845, current portions of notes payable net of discounts of $1,438,450 and current portions of related party payables of $243,355.

 

The Company had cash on hand of $121,013 as of September 30, 2017, current assets of $627,572 and current liabilities of $4,428,578 creating a working capital deficit of $3,801,006. Current assets consisted of cash totaling $121,013, accounts receivable net of allowances totaling $229,564, prepaid expenses totaling $169,557, other current assets of $7,438 and current portion of a note receivable of $100,000. Current liabilities consisted of accounts payable and accrued liabilities of $773,053, client deposits of $119,281, deferred revenue of $40,800, convertible notes payable net of discounts of $1,212,720, current capital lease obligations of $37,990, interest payable of $133,697, derivative liabilities of $294,637, current portions of notes payable net of discounts of $1,503,545 and current portions of related party payables of $312,855.

 

 
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Three Months Ended December 31, 2017

 

The Company used $192,386 of cash in operating activities which consisted of a net loss of $994,482, non-cash losses of $622,362 and changes in working capital of $179,734.

 

Net cash used in investing activities totaled $6,952 during the three months ended December 31, 2017 which consisted solely of cash used to purchase equipment.

 

During the three months ended December 31, 2017, the Company generated cash of $300,145 from financing activities. The Company received $350,000 from the sale of common stock, made repayments of $9,391 on capital leases, repayments of $2,636 on loans payment and $37,828 on related party loans payable.

 

Three Months Ended December 31, 2016

 

The Company used $7,691 of cash in operating activities which consisted of a net loss of $820,981, non-cash losses of $621,415 and changes in working capital of $191,875.

 

Net cash used in investing activities totaled $33,244 during the three months ended December 31, 2016. The Company acquired net cash of $13,070 in asset purchases, paid $26,314 for the purchase of equipment and used net cash in acquisitions of $20,000.

 

During the three months ended December 31, 2016, the Company generated cash of $135,332 from financing activities. The Company received $114,500 of cash from the sale of series D preferred stock, $70,000 in cash from convertible notes payable, repayments of notes payable of $31,687 and net repayments on related party notes payable of $17,481.

 

Dividends

 

The Company declared $0 of dividends during the three months ended December 31, 2017 and 2016.

 

Critical Accounting Policies and Estimates. 

 

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations section discusses our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources.

 

While our significant accounting policies are more fully described in notes to our consolidated financial statements appearing elsewhere in this Form 10-Q, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our reported financial results and affect the more significant judgments and estimates that we used in the preparation of our financial statements.

 

 
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Revenue Recognition:

 

EVIO recognizes revenue from the sale of services in accordance with ASC 606. The Company first identifies the promised goods or services in the contract and reduces the cost and complexity then evaluates whether promised goods and services are distinct. Specifically as it relates to certain licensing agreements whereby licensees have access to certain intellectual property of the Company, revenue is recognized ratably over the term of the agreement. In agreements were training and other support is required, revenue us recognized as services are performed.

 

Stock Based Compensation

 

Pursuant to Accounting Standards Codification (“ASC”) 505, the guidelines for recording stock issued for services require the fair value of the shares granted be based on the fair value of the services received or the publicly traded share price of the Company’s registered shares on the date the shares were granted (irrespective of the fact that the shares granted were unregistered), whichever is more readily determinable. This position has been further clarified by the issuance of ASC 820. ASC 820 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”. Accordingly, the Company elected the application of these guidelines. EVIO has determined that the fair value of all common stock issued for goods or services is more readily determinable based on the publicly traded share price on the date of grant.

 

Emerging Growth Company Status

 

We are an “emerging growth company” as defined under the Jumpstart Our Business Startups Act, commonly referred to as the JOBS Act. We will remain an “emerging growth company” for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our total annual gross revenues exceed $1 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, which would occur if the market value of our ordinary shares that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period.

 

As an “emerging growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to:

 

 

·

not being required to comply with the auditor attestation requirements of section 404(b) of the Sarbanes-Oxley Act (we also will not be subject to the auditor attestation requirements of Section 404(b) as long as we are a “smaller reporting company,” which includes issuers that had a public float of less than $ 75 million as of the last business day of their most recently completed second fiscal quarter);

 

 

·

reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and

 

 

·

exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

 

In addition, Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Under this provision, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. In other words, an “emerging growth company” can delay the adoption of such accounting standards until those standards would otherwise apply to private companies until the first to occur of the date the subject company (i) is no longer an “emerging growth company” or (ii) affirmatively and irrevocably opts out of the extended transition period provided in Securities Act Section 7(a) (2) (B). The Company has elected to take advantage of this extended transition period and, as a result, our financial statements may not be comparable to the financial statements of other public companies. Accordingly, until the date that we are no longer an “emerging growth company” or affirmatively and irrevocably opt out of the exemption provided by Securities Act Section 7(a) (2) (B), upon the issuance of a new or revised accounting standard that applies to your financial statements and has a different effective date for public and private companies, clarify that we will disclose the date on which adoption is required for non-emerging growth companies and the date on which we will adopt the recently issued accounting standard.

 

 
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Accounting and Audit Plan

 

In the next twelve months, we anticipate spending approximately $70,000 - $85,000 to pay for our accounting and audit requirements.

 

Off-balance sheet arrangements

 

On March 31, 2017, the Company entered into a long term operating lease requiring monthly payments of $10,275 for a period of 48 months terminating on March 31, 2021.

 

We have no other significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.

 

Our Website

 

Our website can be found at www.eviolabs.com.

 

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Company, as a smaller reporting company, as defined by Rule 229.10(f)(1), is not required to provide the information required by this Item.

 

ITEM 4 – CONTROLS AND PROCEDURES

 

(a) Evaluation of Disclosure Controls and Procedures

 

Our principal executive and principal financial officers have evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a – 15(e) and 15d – 15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods required under the SEC’s rules and forms and that the information is gathered and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure.

 

Our principal executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report.

 

This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to Rule 308(b) of Regulation S-K, which permits the Company to provide only management’s report in this Annual Report.

 

(b) Changes in Internal Control over Financial Reporting

 

There were no change in Internal Controls over Financial Reporting during the three months ended December 31, 2017. Upon hiring additional financial staff, EVIO will prepare written policies and procedures for accounting and financial reporting to establish a formal process to close our books monthly on an accrual basis and account for all transactions, including equity transactions, and prepare, review and submit SEC filings in a timely manner. 

 

 
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PART II -- OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

None.

 

ITEM 1A. RISK FACTORS

 

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

 

The above statement notwithstanding, shareholders and prospective investors should be aware that certain risks exist with respect to the Company and its business, including those risk factors contained in our most recent Registration Statements on Form S-1 and Form 10, as amended. These risks include, among others: limited assets, lack of significant revenues and only losses since inception, industry risks, dependence on third party manufacturers/suppliers and the need for additional capital. The Company’s management is aware of these risks and has established the minimum controls and procedures to insure adequate risk assessment and execution to reduce loss exposure.

 

ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not Applicable.

 

ITEM 5. OTHER INFORMATION

 

There was no other information during the quarter ended December 31, 2017, which was not previously disclosed in our filings during that period.

 

 
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ITEM 6. EXHIBITS

 

31.1

 

Certifications pursuant to Section 302 of Sarbanes Oxley Act of 2002

31.2

 

Certifications pursuant to Section 302 of Sarbanes Oxley Act of 2002

32.1

 

Certifications pursuant to Section 906 of Sarbanes Oxley Act of 2002

32.2

 

Certifications pursuant to Section 906 of Sarbanes Oxley Act of 2002

101.INS

 

XBRL Instance Document

101.SCH

 

XBRL Taxonomy Extension Schema

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase

101.LAB

 

XBRL Taxonomy Extension Label Linkbase

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase

 

 
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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on February 13, 2018.

 

 

EVIO, INC.

 

By:

/s/ William Waldrop

 

William Waldrop

 

Chief Executive Officer

 

 

By:

/s/ Christian Carnell

 

Christian Carnell

 

Chief Financial Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on February 13, 2018.

 

 

By:

/s/ William Waldrop

 

William Waldrop

 

Director & Principal Executive Officer

 

 

By:

/s/ Lori Glauser

 

Lori Glauser

 

Director

 

By:

/s/ Anthony Smith

 

Anthony Smith

 

Director

 

By:

/s/ Henry Grimmett

 

Henry Grimmett

 

Director

 

 

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