ITEM 9 DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF MANAGEMENT OF LABS CORP. (Form 10-Q) – Marketscreener.com | Vette Leader

The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our unaudited condensed
consolidated financial statements and related notes included in this Quarterly
Report on Form 10-Q and the audited financial statements and notes thereto as of
and for the year ended September 30, 2021 and the related Management's
Discussion and Analysis of Financial Condition and Results of Operations, both
of which are contained in the Company's Annual Report on Form 10-K for the year
ended September 30, 2021, filed with the Securities and Exchange Commission
(the
"SEC") on January 13, 2022.



Forward-Looking Statements


The information in this discussion contains forward-looking statements and
information within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the securities Exchange Act of 1934, as amended,
(the "Exchange Act"), which are subject to the "safe harbor" created by those
sections. The words "anticipated," "believes," "estimates," "expects,"
"intends," "may," "plans," "projects," "will," "should," "could," "predicts,"
"potential," "continue," "would," and similar expressions are intended to
identify forward-looking statements, although not all forward-looking statements
contain these identifying words. We may not actually achieve the plans,
intentions, or expectations disclosed in our forward-looking statements that we
make. The forward-looking statements are applicable only as of the date on which
they are made, and we do not assume any obligation to update any forward-looking
statements. All forward-looking statements in this Form 10-Q are made based on
our current expectations, forecasts, estimates and assumptions, and involve
risks, uncertainties and other factors that could cause results or events to
differ materially from those expressed in the forward-looking statements. In
evaluating these statements, you should specifically consider various factors,
uncertainties and risks that could affect our future results or operations.
These factors, uncertainties and risks may cause our actual results to differ
materially from any forward-looking statement set forth in this quarterly report
on Form 10-Q. You should carefully consider these risks and uncertainties
described and other information contained in the reports we file with or furnish
to the SEC before making any investment decision with respect to our securities.
All forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by this cautionary statement.



Overview



Item 9 Labs produces premium cannabis and cannabis related products in a rapidly
growing market. The Company currently offers over seventy-five (75) active
cannabis strains and more than one hundred fifty (150) differentiated cannabis
vape products as well as premium concentrates and Orion vape technologies. The
Company's product offerings will continue to grow as they develop new products
to meet the needs of the end users. The Company makes its products available to
consumers through licensed dispensaries in Arizona. Item 9 Labs' products are
now carried in more than 80 dispensaries throughout the state of Arizona.

The Company believes its past and future success is dependent upon its ongoing
ability to understand the needs and desires of the consumers, and the Company
develops and offers products that meet those needs.

The Company's objective is to leverage its assets (tangible and intangible) to
fuel the growth of its share of the Arizona cannabis market, as well as expand
the geographical reach of its products into markets outside of Arizona, with the
ultimate goal of providing comfortable cannabis health solutions to a larger
population in a manner that will create value for the Company's shareholders.

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

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

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The Company's Arizona cannabis operations have expanded in recent years, with
the addition of a 2nd nearly 10,000 square foot facility in the 4th quarter of
fiscal year 2019, more than doubling the Company's cultivation and processing
space for Arizona. As the Company methodically expanded its operational capacity
by more than 100% in fiscal year 2020, it was also able to significantly
increase efficiencies within the cultivation and processing operations. The
increased efficiencies have been offset in the current period by certain supply
shortages and repair and maintenance delays resulting in longer production
lead
times.


The Arizona expansion has continued in fiscal year 2022 and is expected to
continue thereafter. The Company has tripled production since October 1,
2020, while beginning construction on phase 1 of its construction plan to build
additional cultivation space. Phase 1 plans total over 60,000 square feet
of additional cultivation and processing space, and the planned remaining five
phases would add over 560,000 square feet of cultivation and processing
space. By the conclusion of the master site development, the Company anticipates
a total of more than 640,000 square feet of cultivation and processing
space; there is no assurance the Company can complete these construction
projects as planned.



The Company estimates that phase 1 of its construction plan will be completed
during the third quarter of its fiscal year 2023. The extension of time to
complete phase 1 of its construction plan is primarily due to delays in
obtaining the necessary construction permits and supply chain shortages of
construction materials. Further, given the current level of inflation and the
supply chain shortages, the Company estimates that costs will exceed original
estimates by 25%-30%. The needed permits were obtained subsequent to June 30,
2022. The Company may experience additional construction delays. The Company can
provide no assurance that it will be able to obtain the financing needed to pay
the additional construction costs.



Item 9 Labs Corp. has continued its expansion plans into other states as well as
the Company acquired (pending regulatory approval) cultivation and processing
licenses in Nye County, Nevada which will be paired with their Nevada facility.
In fiscal 2019, the Company broke ground on their 20,000 square foot cultivation
and processing facility in Nevada. The facility is now approximately 98%
complete. Construction recommenced, after a pause due to Covid-19, in August
2021. The Company aims to commence operations in Nevada in early fiscal year
2023.



On October 6, 2021, the Company entered into an Asset Purchase Agreement ("APA")
to acquire an existing dispensary license and storefront from Nebrina Adams
County LLC, a Colorado limited liability company ("Seller") in Adams County, CO.
The total purchase price was $1,536,000, as to which $1,000,000 was paid to an
escrow account upon conditional approvals of the change of ownership from state
and local licensing authorities concerning the transfer of ownership. At
closing, that amount was released to the Seller along with an 18-month
promissory note in the principal amount of $200,000 and the balance payable in
300,000 shares of Company common stock, valued at $336,000. The Company obtained
financing to consummate this transaction. On March 2, 2022, the Company received
the necessary regulatory approvals and completed this transaction. The existing
dispensary license had never been operational. This dispensary, known as the
Company's North Denver location, began operations on July 11, 2022, making it
the Company's first corporate-owned shop in Colorado under the Company's
cannabis dispensary brand, Unity Rd.



This license acquisition is part of an overarching acquisition strategy that is
intended to accelerate national expansion by creating turnkey investment
opportunities for Unity Rd. franchisees. The Company plans to convert acquired
dispensaries into Unity Rd. shops, operate them internally and sell them to an
existing or future franchise partner. This offers an expedited solution for
entrepreneurs seeking immediate entry into cannabis. The Company is targeting
numerous similar transactions in the next 12 months to gain a deeper market
penetration in select markets. Subsequently and/or concurrently, the Company
plans to introduce the Item 9 Labs suite of products to the same markets through
the acquisition of cultivation and production licenses or through joint ventures
with qualified local, licensed operators.



On March 11, 2022, the Company entered into an Asset Purchase Agreement with The
Herbal Cure LLC, a Colorado limited liability company, pursuant to which the
Company is purchasing certain assets. Effective upon the completion of the sale,
which has not occurred as of the date of this filing, the licenses, contracts
and certain personal property to operate a licensed medicinal and recreational
cannabis dispensary will be delivered to the Company. The total purchase price
is $5,750,000, as to which $250,000 is to be paid upon execution of the Asset
Purchase Agreement, $3,700,000 payable at closing, $700,000 shall be financed by
seller pursuant to a Secured Promissory Note and the remainder of the purchase
prices shall be paid in shares of the Company's common stock on the closing
date. The Secured Promissory Note shall accrue interest at 5% per annum and have
a term of 18 months, commencing on the closing date, payable in even monthly
installments until paid in full. The shares of the Company's common stock to be
issued shall be in such an amount as is the quotient of $1,100,000 divided by
the product of the 10-day volume weighted average price of the shares as of the
closing date and 85%. The Company can provide no assurance that it will be
successful in finalizing this acquisition.



On May 18, 2022, the Company and its wholly owned subsidiary, OCG Management
Ontario, Inc., a corporation formed under the laws of the Province of Ontario
("Purchaser") solely for the purpose of completing this transaction, entered
into a Share Purchase Agreement pursuant to which the Purchaser is purchasing
all, but not less than all, of the issued and outstanding shares in the capital
of Wild Card Cannabis Incorporated, a corporation formed under the laws of the
Province of Ontario free and clear of all Liens from the Shareholders. The
Company can provide no assurance that it will be successful in finalizing this
acquisition.


The aggregate purchase price for the Shares is twelve million eight hundred thousand dollars ($12,800,000.00) (the “Purchase Price”), as adjusted, plus earnout payment, if applicable (collectively, the “Purchase Price”), payable as follows:

(i) The Company has posted the exclusivity deposit of $156,902
to the escrow agent March 4, 2022.




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



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



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

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Results of Operations

                                           Nine months ended June 30,
                                             2022              2021           $ Change         % Change
Revenues, net                           $  17,755,519     $ 15,843,256     $   1,912,263              12 %
Cost of revenues                           11,089,560        8,531,623         2,557,937              30 %
Gross profit                                6,665,959        7,311,633          (645,674 )            -9 %
Operating expenses
Professional fees and outside
services                                    2,207,618        1,350,196           857,422              64 %
Payroll and employee related expenses       7,889,672        4,014,819         3,874,853              97 %
Sales and marketing                         1,260,551          389,819           870,732             223 %
Depreciation and amortization               1,320,664          360,601           960,063             266 %
Other operating expenses                    2,747,158        1,292,154         1,455,004             113 %
Provision for bad debt                         (5,000 )             -             (5,000 )           100 %
Total operating expenses                   15,420,663        7,407,589         8,013,074             108 %
Income (loss) from operations              (8,754,704 )        (95,956 )      (8,658,748 )          9024 %
Other expense, net                         (3,932,600 )     (1,763,385 )      (2,169,215 )           123 %
Net loss, before income tax provision
(benefit)                                 (12,687,304 )     (1,859,341 )     (10,827,963 )           582 %
Income tax provision (benefit)                  7,948               -              7,948               0 %
Net loss                                  (12,695,252 )     (1,859,341 )     (10,835,911 )           583 %
Less: Net loss attributable to
non-controlling interests                      (1,683 )             -             (1,683 )           100 %
Net loss attributable to Item 9 Labs
Corp.                                   $ (12,693,569 )   $ (1,859,341 )   $ (10,834,228 )           583 %






                                           Three months ended June 30,
                                              2022              2021           $ Change        % Change
Revenues, net                           $     4,931,322     $ 6,693,061     $ (1,761,739 )           -26 %
Cost of revenues                              3,341,367       3,802,447         (461,080 )           -12 %
Gross profit                                  1,589,955       2,890,614       (1,300,659 )           -45 %
Operating expenses
Professional fees and outside
services                                        993,452         442,483          550,969             125 %
Payroll and employee related expenses         2,683,722       1,592,673        1,091,049              69 %
Sales and marketing                             207,213         262,473          (55,260 )           -21 %
Other operating expenses                      1,114,323         728,100          386,223              53 %
Total operating expenses                      5,437,762       3,137,888        2,299,874              73 %
Income (loss) from operations                (3,847,807 )      (247,274 )     (3,600,533 )          1456 %
Other expense, net                           (1,625,155 )      (586,631 )     (1,038,524 )           177 %
Net income (loss), before income tax
provision (benefit)                          (5,472,962 )      (833,905 )     (4,639,057 )           556 %
Income tax provision (benefit)                    4,624              -             4,624               0 %
Net income (loss)                            (5,477,586 )      (833,905 )     (4,643,681 )           557 %
Less: Net loss attributable to
non-controlling interests                        (7,109 )            -            (7,109 )           100 %
Net loss attributable to Item 9 Labs
Corp.                                   $    (5,470,477 )   $  (833,905 )   $ (4,636,572 )           556 %




Revenues



The increase in revenue for the nine months ended June 30, 2022 was primarily
due to a change in certain processes and procedures in the Company's lab during
the year ended September 30, 2021. That is, during fiscal year 2021, the Company
purchased equipment to automate certain manual processes. The purchase of this
equipment made certain processes, such as the filling of cartridges, more
efficient, which allowed for increased output. In order to support this
increased output, the Company purchases certain inventory materials from third
party vendors that it had previously produced itself. Further, during fiscal
year 2021, the Company added and reorganized post-production space to more
efficiently package its products for sale. These improvements for the nine
months ended June 30, 2022 were offset by the following events during the
quarter ended June 30, 2022.



The decrease in revenue for the three months ended June 30, 2022 was primarily
due to effects of additional competition entering the Company's market that were
not as significant during the same three month period of the prior year. This
additional competition resulted in a decrease in units sold and a decrease in
unit sales prices. Further, during the three months ended June 30, 2022, the
Company experienced supply chain issues that caused a decrease in new orders for
the Company's products and delays in fulfilling existing orders.



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Cost of Revenues



Cost of revenues consist primarily of labor, materials, supplies and utilities.
Cost of revenues as a percentage of revenues was 68% and 62% for the three and
nine months ended June 30, 2022 compared to 57% and 54% for the three and nine
months ended June 30, 2021. The Company was able to increase operational
efficiency throughout fiscal year 2021. However, the cost of the purchased
inventory materials discussed above and increases in other costs, such as
product testing, primarily negated these efficiency gains. Further, cost of
revenues as a percentage of revenues decreased due to the reduction in unit
sales prices during the quarter. Management will remain focused on reducing
costs through bulk purchasing, implementing additional efficiencies in
production and making additional investments in property and equipment. The
Company believes that it will reduce the overall cost of revenues and cost of
revenues will increase at a lower rate than revenues in future periods, which
will lead to increased profit margins.



Gross Profit


The decrease in gross profit as a percentage of revenue for the nine months
ended June 30, 2022 was due to increases in revenue offset by price reduction as
competition rises and by increases in purchased inventory materials and other
costs. Further, the decrease in gross profit as a percentage of revenue of the
three months ended June 30, 2022 also decreased due to the decrease in the
number of units sold as a result of the increased competition and the supply
chain issues experienced. With the Company's continued efforts to increase
capacity and focus on efficiencies and reducing costs, management expects gross
profit to increase going forward.



Operating Expenses


Professional fees and outside services increased for the nine months ended June
30, 2022 compared to the nine months ended June 30, 2021 primarily due to the
amortization of prepaid consulting agreements that were entered into subsequent
to June 30, 2021 and additional expenses incurred for corporate advisory
services, and investor and public relations services. Further, the Company
incurred significant legal expenses during the three and nine months ended June
30, 2022 related to entering into the Share Purchase Agreement for the purchase
of all of the issued and outstanding shares of Wild Card Cannabis, Incorporated,
a corporation formed under the laws of the Province of Ontario, Canada.



The increase in payroll expenses was primarily due to the amortization of
stock-based compensation expense for stock options granted subsequent to June
30, 2021. Further, payroll expenses increased due to an increase in employee
headcount during fiscal year 2021 and the nine months ended June 30, 2022, as a
result of increased hiring of employees. The increase was offset by
approximately $294,000 of Employee Retention Credits ("ERCs") received by the
Company.



Sales and marketing expenses increased due to increased spending on promotional
items and marketing and branding initiatives during the nine months ended June
30, 2022. The decrease in sales and marketing expenses decreased slightly for
the three months ended June 30, 2022 compared to June 30, 2021 as a result of
the decrease in promotional items during the quarter.



The increase in depreciation and amortization is due primarily to the scheduled
amortization of intangible assets acquired in the OCG Inc. acquisition in March
2021.


Other operating expenses increased mainly due to increased insurance expenses, facility expenses such as rental expenses, travel expenses and additional IT support for the increase in headcount.




Total operating expenses as a percentage of gross profit increased from 109% and
101% for the three and nine months ended June 30, 2021, respectively, to 342%
and 231% for the three and nine months ended June 30, 2022, respectively.
Management believes this ratio will decrease for the Cultivation segment going
forward as the expectation is that revenues will grow at a higher rate than
operating expenses, however, management believes that operating expenses will
outpace revenues for the Franchising and Corporate segments as the Franchising
and Corporate segments continue to perform on growth initiatives.



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



Other Expense, net



Other expenses consist primarily of interest expense of $1,625,155 and
$3,932,918 for the three and nine months ended June 30, 2022, respectively, and
$629,265 and $1,806,019 for the three and nine months ended June 30, 2021,
respectively. The increase in interest expense was primarily the result of the
continued interest and amortization of debt discounts for debt outstanding at
June 30, 2021 and the additional interest and amortization of debt discounts for
debt incurred subsequent to June 30, 2021. This increase in interest expense was
offset by debt and amortization of debt discounts that were capitalized to
construction in progress related to the Company's capital projects.



Adjusted EBITDA



Management uses the non-GAAP measurement of earnings before interest, taxes,
depreciation, amortization, stock-related compensation expense,
acquisition-related costs, and other adjustments, or "Adjusted EBITDA," to
evaluate the Company's performance. Adjusted EBITDA is a non-GAAP measure that
is also frequently used by analysts, investors and other interested parties to
evaluate the market value of companies considered to be in similar businesses.
The Company suggests that Adjusted EBITDA be viewed in conjunction with its
reported financial results or other financial information prepared in accordance
with accounting principles generally accepted in the United States, or "US
GAAP."

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The following table shows the reconciliation of net income (loss) to Adjusted EBITDA for the three and nine months ended June 30, 2022 and 2021:



                                   Three months ended June 30,          Nine months ended June 30,
                                       2022              2021             2022              2021
Net loss                        $    (5,477,586 )    $  (833,905 )   $ (12,695,252 )   $ (1,859,341 )
Depreciation and amortization           439,052          112,159         1,320,664          360,601
Interest expense                      1,625,155          629,265         3,932,918        1,806,019
Income tax expense                        4,624               -              7,948               -
Stock-based expense                   1,161,739          304,672         3,032,518        1,077,252
Acquisition related costs               479,904            5,804           499,904          272,541
Adjusted EBITDA                 $    (1,767,112 )    $   217,995     $  (3,901,300 )   $  1,657,072




The approximately $5.6 million change from prior year is due to the addition of
the franchise business, as well as significant investments in human capital and
infrastructure to prepare for anticipated growth.



FINANCIAL POSITION, LIQUIDITY AND CAPITAL POSITION

liquidity and capital resources




The Company's primary need for liquidity is to fund working capital requirements
of its business, capital expenditures, acquisitions, debt service, and for
general corporate purposes. The Company's primary source of liquidity is funds
generated from revenues, financing activities and from private placements. The
Company's ability to fund its operations, to make planned capital expenditures,
to make planned acquisitions, to make scheduled debt payments, and to repay or
refinance indebtedness depends on its future operating performance and cash
flows, which are subject to prevailing economic conditions and financial,
business and other factors, some of which are beyond the Company's control.



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



In order to continue in business, the company must generate additional income and raise additional capital to fund its operating losses and service its debt. Management’s plans in relation to these matters are described as follows:




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


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



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

  29



As of June 30, 2022, the Company had $441,662 of cash and cash equivalents and
negative working capital of ($33,778,387) (current assets minus current
liabilities), compared with $1,454,460 of cash and cash equivalents and negative
working capital of ($4,893,385) as of September 30, 2021. The decrease of
$28,885,002 in the Company's working capital is primarily due to increases in
the amount of the Company's debt maturing within the next 12 months. The
decrease is also due to decreases in the Company's cash, accounts receivable,
inventory and prepaid balances and increases in the Company's accounts payable
and other operating liabilities and the current portion of operating lease
liabilities. The $1,012,798 decrease in cash and cash equivalents was primarily
due to the net cash used in operating activities, purchases of property,
equipment and construction in progress related to the Company's capital
projects, and the Company's acquisition of a dispensary license in Colorado. The
Company is an early-stage growth company. It is generating cash from sales and
is investing its capital reserves in current operations and new acquisitions
that are expected to generate additional earnings in the long term. The Company
expects that its cash on hand and cash flows from operations, along with private
and/or public financing, will be adequate to meet its capital requirements and
operational needs for the next 12 months, although no assurance can be given
that private and/or public financing can be obtained on terms acceptable to
the
Company, or at all.



Cash Flows



The following table summarizes the sources and uses of cash for each of the
periods presented:



                                         Nine months ended June 30,
                                           2022              2021           $ Change        % Change
Net cash used in operating
activities                            $  (2,016,148 )   $ (6,877,259 )   $  4,861,111             -71 %
Net cash used in investing
activities                               (3,769,744 )     (3,851,950 )         82,206              -2 %
Net cash provided by financing
activities                                4,773,094       10,941,424       (6,168,330 )           -56 %
Net increase (decrease) in cash and
cash equivalents                      $  (1,012,798 )   $    212,215     $ (1,225,013 )          -577 %




Operating Activities



During the nine months ended June 30, 2022, operating activities used $2,016,148
of cash and cash equivalents, primarily resulting from a net loss of $12,695,252
which was offset by net cash provided by operating assets and liabilities of
$3,918,454. There was significant non-cash activity that contributed to the net
loss totaling $6,760,650 including depreciation and amortization of $1,410,508,
amortization of debt discount of $2,311,783, and stock-based compensation of
$3,032,518.



During the nine months ended June 30, 2021, operating activities used $6,877,259
of cash, primarily resulting from a net loss of $1,859,341which was extended by
net cash used in operating assets and liabilities of $7,060,610. There was
significant non-cash activity that contributed to the net loss totaling
$2,042,692 including depreciation and amortization of $400,419, amortization of
debt discount of $565,021, and stock based compensation of $1,077,252. With the
increase in revenues, the Company's receivables increased $1,703,092, deferred
costs increased $6,348,573 and prepaid expenses increased $192,292, offset by an
increase in current liabilities of $1,183,347.



Investing Activities



During the nine months ended June 30, 2022, investing activities used $3,769,744
of cash and cash equivalents, consisting primarily of $2,918,584 in purchases of
property, equipment and construction in progress, the purchase of a dispensary
license in the amount of $1,130,872, cash payments for acquisitions of $140,726
and cash paid to acquisition escrow accounts of $406,932, offset by $816,227 of
cash received from the escrow deposit accounts.



During the nine months ended June 30, 2021investment activity used $3,851,950
Cash consisting mainly of $2,263,388 when purchasing property and equipment and $1,685,368 of advance payments made on an acquisition.



Financing Activities


During the nine months ended June 30, 2022provided financing activities
$4,773,094consisting of $7,282,763 in proceeds from the issuance of debt instruments,
$555,911 in proceeds from the issuance of shares and offset by $3,002,097 debt repayments made.




During the nine months ended June 30, 2021, financing activities provided
$10,941,424, consisting of $13,298,965 in proceeds from the issuance of stock
and proceeds from the issuance of convertible debt of $1,355,000 and offset by
$3,712,541 in debt payments made.



Given that our cash needs are strongly driven by our growth requirements, we
also intend to maintain a cash reserve for other risk contingencies that may
arise.

  30



We intend to meet our cash requirements for the next 12 months through the use
of the cash we have on hand and through business operations, future equity
financing, debt financing, or other sources, which may result in further
dilution in the equity ownership of our shares. We have filed an offering
document on Form 1-A with the Securities and Exchange Commission in order to
sell units comprising of one share of common stock and one-half of one warrant.
We are also in discussions with various potential capital partners to provide
additional debt capital for accretive acquisitions. We do not have any other
arrangements in place to complete any private placement financings of debt and
equity. There is no assurance that we will be successful in completing the
offering on Form 1-A, or in finding a capital partner to provide additional debt
capital or any other such financings on terms that will be acceptable to us.



Off-Balance Sheet Arrangements

We are not currently involved or otherwise involved in any off-balance sheet arrangement that has or is likely to have a present or future material effect on our financial condition, changes in financial condition, income or expenses, or results of operations, liquidity, capital expenditures or capital resources.



Critical Accounting Policies



Our discussion and analysis of our financial condition and results of operations
are based on our condensed consolidated financial statements, which have been
prepared in accordance with US GAAP. The preparation of our condensed
consolidated financial statements requires us to make estimates and judgements
that affect the reported amounts of assets, liabilities, revenue, expenses and
related disclosure of contingent assets and liabilities. On an ongoing basis, we
evaluate our estimates, including those related to areas that require a
significant level of judgment or are otherwise subject to an inherent degree of
uncertainty. Critical accounting policies and estimates in these condensed
consolidated financial statements are those related to revenue recognition,
valuation of options, warrants and debt discounts, carrying value of intangible
assets subject to amortization, infinite life intangible assets and goodwill,
stock-based compensation, and income taxes. We base our estimates on historical
experience, our observance of trends in particular areas, and information or
valuations and various other assumptions that we believe to be reasonable under
the circumstances and which form the basis for making judgments about the
carrying value of assets and liabilities that may not be readily apparent from
other sources. Actual amounts could differ significantly from amounts previously
estimated. For a discussion of our critical accounting policies, refer to Part
I, item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in our annual report on Form 10-K for the year ended
September 30, 2021. Management believes that there have been no material changes
in our critical accounting policies during the three months ended June 30, 2022.



Recently issued accounting pronouncements

See Note 1 to our Condensed Consolidated Financial Statements contained in Part I, Item 1, Financial Information for this Quarterly Report on Form 10-Q.



Contractual Obligations



We are a smaller reporting company as defined by Rule 12b-2 of the Securities
Exchange Act of 1934 and are not required to provide the information under this
item.

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