UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended September 30, 2019

 

[  ] 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.)
2340 Horizon Ridge Dr. Suite 120 Henderson, NV		89052
(Address of principal executive offices)		(Zip Code)

 

(541) 633-4568

(Registrant’s telephone number, including area code)

 

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

 

Securities registered pursuant to Section 12(g) of the Act:

 

Common stock, $.0001 par value

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [  ] No [X]

 

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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]

 

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 definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

(Check one):

 

Large accelerated filer	[  ]	Accelerated filer	[  ]
Non-accelerated filer	[X]	Smaller reporting company	[X]
		Emerging Growth company	[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 by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant based upon the closing price of $1.25 per share as of March 31, 2019 was approximately $16,621,047.

 

As of May 9, 2020, there were 85,842,473 shares of registrant’s common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None.

 

 

 

TABLE OF CONTENTS

 

			Page
PART I
Item 1.	Business		4
Item 1A.	Risk Factors		7
Item 1B.	Unresolved Staff Comments		8
Item 2.	Properties		9
Item 3.	Legal Proceedings		9
Item 4.	Mine Safety Disclosure		9
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		10
Item 6.	Selected Financial Data		11
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		12
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		17
Item 8.	Financial Statements and Supplementary Data		18
	Balance Sheets		F-2
	Statements of Operations		F-3
	Statements of Stockholders’ Equity (Deficit)		F-5
	Statements of Cash Flows		F-6
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		19
Item 9A.	Controls and Procedures		19
Item 9B.	Other Information		20
PART III
Item 10.	Directors, Executive Officers and Corporate Governance		21
Item 11.	Executive Compensation		22
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		23
Item 13.	Certain Relationships and Related Transactions, and Director Independence		23
Item 14.	Principal Accountant Fees and Services		23
PART IV
Item 15.	Exhibits and Financial Statement Schedules		24
SIGNATURES			25

 

 

PART I

 

Forward-Looking Statements

 

This report includes “forward-looking” statements as the term is defined in the Private Securities Litigation Reform Act of 1995 or by the U.S. Securities and Exchange Commission. All statements other than statements of historical facts contained in this report, including statements regarding our future financial position, business strategy and plans and objectives of management for future operations may be deemed to be forward-looking statements. The words “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “could,” “target,” “potential,” “is likely,” “will,” “expect” and similar expressions, as they relate to us, are also intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. In addition, our past results of operations do not necessarily indicate our future results.

 

Other sections of this report may include additional factors which could adversely affect our business and financial performance. New risk factors emerge from time to time and it is not possible for us to anticipate all the relevant risks to our business, and we cannot assess the impact of all such risks on our business or the extent to which any risk, or combination of risks, may cause actual results to differ materially from those contained in any forward-looking statements. Those factors include, among others, those matters disclosed in this Annual Report on Form 10-K.

 

Except as otherwise required by applicable laws and regulations, we undertake no obligation to publicly update or revise any forward-looking statements or the risk factors described in this report, whether as a result of new information, future events, changed circumstances or any other reason after the date of this report. Neither the Private Securities Litigation Reform Act of 1995 nor Section 27A of the Securities Act of 1933 provides any protection to us for statements made in this report. You should not rely upon forward-looking statements as predictions of future events or performance. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

 

The Company maintains an internet website at www.eviolabs.com. The Company makes available, free of charge, through the Investor Information section of the web site, its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Section 16 filings and all amendments to those reports, as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission. Any of the foregoing information is available in print to any stockholder who requests it by contacting our Investor Relations Department.

 

 

ITEM 1. BUSINESS

 

Corporate Background and Our Business

 

Our Vision

 

EVIO, Inc. supports and optimizes our clients’ businesses, and protects the health and safety of consumers by providing analytical testing, compliance consulting, and research & development services to the legal cannabis and hemp industries.

 

Our founders believe that products derived from the cannabis sativa plant could have the potential to provide an alternative to pharmaceutical products and may improve wellness. Our founders also believe that it is imperative that there be third party verification of the safety and quality of these products by qualified scientists in adherence with the highest accreditation standards, including ISO 17025, TNI NELAP, and GMP.

 

We believe that as we leverage best practices from labs across North America, we are building standardized and optimized methods and procedures that will provide EVIO a considerable advantage in a future global market for cannabis and hemp ingredients and products.

 

We work to ensure the EVIO brand is synonymous with safe, high quality products.

 

Our Services

 

EVIO, Inc’s core business is analytical testing services for cannabis and hemp growers, product formulators, processors, distributors, and retailers. We perform testing as required by state and provincial mandates, as well as for research and development or informational purposes.

 

Tests include identification and quantification of compounds including cannabinoids such as THC and CBD, and terpenes. This testing includes mandated hemp field verifications, quantitation for product labeling, and testing to support product formulations. We also perform homogeneity and process control testing, and other tests to determine the quality and conformance of cannabis products.

 

We also identify contaminants such as solvents, pesticides, e. coli, salmonella, aflatoxins, excess moisture, and heavy metals in cannabis and related products including soils, water, hemp and CBD products.

 

Our labs rely on instrumentation including High Performance Liquid Chromatography (PLC) for cannabinoid testing; triple-quadrupole mass spectrometry for pesticide testing; gas chromatography for solvent and terpene testing; Inductively Coupled Plasma Mass Spectrometer (ICPMS) to identify heavy metal; Polymerase Chain Reaction (PCR) technology for identification of DNA or RNA from harmful microbial contaminants; and other support instruments including moisture analyzers and water activity meters, plating, and microscopy.

 

EVIO Biosciences and our advisory services work include providing technical guidance to our clients and governments in the areas of industry best practices, regulatory compliance, support for product formulation, assisting businesses with setting up their own internal research laboratories, providing expert advice and data to governments and financial auditors, and assisting with state and local cannabis licensing. We also leverage our expertise and access to data to perform R&D and identify new and novel testing methods and gain insights about cannabis and its potential uses.

 

Our Team

 

Our company is led by a team of technology-focused professionals who came from Fortune-500 companies. Each of our labs are led by experienced laboratory directors who hold PhD’s or other advanced degrees in chemistry, biology, chemical engineering or other sciences. Our laboratory teams include analytical chemists and biologists and laboratory technicians who are trained to EVIO’s standardized methods and procedures to be both specialists in one area of testing and attain cross-training in other tests.

 

Our teams collaborate across labs to share best practices, and we continuously improve our methods and processes across all labs based on lessons learned in each. The ability to learn from labs across the country provides a significant advantage compared to our competitors that operate one or two labs.

 

Background

 

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, Signal Bay Research, Inc., a Nevada corporation completed a reverse merger with Quantech Electronics Corp., a public shell company. In September 2014, the Company changed its name to Signal Bay, Inc. (now named EVIO). 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 Henderson, NV.

 

 

During 2014 and 2015, Signal Bay’s primary business focus was providing consulting services, market research, and data analysis for businesses, governments, and individuals, involved with the emerging legal cannabis industry. In 2015, the founders identified the testing market as an underserved segment of the emerging cannabis industry that provided a service that was in alignment with our vision to contribute to the development of a safe and compliant industry.

 

In September 2015, the Company acquired a majority stake of an analytical testing laboratory in Bend, OR. The Company continued to acquire laboratories with the goal of attaining best practices and capturing market share in advance of the adult-use legalization of cannabis in Oregon. By 2018, the Company had acquired 4 testing labs in Oregon and gained licensing and accreditation for all four labs to perform testing to the newly adopted rigorous testing standards required by the State of Oregon. The labs began operating under one name, EVIO Labs. The company continued its growth in other states, through both acquisitions and licensing agreements.

 

In August 2018, Signal Bay, Inc. changed its name to EVIO, Inc.

 

In January 2019, the Company acquired C3 Labs, LLC, a cannabis research and development laboratory in Berkeley California. During 2019, we expanded the scope of lab services to include compliance testing, in anticipation of newly adopted rules to serve California’s mandated testing requirements.

 

In May 2019, the Company formed EVIO Canada, Inc. and acquired a 50% state in Keystone Labs, Inc. located in Edmonton, Alberta. Keystone provides a full array of analytical and microbiological testing services for pharmaceutical, biotechnology, medical device, nutraceutical, and medical cannabis industries.

 

In September 2019, the company operated or licensed labs in 6 states and Alberta, Canada.

 

EVIO, Inc.:

 

Trade Name (dba)		Company Name		State of Incorporation		Ownership %				Inception/Acquisition Month
EVIO Labs Medford		Smith Scientific Industries, LLC		Oregon			80	%		June 2016
EVIO Labs Portland		Greenhaus Analytical Labs, LLC		Oregon			100	%		October 2016
EVIO Labs MA		Viridis Analytics LLC		Massachusetts			100	%		August 2018
EVIO Labs Berkeley		C3 Labs, LLC		Nevada			90	%		January 2019
EVIO Labs Humboldt		EVIO Labs Humboldt, LLC		California			100	%		April 2019
Keystone Labs		Keystone Labs, Inc.		Canada			50	%		May 2019

 

EVIO Business Segments

 

The Company currently has three principal business segments: (1) Management and Corporate; (2) Consulting Services to the cannabis industry; and (3) Analytical Testing Services to the cannabis industry.

 

None of the Company’s business segments constitutes the transport, production, distribution, storage, sale or possession of cannabis for non-medical purposes.

 

1. Management and Corporate

 

The Company provides overall management and corporate reporting functions for the entire organization. This includes marketing, human resources, financial management and reporting, investor relations, mergers & acquisitions, and corporate compliance.

 

The Company competes with other cannabis testing labs on a state by state basis. Digipath Labs is a known publicly traded cannabis testing lab. It has one location in Nevada. The Company does not currently operate in Nevada. Each of our labs compete with other laboratories in their respective states as described below.

 

The Company maintains intangible property including its brand, which it uses internally and licenses to certain laboratories. It also has consolidated customer lists and has developed proprietary laboratory methods, procedures, and software.

 

As of September 30, 2019, the Management and Corporate division has seven employees. These corporate employees include the Chief Executive Officer, Chief Operating Officer, Chief Science Officer, Controller, Vice President of Operations, Director of Human Resources, and Accountant.

 

2. Consulting Services

 

The Company provides advisory, product formulation, licensing and compliance services to the cannabis industry. Consulting clients are located in states that have state managed medical and/or recreational cannabis programs. The Company assists such clients with business planning, state compliance, product and process development advice, and ongoing operational support, evaluation of processes, identification of alternative solutions, formulations, or processes, recommendations of resources needed, and deliverable reports or prototype products.

 

Business advisory and compliance consulting require specialized skills in the areas of policy and compliance, cannabis industry regulations, and cannabis operations. Cannabis product formulation, custom R&D, and process optimization consulting require additional skills in chemistry and/or chemical engineering, product formulation and product development. Consulting services depends on the shared resources of corporate and laboratory personnel on an as-needed basis. The Chief Operations Officer, and/or Chief Science Officer lead advisory projects, and recruit qualified personnel from our labs, as well as outside consultants, to perform services on an as-needed basis.

 

There are many small private cannabis consulting firms and sole proprietor consultants working in the cannabis industry today. Most of our consulting clients come to us as referral business from our testing operations, or as referrals from or repeat business from our consulting clients. Therefore, we rarely encounter direct competition for our consulting services, which we currently provide as a companion or value-added service to our analytical testing services.

 

 

3. Testing Services

 

Testing services represents the core of the Company’s operations. The Company provides analytical testing services to the cannabis industry under the EVIO Labs brand. As of September 30, 2019.

 

EVIO Labs clients are located in Oregon, California, Massachusetts and Edmonton and consists of distributors, growers, processors and dispensaries. Operating under the rule of the appropriate state regulating bodies, EVIO Labs certifies products have been tested and are free from pesticide and other contaminants before resale to patients and consumers. The Company’s deliverable is a certificate of analysis that is provided to both the Company’s client and the state regulators. The Company has hundreds of customers across North America. No single customer comprises more that 15% of total consolidated revenue of the Company.

 

Production and Services

 

EVIO tests cannabis and hemp and related products to quantify, or detect the presence of, certain compounds including those that might endanger consumer health. At a minimum, we test the compounds required for sale of product by regulation, and in addition, we provide additional testing services. A description of those services is set forth below:

 

Analytical Testing

 

EVIO Labs provides product testing for agricultural, medical, and biotechnology companies, currently specializing in analytical services for the emerging legal cannabis industry. EVIO Labs provides a variety of testing services for the cannabis industry including cannabinoid potency testing, terpene analysis, pesticide testing, residual solvent screening, visual inspections, biological contaminant testing, and more. In addition, our laboratories work together to engage in internal research to improve methods and develop additional technical services. The tests we perform include the following:

 

	-	Cannabinoid Potency (detecting the presence of cannabinoids including d9-THC, THCA, CBD, CBDA, CBN, CBC and CBG; this also includes THC:CBD ratio for immature plants. Some labs may also detect additional cannabinoids such as THCV, d8-THC)
	-	Terpene Analysis
	-	Water Activity and Moisture Content
	-	Microbiological Testing

 

	o	Yeast/Mold Enumeration
	o	Bacterial Testing (E. coli, Salmonella)
	o	Mycotoxins and Aflatoxins

 

	-	Pesticide/Fungicide Screening
	-	Residual Solvent Screening
	-	Immature Plant Inspection
	-	Foreign Matter Inspections
	-	Heavy Metals Detection (Lead, Mercury, Arsenic, Cadmium)

 

 

Specialized Skill and Knowledge

 

Our testing labs require the specialized expertise of qualified chemists and micro-biologists at each lab location. All of the Company’s laboratory technicians have undergraduate degrees in science; laboratory analysts have masters’ degrees or equivalent experience; and laboratory directors have post-graduate degrees or prior laboratory experience plus management expertise. Laboratory staff have both scientific knowledge and specialized expertise in performing analytical testing, and specifically testing cannabis and cannabis products. The labs also require specialized personnel in the areas of compliance and quality assurance.

 

Competitive Conditions

 

Due to prohibitions on interstate transport of cannabis in the US, cannabis labs compete on a state by state level.

 

In Oregon, according to the Oregon Liquor Licensing Commission there are approximately 20 accredited cannabis test labs, of which we owned four, and consolidated to two. Competitors in Oregon include GreenLeaf Labs, ChemHistory, Juniper Labs, and Pixis Labs. None of the Company’s competitors in Oregon have labs at multiple locations.

 

In Massachusetts, according to the Cannabis Control Commission, there are four labs, of which the Company owns one. Competing labs in Massachusetts include MCR Labs and Pro Verde.

 

In Canada, according to Health Canada, the Company competes with 33 “licensed testing companies” nationwide.

 

In California, according to the Bureau of Cannabis Control, there are currently 32 licensed cannabis laboratories. Current incumbent competitors include: Steep Hill Labs, SC Labs, PharmLabs and CW Analytical.

 

DigiPath in Nevada is the only other publicly traded lab and operates in Las Vegas, Nevada, where we do not compete.

 

Our Growth Strategy

 

Focus on the newly legalized markets in California and Massachusetts. California is projected to be the largest cannabis market in the world. In 2019, California implemented new testing requirements that require all cannabis sold in the recently regulated adult-use dispensaries be tested. This opens a substantial opportunity for EVIO to capture substantial market share of the California market. Massachusetts is also a recent addition to the roster of adult-use states and has created an immediate opportunity to perform testing, especially because of the small number of labs in the state.

 

Increase participation in the recently regulated hemp and CBD markets. With the emergence of CBD products, and a market that is expected to soon eclipse the cannabis market, we anticipate that the states, and the FDA will require that hemp-derived CBD products undergo testing. EVIO is well positioned to perform this testing.

 

Evaluate new domestic and international markets for growth. The cannabis market continues to grow as more US states and many countries implement medical and adult use cannabis programs. EVIO will continue to evaluate new markets.

 

Establish partnerships with the industry’s leading national brands and organizations. We believe that consolidation within the industry is likely. Therefore, we will focus our efforts on establishing partnerships with the companies and brands that are most likely to emerge as leaders. EVIO’s national footprint should attract the multi-state and multi-national operators that seek consistent testing and a consistent customer experience at any lab they work with.

 

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 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.

 

 

Recent Events

 

COVID-19 Pandemic

 

On March 11, 2020, the World Health Organization (“WHO”) declared the COVID-19 outbreak to be a global pandemic. In addition to the devastating effects on human life, the pandemic is having a negative ripple effect on the global economy, leading to disruptions and volatility in the global financial markets. Most U.S. states and many countries have issued policies intended to stop or slow the further spread of the disease.

 

COVID-19 and the U.S.’s response to the pandemic are significantly affecting the economy. There are no comparable events that provide guidance as to the effect the COVID-19 pandemic may have, and, as a result, the ultimate effect of the pandemic is highly uncertain and subject to change. We do not yet know the full extent of the effects on the economy, the markets we serve, our business or our operations.

 

Risks Related To Our Cannabis Related Businesses

 

Our Cannabis testing business is dependent on state laws pertaining to the cannabis and hemp industries. The states where EVIO works have allowed the use of cannabis for medical use, adult use or both. Continued development of the cannabis industry is dependent upon continued legislative authorization of cannabis at the state level. Any number of factors could slow or halt progress in this area. Further progress in the cannabis industry, while encouraging, is not assured. While there may be ample public support for legislative action, numerous factors impact the legislative process. Any one of these factors could slow or halt use of cannabis, which would negatively impact our business.

 

Cannabis containing over 0.3% THC remains illegal under federal law and a change in federal enforcement practices could significantly and negatively affect our business. Despite the rapid development of the cannabis industry, and recent legalization of industrial hemp state laws legalizing medicinal and adult cannabis use continue to be in conflict with the Federal Controlled Substances Act, which classifies cannabis as a Schedule-I controlled substance and makes cannabis use and possession illegal on a national level. The United States Supreme Court has ruled that it is the Federal government that has the right to regulate and criminalize cannabis, even for medical purposes, and thus Federal law criminalizing the use of cannabis preempts state laws that legalize its use. Our business requires us to be in possession of cannabis, plus we provide services to customers that are engaged in the business of possession, use, cultivation, and/or transfer of cannabis. As a result, law enforcement authorities, in their attempt to regulate the illegal use of cannabis, may seek to bring an action or actions against us, including, but not limited, to a claim of aiding and abetting another’s criminal activities. As a result of such an action, we may be forced to cease operations at any one or more of our labs. Such an action would have a material negative effect on our business and operations.

 

Laws and regulations affecting the cannabis and hemp industries are constantly changing, which could detrimentally affect our business, and we cannot predict the impact that future regulations may have on us. Local, state and federal cannabis laws and regulations are constantly changing, and they are subject to evolving interpretations, which could require us to incur substantial costs associated with compliance or to alter one or more of our service offerings. In addition, violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our revenues, profitability, and financial condition. We cannot predict the nature of any future laws, regulations, interpretations or applications, nor can we determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our business. Any change in law or interpretation could have a material adverse effect on our business, financial condition, and results of operations.

 

If the federal government were to change its practices or were to expand its resources attacking providers in the cannabis industry, such action could have a materially adverse effect on our operations, our customers, or the sales of our products. It is possible that additional Federal or state legislation could be enacted in the future that would prohibit our customers from selling cannabis, and if such legislation were enacted, such customers may discontinue the use of our services. We cannot predict the nature of any future laws, regulations, interpretations or applications, nor can we determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our business.

 

Due to our involvement in the cannabis industry, we may have a difficult time obtaining the various insurances that are desired to operate our business, which may expose us to additional risk and financial liabilities. Insurance that is otherwise readily available, such as workers’ compensation, general liability, and directors and officer’s insurance, is more difficult for us to find, and more expensive, because we are service providers to companies in the cannabis industry. There are no guarantees that we will be able to find such insurances in the future, or that the cost will be affordable to us. If we are forced to go without such insurances, it may prevent us from entering into certain business sectors, may inhibit our growth, and may expose us to additional risk and financial liabilities.

 

Participants in the cannabis industry have difficulty accessing the service of banks, which makes it difficult for us to operate. Banks have the responsibility to assure that the funds they receive from businesses are lawfully attained. Since the use of cannabis remains illegal under federal law, most banks will not accept for deposit, funds derived from the sale or distribution of cannabis. Consequently, businesses involved in the cannabis industry are at risk of maintaining banking relationships. An inability to open and maintain bank accounts may make it difficult for us and our customers to do business. The inability for some of our clients to maintain a bank account has resulted in our transporting and holding large sums of cash and exposes us to a greater risk of theft.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

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.

 

 

ITEM 2. PROPERTIES

 

Our executive mailing address is located at 2340 W. Horizon Ridge Parkway, Suite 120, Henderson NV 89052 and our telephone number is (888) 544-3846 (EVIO). Our locations include:

 

Medford, OR:		540 E. Vilas Rd, Suite F, Central Point, OR 97502		Leased
Tigard, OR:		14775 SW 74th Ave. Tigard, OR 97224		Owned
Berkeley, CA		1200 Fifth St, Berkeley, CA 94710		Leased
Costa Mesa, CA:		3505 Cadillac, Unit F1, Costa Mesa, CA 92626		Leased
Framingham, MA:		40 Speen Street, Suite 301 Framingham, MA 01701		Leased
Henderson, NV		2340 W. Horizon Ridge Parkway, Henderson, NV 89052		Leased

 

ITEM 3. LEGAL PROCEEDINGS

 

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.

 

On May 9, 2019, Stephanie Head, a former part-time lab administrator for EVIO Labs Eugene, LLC, filed a wrongful termination lawsuit with the US District Court - District of Oregon, Eugene Division, Case No. 6:19-CV-00681, against EVIO Labs Eugene, LLC, EVIO, Inc. and Lori Glauser. In December, 2018, EVIO Labs Eugene, LLC terminated Stephanie Head because she was not available to work full-time. In February 2019, Ms. Head filed complaint to Oregon Bureau of Labor & Industries (“BOLI”) with allegations that she was discriminated against and unlawfully terminated. In October, 2019 BOLI found substantial evidence of unlawful employment on the basis of protected whistle-blowing, but found no substantial evidence of Ms. Head’s seven other allegations of unlawful employment practice. In April, 2019, BOLI notified EVIO Labs Eugene, LLC that BOLI elected not to pursue the charges further and closed the file. On January 28, 2020, the case was settled for $35,000, $25,000 payable in cash and $10,000 in EVIO Common Stock.

 

On August 29, 2019, the Company issued FIRSTFIRE GLOBAL OPPORTUNITIES FUND, LLC (“Creditor”) a Promissory Note in the original principal amount of $220,000.00 (the “Note”). The Company failed to timely pay certain sums under the Note and, as a result of the Breach, on or about August 7, 2019, Creditor filed a Complaint - Breach of Promissory Note in the Circuit Court of the 17th Judicial Circuit in and for Broward County, Florida. Since such filing, the Company and Creditor have entered into a Settlement Agreement and Stipulation, pursuant to which the Company has agreed to issue the Creditor 1,000,000 shares of its common stock under 3(a)(10) of the Securities Act of 1933 in settlement for all claims. The settlement was approved by the court on August 27, 2019. The shares were issued on September 6, 2019.

 

On February 6, 2020, MC CRE Investments, LLC landlord for the Palm Desert location, filed a Breach of Lease Agreement with the Superior Court of the State of California, County of Riverside. EVIO Labs Palm Desert has vacated the space and turned it back over to the landlord. The Company has expensed past due rents and late fees and these items are included in the liabilities in the balance sheet.

 

On or about March 5, 2020, Paul Tomaso and Jonah Barber beneficiaries for MRX Labs, LLC, filed a Breach of Promissory Note in the original principal amount of $750,000, plus late fees and penalties, with the Circuit Court of the State in Oregon, in Multnomah County against Greenhaus Analytical Labs, LLC. The Company has expensed penalties and late fees and these items are included in the liabilities in the balance sheet.

 

On or about April 30, 2020, Michele Malaret and Gordon Griswold filed, filed a Breach of Contract in the original principal amount of $500,000, with the Superior Court of California, County of Humboldt. The Company currently recognizes the fully liability on its balance sheet. There is no interest due associated with the note.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

None.

 

 

PART II

 

ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND PURCHASE OF EQUITY SECURITIES

 

Market Information

 

Our common stock trades over-the-counter and is quoted on the OTC Market’s Pink Marketplace under the symbol “EVIO.” The table below sets forth the high and low bid prices for our common stock as reflected on the OTC Bulletin Board for the last two fiscal years. Quotations represent prices between dealers, do not include retail markups, markdowns or commissions, and do not necessarily represent prices at which actual transactions were affected.

 

Common Stock
Fiscal Year 2019		High				Low
First Quarter		$	0.92			$	0.33
Second Quarter		$	0.83			$	0.35
Third Quarter		$	0.58			$	0.21
Fourth Quarter		$	0.78			$	0.37

 

Common Stock
Fiscal Year 2018		High				Low
First Quarter		$	1.47			$	0.47
Second Quarter		$	2.70			$	1.06
Third Quarter		$	1.77			$	1.04
Fourth Quarter		$	1.24			$	0.66

 

Holders of Common Equity

 

As of May 9, 2020, there were approximately 119 holders of record of our common stock. Such number does not include any shareholders holding shares in nominee or “street name”. As of May 9, 2020, there were 85,842,473 shares of common stock issued and outstanding.

 

Penny Stock Rules

 

Due to the price of our common stock, as well as the fact that we are not listed on Nasdaq or another national securities exchange, our stock is characterized as a “penny stock” under applicable securities regulations. Our stock therefore is subject to rules adopted by the SEC regulating broker-dealer practices in connection with transactions in penny stocks. The broker or dealer proposing to affect a transaction in a penny stock must furnish his customer a document containing information prescribed by the SEC and obtain from the customer an executed acknowledgment of receipt of that document. The broker or dealer must also provide the customer with pricing information regarding the security prior to the transaction and with the written confirmation of the transaction. The broker or dealer must also disclose the aggregate amount of any compensation received or receivable by him in connection with such transaction prior to consummating the transaction and with the written confirmation of the trade. The broker or dealer must also send an account statement to each customer for which he has executed a transaction in a penny stock each month in which such security is held for the customer’s account. The existence of these rules may have an effect on the price of our stock, and the willingness of certain brokers to effect transactions in our stock.

 

 

Transfer Agent

 

Pacific Stock Transfer is the transfer agent for our common stock with its business address at 6725 Via Austi Pkwy, Suite 300 Las Vegas, NV 89119 and its telephone number is (702) 433-1979.

 

Dividend Policy

 

Since inception we have not paid any dividends on our common stock. We currently do not anticipate paying any cash dividends in the foreseeable future on our common stock. Although we intend to retain our earnings, if any, to finance the development and growth of our business, our Board of Directors has the discretion to declare and pay dividends in the future

 

Equity Incentive Plan

 

The company does not have an effective employee incentive plan.

 

Recent Sales of Unregistered Securities

 

During the year ended September 30, 2019, the company entered into the following transactions:

 

●	The company issued 838,017 common shares valued at $186,550 for vesting of services.
●	The company issued 287,500 common shares $391,980 for vesting of employee services
●	The company issued 2,054,887 common shares for the conversion of $687,200 of outstanding principal on convertible notes payable
●	The company issued 10,163 common shares for the conversion of $25,111 accrued interest
●	The company issued 669,362 common shares for the settlement of $388,000 debenture conversions
●	The company issued 31,579 common shares for the settlement of $15,000 of accounts payable
●	The company issued 1,415,000 common shares for cash proceeds of $586,000
●	The company issued 200,000 common shares professional services of $150,341
●	The company issued 532,500 common shares for the conversion of Preferred Series D stock
●	The company issued 20,000 common shares for debt issuance costs of $11,760

 

All the above securities issued were offered and issued in reliance upon the exemption from registration pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”) and/or Regulation S promulgated thereunder.

 

ITEM 6. SELECTED FINANCIAL DATA

 

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.

 

 

ITEM 7. 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.

 

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 private offerings and 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.

 

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.

 

Revenue Recognition:

 

The Company recognizes revenue from the sale of services in accordance with ASC 606. Revenue is recognized only when the transfer of the promised goods or services to the customer has occurred and recognized in an amount that reflects the consideration to which the Company expects to be entitled to in exchange for those goods and services.

 

 

Stock Based Compensation

 

In accordance with ASC No. 718, Compensation – Stock Compensation (“ASC 718”), the Company measures the cost of stock-based compensation arrangements based on the grant-date fair value and recognizes the cost in the financial statements at the time goods are received or over the period during which employees and non-employees are required to provide services. If the Company cannot estimate reliably the fair value of the goods and services received, the Company shall measure their value indirectly by reference to the fair value of the equity instruments granted. For transactions with employees and others providing similar services, the Company measures the fair value of the services by reference to the fair value of the equity instruments granted. Stock-based compensation arrangements may include stock options, restricted stock plans, performance-based awards, stock appreciation rights and employee stock purchase plans.

 

The Company utilizes the Black-Scholes simulation model, which was developed for use in estimating the fair value of options. Option-pricing models require the input of highly complex and subjective variables including the expected life of options granted and the expected volatility of the Company’s stock price over a period equal to or greater than the expected life of the options.

 

While our significant accounting policies are more fully described in notes to our consolidated financial statements appearing elsewhere in this Form 10-K, 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.

 

RESULTS OF OPERATIONS

 

Revenues

 

														Percentage of Revenue
		2019				2018				Change				2019				2018
Testing services		$	3,786,815			$	3,188,693			$	598,122				99.9	%			94.7	%
Consulting services			3,000				176,832				(173,832	)			0.1	%			5.3	%
Total revenue			3,789,815				3,365,525				424,290				100.0	%			100.0	%
Cost of revenue
Testing services		$	3,494,607			$	3,125,171			$	369,436				92.2	%			92.9	%
Consulting services			1				190,125				(190,124	)			0.0	%			5.6	%
Depreciation			1,231,247				521,992				709,255				32.5	%			15.5	%
Total cost of revenue			4,725,855				3,837,288				888,567				124.7	%			114.0	%
Gross Profit		$	(936,040	)		$	(471,763	)		$	(464,277	)		-	24.7	%			14.0	%

 

Revenues for the year ended September 30, 2019 were $3,786,815 compared to $3,365,525 for the year ended September 30, 2018. The 19% increase in revenues during the year ended September 30, 2019 is primarily the result of increased testing revenue during the year. This was attributed to recognition of a full year operating results from both Canadian and California operations, off-set by the consolidation of two Oregon laboratories. Cost of revenues for the year ended September 30, 2019 were $3,494,607 compared to $3,837,288 for the year ended September 30, 2018. The 12% increase in the cost of revenue during the year ended September 30, 2019 is the result of the increased direct costs associated with additional labor, lab supplies, rent, equipment repair and maintenance, and depreciation and amortization.

 

Gross profit for the year ended September 30, 2019 was $(936,040) compared to $(471,763) during the year ended September 30, 2018. Gross profit as a percentage of revenue decreased from -14% during the year ended September 30, 2018 to -25% during the year ended September 30, 2019 primarily due to startup and integration expenses for acquired labs and required relocation, reaccreditation and licensing of EVIO Labs Massachusetts beginning May, 2019.

 

 

Operating Expenses

 

														Percentage of Revenue
		2019				2018				Change				2019				2018
Selling, general and administrative		$	6,155,187			$	7,501,788			$	(1,346,601	)			162	%			223	%
Depreciation and amortization			234,477				202,873				31,604				6	%			6	%
Total Operating Expenses		$	6,389,664			$	7,704,661			$	(1,314,997	)			169	%			229	%

 

Total operating expenses during the year ended September 30, 2019 decreased $1,314,997 compared to prior year. Total operating expenses were $6,389,664 compared to $7,704,661 during the year ended September 30, 2018. The reduced costs can be attributed to decreased stock option expense, as well as decreased legal, accounting, and promotion expenses, offset by an increase in bad debt expense.

 

Other Expenses

 

														Percentage of Revenue
		2019				2018				Change				2019				2018
Interest expense		$	5,663,242			$	4,870,103			$	793,139				149	%			145	%
Other Income			49,695				(7,246	)			56,941				-1	%			0	%
Loss on settlement of debt			-				56,093				(56,093	)			0	%			2	%
Impairment loss			7,255,724				1,396,319				5,859,405				192	%			41	%
Loss (gain) on change in fair market value of derivative liabilities			366,974				(2,555,350	)			2,922,324				10	%			-76	%
Total Other Expenses		$	13,335,635			$	3,759,919			$	9,575,716				352	%			112	%

 

Total other expenses were $13,335,635 during the year ended September 30, 2019 compared to $3,759,919 during the year ended September 30, 2018. Interest expense increased by $793,139, which is primarily attributable to the amortization of debt discounts. The impairment loss increase of $5,859,405 compared to prior year relates to impairment of goodwill for Keystone Labs, Greenhaus Analytical Labs, Viridis Analytical and Leaf Detective due to changing outlook of market conditions.

 

Net Loss

 

														Percentage of Revenue
		2019				2018				Change				2019				2018
Net loss		$	(20,669,033	)		$	(11,936,343	)		$	(8,732,690	)			-545	%			-355	%

 

Net loss during the year ended September 30, 2019 was $20,669,033 compared to $11,936,343 during the year ended September 30, 2018. The increase in net loss can be attributed primarily to the increase in total other expenses of $13,355,635 which includes increased impairment loss for Keystone Labs and Greenhaus Analytical Labs and increased loss on change in fair market value of derivative liabilities.

 

Liquidity and Capital Resources

 

Year Ended September 30, 2019

 

The Company had cash on hand of $110,325 as of September 30, 2019, current assets of $982,400 and current liabilities of $13,268,665 creating a working capital deficit of $12,286,265. Current assets consisted of cash totaling $110,325, accounts receivable net of allowances totaling $133,022, prepaid expenses totaling $190,460, other current assets of $9,689 and current portion of a note receivable of $538,904. Current liabilities consisted of accounts payable and accrued liabilities of $3,811,237, client deposits of $108,418, convertible notes payable net of discounts of $3,695,484, current capital lease obligations of $957,673, interest payable of $1,387,642, derivative liabilities of $2,545,735, and current portion of notes payable net of discounts of $762,476.

 

During the year ended September 30, 2019, the Company used $2,506,654 of cash in operating activities which consisted of a net loss of $20,669,033, non-cash losses of $16,300,966 and changes in working capital of $1,861,413.

 

Net cash used in investing activities total $353,231 during the year ended September 30, 2019. The Company paid $407,865 for the purchase of equipment and had notes receivable of $761,096 for payments due primarily from Kaycha Holdings for the purchase of Phytatech Note.

 

During the year ended September 30, 2019, the Company generated cash of $2,186,589 from financing activities. The Company repaid $305,781 of capital lease obligations; received $374,000 of cash from the issuance of convertible debenture, $586,000 from the sale of common stock; $1,270,435 in cash from convertible notes payable, net of original issue discounts and fees, repaid loans payable $(36,629), repaid related party notes payable $ (112,277), and $410,841 proceeds from related party advances.

 

Subsequent to year ended September 30, 2019, the Company repaid $1,659,341 in convertible notes payable and $525,778 accrued liabilities through conversion into common stock.

 

 

Dividends

 

The Company did not declare any dividends during the years ended September 30, 2019 or 2018.

 

Employees

 

As of September 30, 2019 EVIO, Inc. had 43 full time employees and 5 part time employee compared to 57 full time and 1 part-time employee in 2018.

 

Need for Additional Financing

 

The Company is uncertain of its ability to generate sufficient liquidity from its operations so the need for additional funding may be necessary. The Company may sell stock and/or issue additional debt to raise capital to accelerate our growth.

 

Going Concern Uncertainties

 

In management’s opinion, the Company’s cash position is insufficient to maintain its operations at the current level for the next 12 months. Any expansion may cause the Company to require additional capital until such expansion began generating revenue. It is anticipated that the raise of additional funds will principally be through the sales of our securities. As of the date of this report, additional funding has not been secured and no assurance may be given that we will be able to raise additional funds.

 

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.

 

Off-balance sheet arrangements

 

On March 31, 2018, the Company entered into a long-term operating lease requiring monthly payments of $10,275 for a period of 36 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.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires lessees to recognize assets and liabilities for most leases. ASU 2016-02 is effective for public entity financial statements for annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early adoption is permitted, including adoption in an interim period. ASU 2016-02 was further clarified and amended within ASU 2018-01, ASU 2018-10, ASU 2018-11 and ASU 2018-20 which included provisions that would provide us with the option to adopt the provisions of the new guidance using a modified retrospective transition approach, without adjusting the comparative periods presented. The Company is currently evaluating ASU 2016-02 and its impact on its consolidated financial statements.

 

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.

 

ITEM 7A. 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

EVIO, INC.

FORM 10-K

September 30, 2019 and 2018

 

TABLE OF CONTENTS

 

REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS	F-1
FINANCIAL STATEMENTS:
Consolidated Balance Sheets	F-2
Consolidated Statements of Operations and comprehensive income	F-3
Consolidated Statements of Stockholders’ Equity	F-5
Consolidated Statements of Cash Flows	F-6
Notes to the Consolidated Financial Statements	F-7

 

 

Report of Independent Registered Public Accounting Firm

 

To the shareholders and the board of directors of Evio, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Evio, Inc. as of September 30, 2019 and 2018, the related statements of operations, stockholders’ equity (deficit), and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2019 and 2018, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

 

Substantial Doubt about the Company’s Ability to Continue as a Going Concern

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 4 to the financial statements, the Company has suffered recurring losses from operations and has a significant accumulated deficit. In addition, the Company continues to experience negative cash flows from operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 4. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/S/ BF Borgers CPA PC

 

We have served as the Company’s auditor since 2019

 

Lakewood, CO

 

May 18, 2020

 

 

EVIO, INC.

CONSOLIDATED BALANCE SHEETS

 

		September 30,
		2019				2018
ASSETS
Current assets
Cash		$	110,325			$	81,736
Accounts receivable, net of allowance of $215,933 and $414,475			133,022				234,178
Prepaid expenses			190,460				45,940
Other current assets			9,689				146,816
Note receivable, current portion			538,904				100,000
Total current assets			982,400				608,670
Right of use assets			2,543,976				-
Capital assets, net of accumulated depreciation of $422,570 and $123,854, respectively			1,383,828				411,241
Assets not in service			-				455,540
Land			212,550				212,550
Property and equipment, net of accumulated depreciation of $1,089,403 and $520,437, respectively			3,080,425				3,525,772
Security deposits			178,918				159,632
Note receivable, net of current portion			-				1,200,000
Prepaid expenses, net of current portion			4,061				63,582
Intangible assets, net of accumulated amortization of $1,977,660 and $318,816			-				1,680,569
Goodwill			-				6,037,404
Total assets		$	8,386,159			$	14,354,960
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued liabilities		$	3,811,237			$	1,546,617
Client deposits			108,418				363,211
Interest payable			1,387,642				416,459
Capital lease obligation, current			957,673				677,030
Derivative liability			2,545,735				1,181,278
Convertible notes payable, net of discounts of $716,714 and $753,557, respectively			3,695,484				1,678,265
Loans payable, current, net of discounts of $0 and $119,000, respectively			762,476				643,927
Loans payable, related party, current							-
Total current liabilities			13,268,665				6,506,787
Convertible debentures payable, net of discounts of $3,448,110 and $4,043,836, respectively			1,734,890				1,153,164
Lease Liabilities			2,594,726
Capital lease obligation, net of current portion			381,786				148,433
Loans payable, net of current portion			657,603				1,193,781
Convertible loans payable, related party, net of current portion, net of discounts of $0 and $23,737, respectively							61,263
Loans payable, related party, net of current portion, net of discounts of $26,563 and $51,971, respectively			1,560,849				1,348,793
Total liabilities			20,198,519				10,412,221
Stockholders’ equity
Series B Convertible Preferred Stock, Par Value $0.0001; 5,000,000 authorized; 5,000,000 shares issued and outstanding at September 30, 2019 and 2018, respectively			500				500
Series C Convertible Preferred Stock, Par Value $0.0001; 500,000 authorized; 500,000 shares issued and outstanding at September 30, 2019 and 2018, respectively			50				50
Series D Convertible Preferred Stock, Par Value $0.0001; 1,000,000 authorized; 339,500 and 552,500 shares issued and outstanding at September 30, 2019 and 2018, respectively			34				55
Common Stock, Par Value $0.0001, 1,000,000,000 authorized; 29,314,419 and 23,255,411 issued and outstanding at September 30, 2019 and 2018, respectively			2,931				2,326
Additional Paid In Capital			26,498,076				21,495,621
Other Comprehensive Income			(353,090	)			(263,985	)
Accumulated Deficit			(37,775,183	)			(19,226,462	)
Total stockholders’ equity			(11,626,682	)			2,008,105
Non-controlling interest			(185,678	)			1,934,634
Total equity			(11,812,360	)			3,942,739
Total liabilities and stockholders’ equity		$	8,386,159			$	14,354,960

 

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

 

 

EVIO, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

		Year ended September 30,
		2019				2018
Revenues
Testing services		$	3,786,815			$	3,188,693
Consulting services			3,000				176,832
Total revenue			3,789,815				3,365,525
Cost of revenue
Testing services			3,494,608				3,125,171
Consulting services			-				190,125
Depreciation and amortization			1,231,247				521,992
Total cost of revenue			4,725,855				3,837,288
Gross margin			(936,040	)			(471,763	)
Operating expenses
Selling, general and administrative			6,155,187				7,501,788
Depreciation and amortization			234,477				202,873
Total operating expenses			6,389,664				7,704,661
Loss from operations			(7,325,704	)			(8,176,424	)
Other income (expense)
Interest expense, net of interest income			(5,663,242	)			(4,870,103	)
Other income			(49,695	)			7,246
Loss on settlement of debt and account payable			-				(56,093	)
Impairment loss			(7,255,724	)			(1,396,319	)
Gain (loss) on change in fair market value of derivative liabilities			(366,974	)			2,555,350	)
Total other income (expense)			(13,335,635	)			(3,759,919	)
Income (loss) before income taxes			(20,661,339	)			(11,936,343	)
Provision for income taxes (benefit)			7,694
Net loss		$	(20,669,033	)		$	(11,936,343	)
Gain (loss) attributable to non-controlling interest			(2,120,312	)			(302,252	)
Net loss attributable to EVIO, Inc.		$	(18,548,721	)		$	(11,634,091	)
Basic and diluted loss per common share			$ (0.69	)		$	(0.70	)
Weighted average common shares outstanding			26,887,932				16,548,473

 

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

 

 

EVIO, INC.

Consolidated Statements of Comprehensive Income

 

		Year ended September 30,
		2019				2018
Net loss		$	(20,669,033	)		$	(11,936,343	)
Other comprehensive income
Foreign currency translation adjustment			(89,105	)
Comprehensive loss		$	(20,758,138	)		$	(11,936,343	)

 

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

 

 

EVIO, INC.

Consolidated Statements of Changes in Stockholders’ Equity

 

		Series B Preferred Stock								Series C Preferred Stock								Series D Preferred Stock								Common Stock								Stock Subscriptions				Additional Paid-in				Retained				Accumulated Other Comprehensive				Total Stockholders’				Noncontrolling				Total
		Shares				Value				Shares				Value				Shares				Value				Shares				Value				Receivable				Capital				Earnings				Income				Equity				Interest				Equity
Balance, September 30, 2017			5,000,000			$	500				500,000			$	50				832,500			$	83				10,732,922			$	1,073			$	-			$	7,657,982			$	(7,592,371	)		$	-			$	67,317			$	158,124			$	225,441
Net income (loss)			-				-				-				-				-				-				-				-				-				-				(11,634,091	)			-				(11,634,091	)			(302,252	)			(11,936,343	)
Change in foreign currency translation			-				-				-				-				-				-				-				-				-				-				-				(263,985	)			(263,985	)			-				(263,985	)
Issuance of common stock in connection with the conversion of Series D preferred stock			-				-				-				-				(280,000	)			(28	)			700,000				70				-				(42	)			-				-				-				-				-
Issuance of common stock in connection with sales made under private offerings			-				-				-				-				-				-				2,561,392				256				-				2,041,246				-				-				2,041,502				-				2,041,502
Issuance of common stock in connection with the exercise of common stock purchase warrants			-				-				-				-				-				-				13,333				1				-				1,999				-				-				2,000				-				2,000
Issuance of common stock as compensation to employees, officers and/or directors			-				-				-				-				-				-				478,500				48				-				2,532,000				-				-				2,532,048				-				2,532,048
Issuance of common stock in exchange for consulting, professional and other services provided			-				-				-				-				-				-				301,250				30				-				278,758				-				-				278,788				-				278,788
Issuance of common stock in satisfaction of debt issuances costs			-				-				-				-				-				-				670,271				67				-				1,414,840				-				-				1,414,907				-				1,414,907
Issuance of common stock in connection with the settlement of accounts payable			-				-				-				-				-				-				37,500				4				-				18,746				-				-				18,750				-				18,750
Issuance of common stock in connection with the settlement of notes payable			-				-				-				-				-				-				324,000				32				-				161,968				-				-				162,000				-				162,000
Issuance of common stock in connection with the conversion of loans payable			-				-				-				-				-				-				4,790,693				480				-				2,755,019				-				-				2,755,499				-				2,755,499
Issuance of common stock in connection with the conversion of debentures			-				-				-				-				-				-				2,309,997				231				-				1,385,769				-				-				1,386,000				-				1,386,000
Issuance of common stock in connection with the conversion of related party notes payable			-				-				-				-				-				-				125,000				13				-				62,488				-				-				62,501				-				62,501
Issuance of common stock in connection with the conversion of interest payable			-				-				-				-				-				-				210,553				21				-				114,771				-				-				114,792				-				114,792
Reclassifcation of derivative liability to additional paid-in capital			-				-				-				-				-				-				-				-				-				2,342,112				-				-				2,342,112				-				2,342,112
Recognition of beneficial conversion features related to convertible debt instruments			-				-				-				-				-				-				-				-				-				727,965				-				-				727,965				-				727,965
Acquisition of equity interests in subsidiaries			-				-				-				-				-				-				-				-				-				-				-				-				-				2,078,762				2,078,762
Balance, September 30, 2018			5,000,000			$	500				500,000			$	50				552,500			$	55				23,255,411			$	2,326			$	-			$	21,495,621			$	(19,226,462	)		$	(263,985	)		$	2,008,105			$	1,934,634			$	3,942,739
Net income (loss)			-				-				-				-				-				-				-				-				-				-				(18,548,721	)			-				(18,548,721	)			(2,120,312	)			(20,669,033	)
Change in foreign currency translation			-				-				-				-				-				-				-				-				-				-				-				(89,105	)			(89,105	)			-				(89,105	)
Issuance of common stock in connection with the conversion of Series D preferred stock			-				-				-				-				(213,000	)			(21	)			532,500				53				-				(32	)			-				-				-				-				-
Issuance of common stock in connection with sales made under private offerings			-				-				-				-				-				-				1,415,000				141				-				585,859				-				-				586,000				-				586,000
Issuance of common stock as compensation to employees, officers and/or directors			-				-				-				-				-				-				287,500				29				-				397,951				-				-				397,980				-				397,980
Issuance of common stock in exchange for consulting, professional and other services provided			-				-				-				-				-				-				1,038,017				104				-				336,787				-				-				336,891				-				336,891
Issuance of common stock in connection with the settlement of accounts payable			-				-				-				-				-				-				31,579				3				-				14,997				-				-				15,000				-				15,000
Issuance of common stock in connection with the conversion of loans payable			-				-				-				-				-				-				2,054,887				205				-				686,995				-				-				687,200				-				687,200
Issuance of common stock in connection with the conversion of debentures			-				-				-				-				-				-				669,362				67				-				387,933				-				-				388,000				-				388,000
Issuance of common stock in connection with the conversion of interest payable			-				-				-				-				-				-				10,163				1				-				25,109				-				-				25,110				-				25,110
Issuance of common stock purchase warrants in satisfaction of debt issuances costs			-				-				-				-				-				-				20,000				2				-				11,758				-				-				11,760				-				11,760
Recognition of beneficial conversion features related to convertible debt instruments			-				-				-				-				-				-				-				-				-				1,844,834				-				-				1,844,834				-				1,844,834
Stock based compensation related to employee stock options			-				-				-				-				-				-				-				-				-				710,264				-				-				710,264				-				710,264
Balance, September 30, 2019			5,000,000			$	500				500,000			$	50				339,500			$	34				29,314,419			$	2,931			$	-			$	26,498,076			$	(37,775,183	)		$	(353,090	)		$	(11,626,682	)		$	(185,678	)		$	(11,812,360	)

 

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

 

 

EVIO, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		Year Ended September 30,
		2019				2018
Cash flows from operating activities
Net loss		$	(20,669,033	)		$	(11,936,343	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of Debt Discount			3,713,299				4,359,074
Common stock issued in exchange for fees and services			348,651				-
Default penalties and other covenant adjustments on convertible debentures			491,896				-
Deferred Taxes			-				-
Depreciation and amortization expense			1,465,724				724,865
Impairment of goodwill and intangible assets			7,255,724				1,367,813
Loss on disposal of assets			64,095				-
Loss on settlement of accounts payable			-				-
Loss on settlement of debt			63,651				52,343
Provision for doubtful accounts			1,422,708				309,116
Stock based compensation			1,108,244				2,810,836
(Gain) loss on derivative liability			366,974				(2,555,350	)
Changes in operating assets and liabilities:
Accounts receivable			(1,322,212	)			(252,771	)
Prepaid expenses			(85,000	)			64,871
Other current asset			137,128				(245,885	)
Security deposits			(19,254	)			112,892
Accounts payable and accrued liabilities			2,280,801				387,204
Interest payable			1,073,867				399,710
Operating lease right of use assets			50,750				-
Customer deposits and deferred revenue			(254,667	)			23,980
Net cash used in operating activities			(2,506,654	)			(4,377,645	)
Cash flows from investing activities
Note Receivable			761,096				-
Net cash paid in acquisitions of subsidiaries			-				(2,825,889	)
Purchase of equipment			(407,865	)			(1,395,450	)
Net cash used in investing activities			353,231				(4,221,339	)
Cash flows from financing activities
Repayments of capital leases			(305,781	)			(199,568	)
Proceeds from issuance of convertible debenture			374,000				6,136,120
Proceeds from exercise of common stock warrants			-				2,000
Proceeds from issuance of common stock			586,000				2,041,501
Proceeds from convertible notes, net of original issue discounts and fees			1,270,435				2,163,750
Payment on loan payable			(36,629	)			(1,114,331	)
Proceeds from related party advances			410,841				155,066
Payments on notes payable - related party			(112,277	)			(449,800	)
Net cash provided by financing activities			2,186,589				8,734,738
Effect of foreign currency translation adjustment			(4,576	)			(175,031	)
Net cash increase for period			28,590				(39,277	)
Cash balance, beginning of period			81,735				121,013
Cash balance, end of period		$	110,325			$	81,736
Supplemental disclosure of cash flow information:
Cash paid for interest		$	67,370			$	230,424
Cash paid for income tax		$	-			$	-
Supplemental disclosure of non-cash investing and financing activities:
Conversion of convertible note and accrued interest into common stock		$	1,100,310			$	4,256,291
Reclassification of derivative liability to additional paid in capital		$	0			$	2,342,112
Settlement of account payable for common stock		$	15,000			$	18,750
Common stock issued for settlement of note payable		$	0			$	162,000
Common stock issued for settlement of related party note payable		$	0			$	62,500
Conversion of Series D Preferred stock to common stock		$	0			$	70
Debt discount recorded on convertible notes and debentures payable upon initial measurement of derivative liability		$	997,483			$	6,318,324
Debt discounts recorded for original issue discounts on convertible debentures		$	0			$	599,052
Debt discounts recorded for beneficial conversion features on convertible debentures and notes payable		$	1,844,834			$	-
Acquisition of C3 Labs through issuance of note payable and convertible note payable		$	0			$	600,000
Sale and assumption of note payable and accrued interest		$	577,588			$	-
Equipment financed through capital leases		$	829,273			$	466,195

 

 

EVIO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 – ORGANIZATION AND NATURE OF ACTIVITIES

 

EVIO, Inc., a Colorado corporation and its subsidiaries 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 August 2018. 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 Henderson, Nevada.

 

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 Signal Bay, Inc.

 

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

 

On September 17, 2015, EVIO 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 Inc. was formed on April 4, 2016 to become the holding company for all laboratory operations.

 

EVIO Labs Eugene 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, EVIO Inc. 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.

 

On October 26, 2016, the Company entered into an Asset Purchase Agreement with Green Style Consulting, LLC which was closed on November 1, 2016.

 

The Company entered into a Membership Interest Purchase Agreement with Viridis Analytics MA, LLC which was closed on August 1, 2018.

 

On December 29, 2018, the Company entered into a Membership Purchase Agreement to purchase 60% of the outstanding shares of C3 Labs, LLC which closed On January 1, 2019.

 

On June 27, 2018, Greenhaus Analytical Labs LLC, a wholly-owned subsidiary of EVIO, Inc. entered into a Purchase and Sale Agreement with Michael G. Myers for the property located at 14775 SW 74^th Ave., Tigard, OR 97224.

 

On June 27, 2018, Greenhaus Analytical Labs, LLC, a wholly-owned subsidiary of EVIO, Inc., entered into an Asset Purchase Agreement with MRX Labs LLC which closed on July 5, 2019.

 

On April 29, 2018, the Company entered into an Asset Purchase Agreement with Leaf Detective, LLC which was closed on the same date.

 

On May 2, 2018, the Company entered into a Stock Purchase Agreement with Keystone, Labs, Inc. to purchase 50% of the outstanding shares of Keystone Labs which was closed on the same date.

 

 

EVIO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

A summary of significant accounting policies of EVIO, INC. (the “Company”) is presented to assist in understanding the Company’s financial statements. The accounting policies presented in these footnotes conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the accompanying financial statements. These financial statements and notes are representations of the Company’s management who are responsible for their integrity and objectivity.

 

Principles of Consolidation

 

The Company prepares its consolidated 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 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.”

 

Cash and Cash Equivalents

 

All cash is maintained with major financial institutions. Deposits may exceed the amount of insurance provided on such deposits. For the purposes of the cash flows, the Company considers all short-term debt securities purchased with original maturity of three months or less to be cash equivalents. The Company did not have any cash equivalents as of September 30, 2019 or 2018.

 

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. Management recognized an allowance for uncollectible amounts, of $215,933 and $414,475 for 2019 and 2018, 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 note was purchased in May 2019, by an unrelated third party. The balance on the purchased note as of September 30, 2019 was $538,904. The Company evaluated the collectability of the note receivable as of September 30, 2019 and determined the full balance is collectible and no reserve for write off was recorded.

 

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), assembled workforce (amortized over five years), websites and domain names (amortized over 15 years) and testing licenses (amortized over 5 years).

 

 

EVIO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

The Company performed its annual fair value assessment at September 30, 2019, on its subsidiaries with material goodwill and intangible asset amounts on their respective balance sheets and determined that carrying value of its goodwill and Intangible assets on our financial statements exceeds its fair value. As such, the Company recorded an impairment charge to its goodwill of $7,255,724. The impairment charge included $1,569,911 for Greenhaus Analytical Labs, $477,900 for EVIO Labs Humboldt, $3,264,623 for Keystone Labs, $784,814 for EVIO Labs Berkeley, $441,903 for Smith Scientific, and $643,729 for EVIO Labs MA due to changing outlook of market conditions.

 

Business Combinations. We have adopted the amendment to ASC 805 for the accounting for business acquisitions both during the period of the acquisition and in subsequent periods. Among the more significant changes in the accounting for acquisitions are the following:

 

	●	Contingent consideration is recorded at fair value as an element of purchase price with subsequent adjustments recognized in operations.
	●	Subsequent decreases in valuation allowances on acquired deferred tax assets are recognized in operations after the measurement period.
	●	Upon gaining control of an entity in which an equity method or cost basis investment was held, the carrying value of that investment is adjusted to fair value with the related gain or loss recorded in earnings.

 

Reclassification

 

Certain amounts in the 2018 financial statements have been reclassified to conform to the 2019 financial presentation. These reclassifications have no impact on net loss.

 

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 may have a material impact on the financial condition and results of operations of the Company 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.

 

Revenue Recognition

 

In 2019 the Company recognizes revenue under ASC 606, Revenue from Contracts with Customers. The core principle of the new revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:

 

	●	Step 1: Identify the contract with the customer
	●	Step 2: Identify the performance obligations in the contract
	●	Step 3: Determine the transaction price
	●	Step 4: Allocate the transaction price to the performance obligations in the contract
	●	Step 5: Recognize revenue when the company satisfies a performance obligation

 

The Company generates revenue from consulting services, licensing agreements and testing of cannabis and cannabis products for both medicinal and recreational consumption.

 

The Company accounts for a contract after it has been approved by all parties to the arrangement, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

 

The Company evaluates the services promised in each contract at inception to determine whether the contract should be accounted for as having one or more performance obligations. The Company’s services included in its contracts are distinct from one another.

 

 

EVIO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

The Company determines the transaction price for each contract based on the consideration it expects to receive for the distinct services being provided under the contract.

 

The Company recognizes revenue as performance obligations are satisfied and the customer obtains control of the goods or services provided. In determining when performance obligations are satisfied, the Company considers factors such as contract terms, payment terms and whether there is an alternative future use of the product or service.

 

The Company recognizes revenue from testing services upon delivery of its testing results to the client. Customer orders for testing services are generally completed within two weeks of receiving the order.

 

Consulting engagements may vary in length and scope, but will generally include the review and/or preparation of regulatory filings, business plans and financial models to customers within the same industry. Revenue from consulting services is recognized upon completion of deliverables as outlined in the consulting agreement.

 

The Company recognizes revenue from right of use license agreements upon transfer of control of the functional intellectual property. In certain licensing agreements, the Company may receive royalty revenues based upon performance metrics which are recognized as earned over time.

 

The Company generated revenues of $3,789,815 and $3,365,525 during the years ended September 30, 2019 and 2018.

 

Cost of Revenue Recognition

 

The Company recognizes all costs incurred that are directly related to revenue generating activities as a cost of revenue. These costs include salaries and payroll taxes associated with lab employees, rent and utilities on lab facilities, repairs and maintenance to facilities and equipment, depreciation of lab equipment and outsourced professional services utilized for consulting engagements. Cost of revenues totaled $4,725,855 and $3,837,288 during the years ended September 30, 2019 and 2018, respectively.

 

Stock Based Compensation

 

In accordance with ASC No. 718, Compensation – Stock Compensation (“ASC 718”), the Company measures the cost of stock-based compensation arrangements based on the grant-date fair value and recognizes the cost in the financial statements at the time goods are received or over the period during which employees and non-employees are required to provide services. If the Company cannot estimate reliably the fair value of the goods and services received, the Company shall measure their value indirectly by reference to the fair value of the equity instruments granted. For transactions with employees and others providing similar services, the Company measures the fair value of the services by reference to the fair value of the equity instruments granted. Stock-based compensation arrangements may include stock options, restricted stock plans, performance-based awards, stock appreciation rights and employee stock purchase plans.

 

The Company utilizes the Black-Scholes simulation model, which was developed for use in estimating the fair value of options. Option-pricing models require the input of highly complex and subjective variables including the expected life of options granted and the expected volatility of the Company’s stock price over a period equal to or greater than the expected life of the options.

 

Income Taxes

 

The Company uses the asset and liability method of accounting for income taxes in accordance with ASC 740-10, “Accounting for Income Taxes.” Under this method, income tax expense is recognized for the amount of: (i) taxes payable or refundable for the current year; and, (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if, based on the weight of available positive and negative evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

 

ASC 740-10 prescribes a recognition threshold and measurement attribute for the financial statement recognition of a tax position taken or expected to be taken on a tax return. Under ASC 740-10, a tax benefit from an uncertain tax position taken or expected to be taken may be recognized only if it is “more likely than not” that the position is sustainable upon examination, based on its technical merits. The tax benefit of a qualifying position under ASC 740-10 would equal the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with a taxing authority having full knowledge of all the relevant information. A liability (including interest and penalties, if applicable) is established to the extent a current benefit has been recognized on a tax return for matters that are considered contingent upon the outcome of an uncertain tax position. Related interest and penalties, if any, are included as components of income tax expense and income taxes payable.

 

 

EVIO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Capital Leases

 

The Company determines if an arrangement is a lease at inception and has lease agreements for warehouses, office facilities, and equipment. These commitments have remaining non-cancelable lease terms, with lease expirations which range from 2020 to 2024.

 

As a result of the adoption of ASC 842, certain real estate and equipment operating leases have been recorded on the balance sheet with a lease liability and right- of-use asset (“ROU”). Application of this standard resulted in the recognition of ROU assets of $2,543,976, net of accumulated amortization, and a corresponding lease liability of $2,594,726. Accounting for finance leases is substantially unchanged.

 

Operating leases are included in operating lease ROU assets, operating lease obligations, current, and operating lease obligations, long term on the condensed consolidated balance sheets. Finance leases are included in property and equipment, finance lease obligations, short term, and finance lease obligations, long term, on the condensed consolidated balance sheets. ROU assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make scheduled lease payments. ROU assets and liabilities are recognized on the lease commencement date based on the present value of lease payments over the lease term. The present value of lease payments is calculated using the incremental borrowing rate at lease commencement, which takes into consideration recent debt issuances as well as other applicable market data available.

 

Amortization of lease assets is included in general and administrative expenses. The future minimum lease payments of lease liabilities as of September 30, 2019, are as follows:

 

Year ended September 30,		Operating Leases				Financing Leases
2019			782,138			$	311,592
2020			970,425				433,087
2021			697,436				514,152
2022			549,390				183,020
2023			347,475				206,674
Thereafter			27,911				5,022
Total lease payments			3,374,775				1,653,547
Less: Payments Made			(780,049	)			(314,088	)
Total Lease Liabilities		$	2,594,726			$	1,339,459

 

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 September 30, 2019, 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.

 

No individual client represents greater than 10% of the annual revenue.

 

As of September 30, 2019, the Company had total accounts receivable, net of allowances, of $133,022. Five separate clients comprised a total of 41% of this balance as follows:

 

		Balance				Percent of Total
Customer 1		$	48,606				14	%
Customer 2			33,572				10	%
Customer 3			20,336				6	%
Customer 4			20,321				6	%
Customer 5			20,208				6	%
All others			246,456				59	%
Total			348,955				100	%
Allowance for doubtful accounts			(215,933	)
Net accounts receivable		$	133,022

 

 

EVIO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

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
Building		39 years
Laboratory and Computer Equipment		5 years
Furniture and Fixtures		7 years
Software		3 years
Domains		15 years

 

Impairment of Long-Lived Assets

 

The Company evaluates, on a periodic basis, long-lived assets to be held and used for impairment in accordance with the reporting requirements of ASC 360-10. The evaluation is based on certain impairment indicators, such as the nature of the assets, the future economic benefit of the assets, any historical or future profitability measurements, as well as other external market conditions or factors that may be present. If these impairment indicators are present or other factors exist that indicate that the carrying amount of the asset may not be recoverable, then an estimate of the undiscounted value of expected future operating cash flows is used to determine whether the asset is recoverable and the amount of any impairment is measured as the difference between the carrying amount of the asset and its estimated fair value. The fair value is estimated using valuation techniques such as market prices for similar assets or discounted future operating cash flows.

 

The Company performed its annual fair value assessment at September 30, 2019, on its subsidiaries with material long-lived asset amounts on their respective balance sheets and determined that no impairment exists.

 

Financial Instruments

 

The Company has adopted the guidance under ASC Topic 820 for financial instruments measured on a fair value on a recurring basis. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

 

ASC Topic 820 establishes a fair value hierarchy, giving the highest priority to quoted prices in active markets and the lowest priority to unobservable data and requires disclosures for assets and liabilities measured at fair value based on their level in the hierarchy. The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, as follows:

 

●	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 cash, accounts payable, and accrued liabilities. The carrying values of these financial instruments approximate their fair value due to their short maturities. The carrying amount of the Company’s debt approximates fair value because the interest rates on these instruments approximate the interest rate on debt with similar terms available to the Company.

 

 

EVIO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

The Company analyzes all financial instruments with features of both liabilities and equity under ASC 480, “Distinguishing Liabilities from Equity” and ASC 815, “Derivatives and Hedging”. Derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as adjustments to fair value of derivatives. The effects of interactions between embedded derivatives are calculated and accounted for in arriving at the overall fair value of the financial instruments. In addition, the fair value of free-standing derivative instruments such as warrant and option derivatives are valued using the Black-Scholes simulation model.

 

The Company’s derivative liabilities were adjusted to fair market value at the end of each reporting period, using Level 3 inputs.

 

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, 2019:

 

		Level 1				Level 2				Level 3				Total
Liabilities
Derivative financial instruments		$	-			$	-			$	2,545,735			$	2,545,735

 

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, 2018:

 

		Level 1				Level 2				Level 3				Total
Liabilities
Derivative financial instruments		$	-			$	-			$	1,181,278			$	1,181,278

 

 

EVIO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

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.

 

Basic Earnings (Loss) Per Share

 

The Company computes net income (loss) per share in accordance with Accounting Standards Codification (“ASC”) 260, “Earnings per Share.” ASC 260 requires presentation of both basic and diluted earnings per share (EPS) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Given the net losses of the Company during the years ended September 30, 2019 and 2018, the effects of convertible equity and debt instruments were anti-dilutive resulting in basic and diluted loss per weighted average common shares outstanding equal. There was a total of 26,887,932 and 16,548,473 common stock equivalents excluded from diluted earnings per share for the years ended September 30, 2019 and 2018.

 

 

EVIO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

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 January 1, 2018.

Management believes recently issued accounting pronouncements will have no impact on the financial statements of the Company.

 

In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718) which simplifies certain aspects of the accounting for nonemployee share-based payment transactions resulting from expanding the scope of Topic 718, Compensation - Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. Certain areas of the simplification apply only to nonpublic entities. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. The amendments of the ASU are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this standard on our consolidated financial statements.

 

In August 2018, the SEC issued Final Rule Release No. 33-10532, Disclosure Update and Simplification. Under the final rule Company’s must now analyze changes in stockholders’ equity in the form of a reconciliation, for the current and comparative year-to-date, with subtotals for each interim period.

 

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.

 

 

 

EVIO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 3 – ACQUISITIONS

 

Completed During the Year Ended September 30, 2019

 

Not Applicable

 

Completed During the Year Ended September 30, 2018

 

C3 Labs, LLC

 

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 which bears no interest.

 

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. In August 2018, the company exercised its option to increase its ownership to 90%.

 

(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.

 

The Company applied the acquisition method to the business combination and valued each of the assets acquired (cash, accounts receivable, security deposits, customer lists, certain testing licenses, equipment and non-compete agreements) and liabilities assumed (accounts payable and deferred rent payable) at fair value as of the acquisition date. The cash, accounts receivable, security deposits, accounts payable and deferred rent payable were deemed to be recorded at fair value as of the acquisition date. The Company determined the fair value of the equipment to be historical net book value. The preliminary allocation of the purchase price was based on estimates of the fair value of the assets and liabilities assumed based on provisional amounts. The allocation of the excess purchase price is not final and the amounts allocated to intangible assets are subject to change pending the completion of final valuations of certain assets and liabilities. Under the purchase agreement, the Company issued a $100,000 promissory note and a $500,000 convertible promissory note for total consideration of $600,000 in exchange for a 60% interest. The following table shows the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:

 

ASSETS ACQUIRED
Cash		$	20,468
Accounts receivable			5,110
Other current assets			3,461
Security deposits			20,000
Equipment			244,875
License			247,000
Customer list			112,000
Non-compete agreement			88,000
Goodwill			291,697
TOTAL ASSETS ACQUIRED		$	1,032,611
LIABILITIES ASSUMED
Accounts payable			4,314
Deferred rent			28,297
TOTAL LIABILITIES ASSUMED			32,611
Non-controlling interest			(400,000	)
NET ASSETS ACQUIRED		$	600,000

 

The license and customer list will be amortized over 7 years and non-compete agreement over 5 years

 

 

EVIO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 3 ACQUISITIONS (CONTINUED)

 

Keystone Labs

 

On May 2, 2018, EVIO Canada, Inc, (“EVIO Canada”), a wholly-owned subsidiary of the Company consummated certain agreements to acquire a 50% interest of Keystone Labs, Inc. (“Keystone”) for $2,495,000 Canadian Dollars in cash.

 

The Company applied the acquisition method to the business combination and valued each of the assets acquired (cash, accounts receivable, prepaid expenses and other current assets, websites, customer lists, certain testing licenses, equipment, non-compete agreements and other intellectual property) and liabilities assumed (accounts payable, capital lease obligations, deferred revenue and related party payables) at fair value as of the acquisition date. The cash, accounts receivable, prepaid expenses and other current assets, accounts payable, related party payables and deferred revenues were deemed to be recorded at fair value as of the acquisition date. The Company determined the fair value of the equipment to be historical net book value. The preliminary allocation of the purchase price was based on estimates of the fair value of the assets and liabilities assumed based on provisional amounts. The allocation of the excess purchase price is not final and the amounts allocated to intangible assets are subject to change pending the completion of final valuations of certain assets and liabilities. Under the purchase agreement, the Company paid a total of $2,495,000 Canadian Dollars which equated to $1,962,095 US Dollars in exchange for a 50% interest. The following table shows the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:

 

ASSETS ACQUIRED
Cash		$	371,278
Accounts receivable			65,815
Prepaid expenses and other current assets			38,415
Equipment			40,774
Intellectual property			334,719
Websites and domain names			18,299
Customer list			521,539
Non-compete agreement			97,302
Goodwill			2,716,027
TOTAL ASSETS ACQUIRED		$	4,204,167
LIABILITIES ASSUMED
Accounts payable			108,207
Capital lease obligation			12,826
Related party payables			153,755
Deferred revenue			5,189
TOTAL LIABILITIES ASSUMED			279,977
Non-controlling interest			(1,962,095	)
NET ASSETS ACQUIRED		$	1,962,095

 

MRX Labs

 

On July 5, 2018, the Company acquired the assets of MRX Labs for $2,705,000. $750,000. The note carries interest at 8% annually and is due on January 5, 2019. The acquisition included purchase of the property in Tigard, OR valued at $1,150,000 for the land and building, property, plant and equipment valued at $721,000; customer contracts and relationships for $50,750, and goodwill valued at $718,000.

 

ASSETS ACQUIRED
LAND		$	212,550
BUILDING			937,450
PROPERTY PLANT AND EQUIPMENT			721,000
CUSTOMER CONTRACTS/RELATIONSHIPS			65,250
ASSEMBLED WORKFORCE			50,750
GOODWILL			718,000
TOTAL ASSETS ACQUIRED		$	2,705,000
LIABILITIES ASSUMED			174,000
NET ASSETS ACQUIRED FROM MRX		$	2,531,000

 

 

EVIO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 3 – ACQUISITIONS (CONTINUED)

 

In accordance with ASC 805-10-50, the Company is providing the following unaudited pro-forma to present a summary of the combined results of the Company’s consolidated operations with all acquisitions. as if the acquisitions had been completed as of the beginning of the reporting period. Adjustments were made to eliminate any inter-company transactions in the periods presented.

 

EVIO, INC.

UNAUDITED PROFORMA CONSOLIDATED STATEMENTS OF OPERATIONS

 

		Year ended September 30,
		2018				2017
Revenues
Testing services		$	3,576,919			$	3,499,135
Consulting services			176,832				347,044
Total revenue			3,753,751				3,846,179
Cost of revenue
Testing services			3,301,016				3,089,092
Consulting services			190,125				115,387
Depreciation and amortization			529,732				145,203
Total cost of revenue			4,020,873				3,349,681
Gross margin			(267,122	)			496,498
Operating expenses
Selling, general and administrative			7,766,313				3,396,397
Depreciation and amortization			202,873				222,714
Total operating expenses			7,969,186				3,619,111
Loss from operations			(8,236,308	)			(3,122,614	)
Other income (expense)
Interest expense, net of interest income			(4,872,084	)			(1,011,259	)
Other income			7,246				(22,170	)
Loss on settlement of debt and account payable			(56,093	)			-
Impairment loss			(1,396,319	)			(200,000	)
Gain (loss) on change in fair market value of derivative liabilities			2,555,350				(285,887	)
Total other income (expense)			(3,761,900	)			(1,519,316	)
Net loss		$	(11,998,208	)		$	(4,641,930	)

 

 

EVIO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 4 – GOING CONCERN

 

The Company’s consolidated 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 a 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 5 – INTANGIBLE ASSETS

 

The Company’s intangible assets consist of customer lists, testing licenses, favorable leases and websites. The components of intangible assets as of September 30, 2019 and 2018 consist of:

 

		2019				2018
Customer list		$	854,014			$	865,672
License			503,000				503,000
Favorable lease			3,100				3,100
Website			49,516				49,690
Non-Compete			182,388				184,563
Assembled Workforce			50,750				50,750
Intellectual Property			334,893				342,610
Total			1,977,661				1,999,385
Accumulated amortization			(1,977,661	)			(318,815	)
Net value		$	-			$	1,680,570

 

The Company has fully amortized the intangible assets during the fiscal year ended September 30, 2020, and no future amortization is to calculated.

 

 

EVIO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 6 – PROPERTY, PLANT AND EQUIPMENT

 

The Company’s property and equipment consisted of the following as of September 30, 2019 and 2018:

 

		2019				2018
Assets Not-In-Service		$	-			$	455,540
Capital Assets			1,800,347				535,095
Land			212,550				212,550
Buildings & Real Estate			941,857				937,450
Furniture and Equipment			152,933				189,459
Laboratory Equipment			2,188,828				2,468,141
Software			78,996				63,913
Leasehold Improvements			697,333				303,331
Vehicles			83,915				83,915
Total			6,188,777				5,249,394
Accumulated depreciation			(1,511,973	)			(644,291	)
Net value		$	4,676,804			$	4,605,103

 

NOTE 7 – RELATED PARTY TRANSACTIONS

 

During the years ended September 30, 2019 and 2018, the Company received loans from its Chief Operating Officer totaling $194,820 and $0 and made repayments totaling $1,040 and $0, respectively. There was $193,780 and $0 due as of September 30, 2019 and 2018, respectively and are included in the accompanying consolidated balance sheets as a current portion of notes payable to related parties. The loans carry a 0% interest rate and are due on demand.

 

During the years ended September 30, 2019 and 2018, the Company received loans from its Chief Executive Officer totaling $75,000 and $0 and made repayments totaling $19,200 and $0, respectively. There was $55,800 and $0 due as of September 30, 2019 and 2018, respectively and are included in the accompanying consolidated balance sheets as a current portion of notes payable to related parties. The loans carry a 0% interest rate and are due on demand.

 

During the years ended September 30, 2019 and 2018 the Company made payments to Sara Lausmann, associated with the asset purchase of Oregon Analytical Services, LLC, totaling $12,000 and $97,500, respectively. There was $568,299 and $580,299 of principal due as of September 30, 2019 and 2018, respectively. The note carries interest at a rate of 5% per annum and had accrued interest totaling $107,899 and $79,295 due as of September 30, 2019 and 2018, respectively.

 

During the years ended September 30, 2019 and 2018 the Company made payments to Anthony Smith, our Chief Science Officer, associated with the purchase of 80% of Smith Scientific Industries, totaling $55,090 and $25,000, respectively. There was $180,910 and $236,000 of principal due as of September 30, 2019 and 2018, respectively. The note carries interest at a rate of 5% per annum and had accrued interest totaling $41,600 and $30,960 due as of September 30, 2019 and 2018, respectively.

 

During the years ended September 30, 2019 and 2018 the Company made repayments to Henry Grimmett, prior Company Director (retired April 2018), on an outstanding loan from member assumed by the Company, totaling a note payable of Greenhaus Analytical Services, LLC, totaling $3,859 and $52,000, respectively. There was $113,554 and $117,412 of principal due as of September 30, 2019 and 2018, respectively. The note bears interest at 0% per annum and requires repayments of $25,000 quarterly.

 

During the years ended September 30, 2019 and 2018, the Company made no payments to Henry Grimmett, prior Company Director (retired April 2018), associated with the acquisition of Greenhaus Analytical Services, LLC. The Company entered into a $340,000 note payable as part of its acquisition of Greenhaus Analytical Services, LLC. The note carries interest at a rate of 6% per annum and matures on October 16, 2020. During the quarter ending September 30, 2019, a third party purchased $170,000 of the note from Henry Grimmett, refer to Note 10, Convertible Notes; Noteholder 14. There was $170,000 and $340,000 of principal due as of September 30, 2019 and 2018, respectively. Unamortized debt discount of $26,563 and $51,971 as of September 30, 2019 and 2018, respectively and $59,412 and $39,905 of accrued interest due as of September 30, 2019 and 2018, respectively.

 

During the years ended September 30, 2019 and 2018, the Company received loans from a related party associate with Keystone Labs totaling $191,515 and $171,425 and made repayments totaling $9,034 of $18,733. There was $354,050 and $153,17 due as of September 30, 2019 and 2018, respectively. Amounts have been adjusted for USD. The advances are non-interest bearing and due on demand and is included in the accompanying consolidated balance sheets as a current portion of notes payable to related parties.

 

 

EVIO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 8 – 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.

 

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.

 

The Company has 0 shares of Series A Convertible Stock issued and outstanding as of September 30, 2019 and 2018.

 

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.

 

 

EVIO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 8 – STOCKHOLDERS’ EQUITY (CONTINUED)

 

Series B Convertible Preferred Stock (continued)

 

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 September 30, 2019 and 2018.

 

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.

 

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.

 

There were 500,000 shares of Series C Convertible Stock issued and outstanding as of September 30, 2019 and 2018.

 

 

EVIO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 8 – STOCKHOLDERS’ EQUITY (CONTINUED)

 

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, 2018, 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.

 

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, 2019, the Company received conversion notices from Series D Preferred Stockholders resulting in a total of 532,500 shares of common stock being issued for the conversion of 213,000 shares of Series D Preferred Stock.

 

During the Year Ended September, 2018, the Company received conversion notices from Series D Preferred Stockholders resulting in a total of 700,000 shares of common stock being issued for the conversion of 280,000 shares of Series D Preferred Stock.

 

There were 339,500 and 552,500 shares of Series D Convertible Stock issued and outstanding as September 30, 2019 and 2018, respectively.

 

 

EVIO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 8 – STOCKHOLDERS’ EQUITY (CONTINUED)

 

Common Stock

 

During the year ended September 30, 2018, the Company issued 131,250 common shares valued at $153,788 for services; 2,561,392 common shares for cash proceeds of $2,041,501; 478,500 common shares valued at $831,133 under its employee equity incentive plan; 37,500 common shares for the settlement of $18,750 of accounts payable; 324,000 common shares for the settlement of $162,000 of notes payable, 4,918,580 common shares for the conversion of $2,805,008 of outstanding principal on convertible notes payable; 210,553 for the conversion of $114,792 of convertible accrued interest; 548,780 common shares for the settlement of non-convertible debt totaling $450,000; 2,309,997 common shares for the settlement of $1,386,000 debenture conversions, and 700,000 common shares for the conversion of Preferred Series D stock. All conversions of outstanding principal and accrued interest on convertible notes payable were done so at contractual terms.

 

During the year ended September 30, 2019, the Company issued 1,038,017 common shares valued at $336,891 for services; 1,415,000 common shares for cash proceeds of $586,000; 287,500 common shares valued at $397,980 as compensation to employees; 31,579 common shares for the settlement of $15,000 of accounts payable; 2,054,887 common shares for the settlement of $687,200 of convertible notes payable; 10,163 for the conversion of $25,110 of convertible accrued interest; 20,000 common shares for issuance of a stock purchase agreement valued at $11,760; 669,362 common shares for the settlement of $388,000 debenture conversions, and 532,500 common shares for the conversion of Preferred Series D stock. All conversions of outstanding principal and accrued interest on convertible notes payable were done so at contractual terms.

 

There were 29,314,419 and 23,255,411 shares of common stock issued and outstanding at September 30, 2019 and 2018, respectively.

 

NOTE 9 – LOANS PAYABLE

 

The Company had the following loans payable outstanding as of September 30, 2019 and September 30, 2018:

 

		September 30, 2019				September 30, 2018
On March 16, 2018, 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.			47,551				60,477
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.			-				500,000
On June 28, 2018, the Company executed a note payable for $650,000 for the purchase of the building at 14775 SW 74th Ave, Tigard, OR. The note carries interest at 8% annually and is due on June 28, 2021.			622,523				646,231
On July 5, 2018, the Company executed a note payable for $750,000 for the asset purchase of MRX Labs, The note carries interest at 8% annually and is due on January 5, 2019. (This note is in default as of 7/5/2019, which resulted in 5% penalty on outstanding amount.)			750,000				750,000
							1,956,708
Less: unamortized original issue discounts			-				(119,000	)
Total loans payable			1,420,079				1,837,708
Less: current portion of loans payable			762,476				643,627
Long-term portion of loans payable		$	657,603			$	1,193,781

 

As of September 30, 2019 and 2018, the Company accrued interest of $74,301 and $47,767, respectively.

 

 

EVIO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 10 – CONVERTIBLE NOTES PAYABLE

 

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 11 – 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, 2019:

 

Holder		Issue Date		Due Date		Principal				Unamortized Debt Discount				Carrying Value				Accrued Interest
Noteholder 10		4/24/18		4/24/19			500,000				-				500,000				-
Noteholder 4		8/1/18		1/1/19			396,000				-				396,000				76,471
Noteholder 6		9/6/18		9/6/19			145,000								145,000				15,575
Noteholder 7		9/17/18		9/17/19			82,500								82,500				8,586
Noteholder 4		10/2/18		1/1/19			264,000				-				264,000				40,634
Noteholder 8		11/15/18		11/15/19			222,600				(28,054	)			194,546				15,564
Noteholder 9		12/27/18		12/27/19			105,000				(25,603	)			79,397				18,204
Noteholder 8		1/14/19		1/14/20			131,250				(46,027	)			85,223				7,364
Noteholder 8		2/04/19		2/04/20			265,000				(92,205	)			172,795				13,824
Noteholder 9		2/05/19		2/05/20			131,250				(48,185	)			83,065				6,616
Noteholder 11		2/08/19		2/08/20			783,724				(208,357	)			575,367				89,627
Noteholder 8		3/15/19		3/15/20			70,913				-				70,913				3,093
Noteholder 9		3/15/19		3/15/20			70,913				-				70,913				2,938
Noteholder 12		3/15/19		3/15/20			70,913				-				70,913				3,093
Noteholder 13		3/15/19		3/15/20			70,913				-				70,913				3,093
Noteholder 3		7/1/19		9/30/19			825,930								825,930				18,983
Noteholder 8		8/8/19		8/8/20			33,092				(10,291	)			22,801				384
Noteholder 9		8/8/19		8/8/20			33,092				(10,291	)			22,801				384
Noteholder 14		8/29/19		5/29/19			100,000				(150,146	)			(50,146	)			964
Noteholder 14		8/30/19		5/30/19			110,000				(97,555	)			12,445				747
						$	4,412,090			$	(716,714	)			3,695,376			$	326,145

 

The following table summarizes all convertible notes outstanding as of September 30, 2018:

 

Holder		Issue Date		Due Date		Principal				Unamortized Debt Discount				Carrying Value				Accrued Interest
Noteholder 2		7/2/18		10/1/18			220,000				(220	)			219,780				4,340
Noteholder 3		7/2/18		10/1/18			220,000				(220	)			219,780				4,340
Noteholder 4		8/1/18		10/1/18			330,000				(492	)			329,508				-
Noteholder 1		8/14/18		8/14/19			167,100				(13,591	)			153,509				2,839
Noteholder 5		8/29/18		2/28/19			222,222				(78,670	)			143,552				-
Noteholder 6		9/6/18		9/6/19			125,000				(89,921	)			35,079				-
Noteholder 3		9/13/18		3/11/19			585,000				(513,062	)			71,938				-
Noteholder 7		9/17/18		9/17/19			62,500				(57,381	)			5,119				-
Noteholder 10		4/24/18		4/24/19			500,000				0				500,000				-
						$	2,431,822			$	(753,557	)		$	1,678,265			$	11,519

 

Noteholder 1

 

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%, was 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. During the year ended September 30, 2018, the holder elected to convert $167,100 of principal due in exchange for 479,848 shares of common stock and the holder elected to convert $2,988 of interest due in exchange for 10,163 shares of common stock. There was $0 and $167,100 of principal and $0 and $2,839 of accrued interest due at September 30, 2019 and September 30, 2018, respectively.

 

 

EVIO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 10 – CONVERTIBLE NOTES PAYABLE (CONTINUED)

 

Noteholder 2

 

On July 2, 2018, the Company sold and issued a Convertible Promissory to an unrelated party for the principal amount of $220,000 of which $20,000 was an original issue discount and $17,000 was paid directly to third parties resulting in cash proceeds to the Company of $183,000 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 October 1, 2018. The principal amount of the note 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. There was $0 and $220,000 of principal and $0 and $4,340 of accrued interest due at September 30, 2019 and September 30, 2018, respectively. This note was purchased by Noteholders 8, 9, 12 & 13.

 

Noteholder 3

 

On July 2, 2018, the Company sold and issued a Convertible Promissory to an unrelated party for the principal amount of $220,000 of which $20,000 was an original issue discount resulting in cash proceeds to the Company of $200,000 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%, was due on October 1, 2018. The principal amount of the note 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. There was $0 and $220,000 of principal and $0 and $4,340 of accrued interest due at September 30, 2019 and September 30, 2018, respectively. This note was replaced on July 1, 2019.

 

On September 13, 2018, the Company entered into an exchange agreement with an unrelated party for the principal amount $585,000, of which the loan payable to Palliatech, Dated August 1, 2017, outstanding and principal of $549,652 would be assumed by the new note holder, with difference of $35,348 to be treated as an original issue discount. The new convertible note payable carries an interest rate of 0% per annum is convertible into common stock of the Company at the option of the noteholder immediately at 80% of the lowest volume weighted average price of the Company’s common stock in the preceding 20 trading days. There was $0 and $585,000 of principal and $0 and $0 of accrued interest due at September 30, 2019 and September 30, 2018, respectively. This note was replaced on July 1, 2019.

 

On July 1, 2019, the two previous notes were replaced for the principal amount of $825,890. This included a default penalty of $150,000 for non-payment of the prior two notes. The note, together with accrued interest at the annual rate of 8%, is due on 9/30/2019. The note is convertible into common stock of the Company at the option of the noteholder at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days. There was $825,890 of principal and $18,893.35 of accrued interest at September 30, 2019.

 

Noteholder 4

 

On August 1, 2018, the Company sold and issued a Convertible Promissory to an unrelated party for the principal amount of $330,000 of which $30,000 was an original issue discount resulting in cash proceeds to the Company of $300,000 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%, was due on October 1, 2018. The principal amount of the note and any accrued interest thereon are convertible at the option of the holder into common shares of the Company at any time the lower of a conversion price of $0.50 per share or at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days. On September 30, 2019 a fee for payment default of $66,000 was added to the principal. There was $396,000 and $330,000 of principal and $76,472 and $10,994 of accrued interest due at September 30, 2019 and September 30, 2018, respectively.

 

On October 2, 2018, the Company sold and issued a Convertible Promissory to an unrelated party for the principal amount of $220,000 of which $20,000 was an original issue discount resulting in cash proceeds to the Company of $200,000 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 January 1, 2019. The principal amount of the note 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 $0.50 per share or at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days. On September 30, 2019 a fee for payment default of $44,000 was added to the principal. There was $264,000 of principal and $40,634 of accrued interest at September 30, 2019.

 

 

EVIO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 10 – CONVERTIBLE NOTES PAYABLE (CONTINUED)

 

Noteholder 5

 

On August 29, 2018, the Company sold and issued a Convertible Promissory to an unrelated party for the principal amount of $222,222 of which $22,222 was an original issue discount and $5,500 was paid directly to third parties resulting in cash proceeds to the Company of $194,500 pursuant to the terms of a Securities Purchase Agreement of even date therewith. The Note, together with accrued interest at the annual rate of 5%, is due on February 28, 2019. The principal amount of the note 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 $0.70 per share. This note was previously placed in default and has been settled for issuance of shares. There was $0 and $222,222 of principal and $0 and $0 of accrued interest due at September 30, 2019 and September 30, 2018, respectively.

 

Noteholder 6

 

On September 6, 2018, the Company sold and issued a Convertible Promissory to an unrelated party for the principal amount of $125,000 of which $15,000 was an original issue discount parties resulting in cash proceeds to the Company of $110,000 pursuant to the terms of a Securities Purchase Agreement of even date therewith. The Note, together with accrued interest at the annual rate of 10%, is due on September 6, 2019. The principal amount of the note and any accrued interest thereon are convertible at the option of the holder into common shares of the Company at any time at the lower of a conversion price of $0.50 per share or at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days. On July 5, 2019 a fee for payment default of $20,000 was added to the principal. There was $145,000 and $125,000 of principal and $15,575 and $10,171 of accrued interest due at September 30, 2019 and September 30, 2018, respectively.

 

Noteholder 7

 

On September 6, 2018, the Company sold and issued a Convertible Promissory to an unrelated party for the principal amount of $62,500 of which $6,250 was an original issue discount resulting in cash proceeds to the Company of $56,250 pursuant to the terms of a Securities Purchase Agreement of even date therewith. The Note, together with accrued interest at the annual rate of 10%, is due on September 6, 2019. The principal amount of the note and any accrued interest thereon are convertible at the option of the holder into common shares of the Company at any time at the lower of a conversion price of $0.50 per share or at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days. On July 5, 2019 a fee for payment default of $20,000 was added to the principal. There was $82,500 and $62,500 of principal and $8,586 and $4,897 of accrued interest due at September 30, 2019 and September 30, 2018, respectively.

 

Noteholder 8

 

On November 15, 2018, the Company sold and issued a Convertible Promissory to an unrelated party for the principal amount of $222,600 of which $12,600 was an original issue discount resulting in cash proceeds to the Company of $210,000 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 November 15, 2019. The principal amount of the note and any accrued interest thereon are convertible at the option of the holder into common shares of the Company at any time at the lower of a conversion price of $0.50 per share or at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days. There was $222,600 of principal and $15,564 of accrued interest due at September 30, 2019.

 

On January 14, 2019, the Company entered into a convertible note payable with an unrelated party for $131,250 of which included $6,250 in third party fees resulting in net cash proceeds to the Company of $125,000. The convertible note payable carries interest at a rate of 8% per annum, is due on January 14, 2020 and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days. There was $131,250 of principal and $7,364 of accrued interest due at September 30, 2019.

 

On February 4, 2019, the Company entered into a convertible note payable with an unrelated party for $265,000 of which $15,000 was an original issue discount and $10,000 in third party fees resulting in net cash proceeds to the Company of $240,000. The convertible note payable carries interest at a rate of 8% per annum, is due on February 4, 2020 and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days. There was $265,000 of principal and $13,824 accrued interest due at September 30, 2019.

 

On March 15, 2019, the Company entered into an exchange agreement with an unrelated party for $70,913, of which the loan payable to Noteholder 2, dated July 2, 2018, outstanding and principal would be assumed by the new note holder. The new convertible note payable carries an interest rate of 8% per annum is due on March 15, 2020 and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days. There was $70,913 of principal and $3,093 of accrued interest due at September 30, 2019.

 

On August 8, 2019, the Company entered into a convertible note agreement with an unrelated party for $33,092 of which $1,576 in third party fees resulting in net cash proceeds to the Company of $31,516. The convertible note payable carries interest at a rate of 8% per annum, is due on August 8, 2020 and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days. There was $33,092 of principal and $384 of accrued interest due at September 30, 2019.

 

 

EVIO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 10 – CONVERTIBLE NOTES PAYABLE (CONTINUED)

 

Noteholder 9

 

On December 27, 2018, the Company sold and issued a Convertible Promissory to an unrelated party for the principal amount of $105,000 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 December 27, 2019 and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days. There was $105,000 of principal and $18,204 of accrued interest due at September 30, 2019.

 

On February 5, 2019, the Company entered into a convertible note payable with an unrelated party for $131,250 of which included $6,250 in third party fees resulting in net cash proceeds to the Company of $125,000. The convertible note payable carries interest at a rate of 8% per annum, is due on February 5, 2020 and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days. There was $131,250 of principal and $6,616 of accrued interest due at September 30, 2019.

 

On March 15, 2019, the Company entered into an exchange agreement with an unrelated party for $70,913, of which the loan payable to Noteholder 2, dated July 2, 2018, outstanding and principal would be assumed by the new note holder. The new convertible note payable carries an interest rate of 8% per annum is due on March 15, 2020 and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days. There was $70,913 of principal and $2,938 of accrued interest due at September 30, 2019.

 

On August 8, 2019, the Company entered into a convertible note agreement with an unrelated party for $33,092 of which $1,576 in third party fees resulting in net cash proceeds to the Company of $31,516. The convertible note payable carries interest at a rate of 8% per annum, is due on August 8, 2020 and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days. There was $33,092 of principal and $384 of accrued interest due at September 30, 2019.

 

Noteholder 10

 

On April 24, 2018, the Company entered into a convertible note payable totaling $500,000 in exchange for 100% of the assets of Leaf Detective LLC. The note bears no interest, matures on April 24, 2019 and automatically converted to common stock at $1.25 per share on the maturity date. In the event the average lowest trading price of the Company’s common stock during the five days prior to maturity is less than $1.25 per share, the Company will pay the noteholder the difference between $1.25 and the average lowest trading price during the preceding five days per share converted in cash. There was $500,000 principal and $0 interest due on both September 30, 2019 and September 30, 2018. As disclosed in item #3, On or about April 30, 2020, Michele Malaret and Gordon Griswold filed, filed a Breach of Contract in the original principal amount of $500,000, with the Superior Court of California, County of Humboldt. The Company currently recognizes the fully liability on its balance sheet. There is no interest due associated with the note.

 

 

EVIO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 10 – CONVERTIBLE NOTES PAYABLE (CONTINUED)

 

Noteholder 11

 

On February 8, 2019, the Company entered into an exchange agreement with an unrelated party for $580,537, of which the loan payable to Palliatech, dated September 1, 2017, outstanding and principal would be assumed by the new note holder. The new convertible note payable carries an interest rate of 10% per annum, with one year interest guaranteed, is due on February 8, 2020 and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 30% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days. A principal non-pay default was applied in the amount of $203,188. There was $783,724 of principal and $89,627 of accrued interest due at September 30, 2019.

 

Noteholder 12

 

On March 15, 2019, the Company entered into an exchange agreement with an unrelated party for $70,913, of which the loan payable to Noteholder 2, dated July 2, 2018, outstanding and principal would be assumed by the new note holder. The new convertible note payable carries an interest rate of 8% per annum is due on March 15, 2020 and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days. There was $70,913 of principal and $3,093 of accrued interest due at September 30, 2019.

 

Noteholder 13

 

On March 15, 2019, the Company entered into an exchange agreement with an unrelated party for $70,913, of which the loan payable to Noteholder 2, dated July 2, 2018, outstanding and principal would be assumed by the new note holder. The new convertible note payable carries an interest rate of 8% per annum is due on March 15, 2020 and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days. There was $70,913 of principal and $3,093 of accrued interest due at September 30, 2019.

 

Noteholder 14

 

On August 30, 2019, the Company entered into a convertible note payable with an unrelated party for $110,000 which included $10,000 original issue discount resulting in net cash proceeds to the Company of $100,000. The convertible note payable carries interest at a rate of 8% per annum, is due on May 30, 2020 and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days. There was $110,000 of principal and $747 of accrued interest due at September 30, 2019.

 

On August 29, 2019, the Company entered into an exchange agreement with an unrelated party for $170,000, of which the loan payable to Henry Grimmett, dated October 16, 2016, outstanding and principal would be assumed by the new note holder. The new convertible note payable carries an interest rate of 8% per annum, is due on May 29, 2020 and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days. There was $100,000 of principal and $964 of accrued interest due at September 30, 2019.

 

NOTE 11 – CONVERTIBLE DEBENTURES

 

On January 29, 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 entitles 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 will be paid at a rate of 8% per annum 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 representing an equivalent of 6% of the fully converted debentures. The warrants are exercisable at $0.60 per share for a period of two years.

 

The Company also issued three separate debentures under the same terms for additional cash proceeds of $610,000. The additional debentures carry an additional 152,500 warrants to purchase additional common shares of the Company at $0.80 per share. Additionally, the outstanding principal and interest may be converted to common stock of the Company at $0.60 per share.

 

 

EVIO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 12 – DERIVATIVE LIABILITY

 

As of September 30, 2019 and 2018, Company had a derivative liability balance of $2,545,735 and $1,181,278 on the balance sheets and recorded a loss of $366,974 and a gain of $2,555,350 from derivative liability fair value adjustments during the year ended September 30, 2019 and 2018, respectively.

 

On November 15, 2018, the Company issued a $222,600 convertible promissory note to an unrelated party that matures on November 15, 2019. Refer to Noteholder 8 under “Note 10 – Convertible Debentures” for more information. 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 $220,463 which was recorded as a derivative liability on the balance sheet. The Company recorded a debt discount of $184,957 which was up to the face value of the convertible note with the excess fair value at initial measurement of $35,506 being recognized as a loss on derivative fair value measurement.

 

On December 27, 2018, the Company issued a $105,000 convertible promissory note to an unrelated party that matures on December 27, 2019. Refer to Noteholder 9 under “Note 10 – Convertible Debentures” for more information. The Company analyzed the conversion feature of the agreement for derivative accounting consideration 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.

 

The aggregate fair value of the derivative at the issuance date of the note was $98,091 which was recorded as a derivative liability on the balance sheet. The Company recorded a debt discount of $38,365 which was up to the face value of the convertible note with the excess fair value at initial measurement of $59,725 being recognized as a loss on derivative fair value measurement.

 

On January 14, 2019, the Company issued a $131,250 convertible promissory note to an unrelated party that matures on February 5, 2020. Refer to Noteholder 8 under “Note 10 – Convertible Debentures” for more information. The Company analyzed the conversion feature of the agreement for derivative accounting consideration 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.

 

The aggregate fair value of the derivative at the issuance date of the note was $144,752 which was recorded as a derivative liability on the balance sheet. The Company recorded a debt discount of $14,423 which was up to the face value of the convertible note with the excess fair value at initial measurement of $130,329 being recognized as a loss on derivative fair value measurement

 

On February 4, 2019, the Company issued a $265,000 convertible promissory note to an unrelated party that matures on February 4, 2020. Refer to Noteholder 8 under “Note 10 – Convertible Debentures” for more information. The Company analyzed the conversion feature of the agreement for derivative accounting consideration 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.

 

The aggregate fair value of the derivative at the issuance date of the note was $322,521 which was recorded as a derivative liability on the balance sheet. The Company recognized a loss of $322,521 on derivative fair value measurement.

 

On February 5, 2019, the Company issued a $131,250 convertible promissory note to an unrelated party that matures on February 11, 2020. Refer to Noteholder 9 under “Note 10 – Convertible Debentures” for more information. The Company analyzed the conversion feature of the agreement for derivative accounting consideration 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.

 

The aggregate fair value of the derivative at the issuance date of the note was $228,916 which was recorded as a derivative liability on the balance sheet. The Company recognized a loss of $228,916 on derivative fair value measurement.

 

On July 1, 2019, the Company issued a $825,930 convertible promissory note to an unrelated party that matures on September 30, 2019. Refer to Noteholder 3 under “Note 10 – Convertible Debentures” for more information. The Company analyzed the conversion feature of the agreement for derivative accounting consideration 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.

 

 

EVIO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 12 – DERIVATIVE LIABILITY (CONTINUED)

 

The aggregate fair value of the derivative at the issuance date of the note was $1,807,875 which was recorded as a derivative liability on the balance sheet. The Company recognized a loss of $1,807,875 on derivative fair value measurement.

 

On August 29, 2019, the Company issued a $170,000 convertible promissory note to an unrelated party that matures on May 29, 2020. Refer to Noteholder 14 under “Note 10 – Convertible Debentures” for more information. The Company analyzed the conversion feature of the agreement for derivative accounting consideration 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.

 

The aggregate fair value of the derivative at the issuance date of the note was $143,951 which was recorded as a derivative liability on the balance sheet. The Company recognized a loss of $65,965 on derivative fair value measurement.

 

On August 30, 2019, the Company issued a $110,000 convertible promissory note to an unrelated party that matures on May 30, 2020. Refer to Noteholder 14 under “Note 10 – Convertible Debentures” for more information. The Company analyzed the conversion feature of the agreement for derivative accounting consideration 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.

 

The aggregate fair value of the derivative at the issuance date of the note was $109,936 which was recorded as a derivative liability on the balance sheet. The Company recognized a loss of $79,183 on derivative fair value measurement.

 

At September 30, 2019, the Company marked-to-market the fair value of the derivative liabilities related to conversion features and determined an aggregate fair value of $2,363,919 and recorded a $1,502,833 gain from change in fair value for the year ended September 30, 2019. The fair value of the embedded derivatives was determined using a Black-Scholes option pricing model based on the following assumptions: (1) expected volatility of 128%, (2) risk-free interest rate of 1.75%, (3) exercise prices of $0.21 - $0.26, and (4) expected lives of 0.13 – 0.67 of a year.

 

On October 2, 2018, the Company issued a total of $220,000 convertible debenture to an unrelated party that matures on January 1, 2019. The Company issued a total of 100,000 warrants to purchase additional shares of common stock of the Company in connection with the convertible debenture. The Company analyzed the issued warrants for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the warrants should be classified as a derivative because the Company is unable to ascertain there will be adequate unissued authorized shares of common stock to fulfill its obligations should the warrants be exercised. In accordance with AC 815, the Company has recorded a derivative liability related to the warrants.

 

The derivative for the warrants 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 derivative using the Black-Scholes option pricing model. The aggregate fair value of the derivative at the issuance date of the warrants was $57,014 which was recorded as a derivative liability on the balance sheet. The Company recorded a debt discount of $53,333 which was up to the face value of the convertible debentures with the excess fair value at initial measurement of $3,681 being recognized as a loss on derivative fair value measurement.

 

As discussed in “Note 10 – Convertible Debentures”, the Company issued a total of $374,000 of convertible debentures to unrelated parties that mature on dates ranging from October 17, 2020 to October 23, 2020. The Company issued a total of 187,000 warrants to purchase additional shares of common stock of the Company in connection with the convertible debentures. The Company analyzed the issued warrants for derivative accounting consideration and determined that the warrants should be classified as a derivative. The aggregate fair value of the derivative at the issuance date of the warrants was $73,383 which was recorded as a derivative liability on the balance sheet, for which the Company recorded an equivalent debt discount to the convertible debentures.

 

At September 30, 2019, the Company marked-to-market the fair value of the derivative liabilities related to warrants and determined an aggregate fair value of $181,816 and recorded a $1,100,643 gain from change in fair value for the nine months ended September 30, 2019. The fair value of the derivatives was determined using a Black-Scholes option pricing model based on the following assumptions: (1) expected volatility of 128%, (2) risk-free interest rate of 1.75%, (3) exercise prices of $0.60 to $0.80, and (4) expected lives of 0.33 – 1.07 years.

 

 

EVIO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 12 – DERIVATIVE LIABILITY (CONTINUED)

 

The following table summarizes the derivative liabilities included in the balance sheet at September 30, 2019:

 

Fair Value of Embedded Derivative Liabilities:
Balance, September 30, 2018		$	1,181,278
Initial measurement of derivative liabilities			3,967,933
Change in fair market value			(2,603,476	)
Write off due to conversion			(–	)
Balance, September 30, 2019		$	2,545,735

 

The following table summarizes the gain (loss) on derivative liability included in the income statement for the years ended September 30, 2019 and 2018, respectively.

 

		Year Ended September 30,
		2019				2018
Day one loss due to derivatives on convertible debt		$	(2,970,450	)		$	(765,114	)
Change in fair value of derivatives			2,603,476				3,320,464
Total derivative gain (loss)		$	(366,974	)		$	2,555,350

 

Associated with the issuance of the convertible debentures during the fiscal year ended September 30, 2018; the Company incurred cash-based issuance costs of $702,963, issued common shares valued at $1,414,907 and warrants to purchase additional shares of common stock valued at $1,265,385 for total debt issuance costs of $3,383,255. The debt issuance costs were recorded as a discount to the carrying value of the convertible debentures. The warrants associated with the debt issue costs were valued using a Black-Scholes model with the following assumptions:

 

Expected term of options granted			2.00 years
Expected volatility			223	%
Risk-free interest rate			2.49	%
Expected dividend yield			0	%

 

The Company separately assessed the value of the detachable warrants and conversion features of the convertible debentures. The Company separately initially valued the detachable warrants issued with the convertible debentures at $3,351,160 using a Black-Scholes model with the following assumptions:

 

Expected term of options granted			2.00 years
Expected volatility			211-223	%
Risk-free interest rate			2.09-2.25	%
Expected dividend yield			0	%

 

Additionally, the outstanding principal on convertible debentures totaling $6,583,000 may be converted into common stock of the Company at $0.60 per share for a total of 10,971,667 shares. Due to the variable conversion features of the outstanding convertible notes payable as discussed in Note 10 – Convertible Notes Payable, the Company cannot ascertain there will be adequate unissued authorized common shares to fulfill all share based obligations. As a result, the warrants issued in connection with the convertible debentures are not afforded equity treatment and were recorded as a derivative liability upon initial measurement. The total initial measurement of warrants issued with the convertible debentures was $4,616,545 of which $4,465,131 was recorded as a debt discount and, when combined with debt issuance costs, represents a total debt discount of $6,583,000.

 

As of September 30, 2018 the Company has amortized $1,226,994 of the total outstanding debt discount leaving an unamortized debt discount of $2,156,261. The remaining debt discount will be amortized to interest expense over the expected life of the note. There was $5,197,000 of principal and accrued interest totaling $234,626 outstanding as of September 30, 2018.

 

 

EVIO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 13 – INCOME TAXES

 

We did not provide any current or deferred U.S. federal income tax provision or benefit for any of the periods presented because we have experienced operating losses since inception. When it is more likely than not that a tax asset cannot be realized through future income the Company must allow for this future tax benefit. We provided a full valuation allowance on the net deferred tax asset, consisting of net operating loss carry forwards, because management has determined that it is more likely than not that we will not earn income sufficient to realize the deferred tax assets during the carry forward period.

 

The Company has not taken a tax position that, if challenged, would have a material effect on the financial statements for the years ended September 30, 2019 and 2018 applicable under FASB ASC 740. We did not recognize any adjustment to the liability for uncertain tax position and therefore did not record any adjustment to the beginning balance of accumulated deficit on the balance sheet.

 

The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before provision for income taxes. The sources and tax effects of the differences for the periods presented are as follows:

 

		September 30, 2019				September 30, 2018
Income tax provision at the federal statutory rate			21.0	%			35.0	%
Effect on operating losses			-21.0	%			-35.0	%

 

		September 30, 2019				September 30, 2018
Net deferred tax assets co nsisted of the following:
Net operating loss carryforward		$	3,895,231			$	4,071,932
Valuation allowance			(3,895,231	)			(4,071,932	)
Net deferred tax asset		$	-			$	-

 

A reconciliation of income taxes computed at the statutory rate is as follows.

 

		September 30, 2019				September 30, 2018
Computed federal income tax expense at statutory rate is as follows.		$	(3,895,231	)		$	(4,071,932	)
Depreciation and amortization			307,802				253,703
Deferred revenue			22,768				127,124
Common stock issued for services			69,520				136,671
Common stock issued under employee incentive plan			36,025				251,791
Stock option expense			149,155				595,304
Amortization of debt discounts			779,793				1,519,967
Default penalties on convertible notes payable			98,378				-
Change in derivative liability			387,415				254,788
Change in valuation allowance			2,044,376				932,585
Income tax expense		$	-			$	-

 

 

EVIO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 13 – INCOME TAXES (CONTINUED)

 

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 September 30, 2019, EVIO Labs has operating labs located in Oregon, California and Massachusetts. Clients consist of growers, processors, dispensaries and individuals. 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.

 

Year ended September 30, 2019		Corporate				Consulting Services				Testing Services				Total Consolidated
Revenue		$	-			$	3,000			$	3,786,815			$	3,789,815
Segment income (loss) from operations															(7,325,704	)
Total assets
Capital expenditures																)
Depreciation and amortization

 

 

Year ended September 30, 2018		Corporate				Consulting Services				Testing Services				Total Consolidated
Revenue		$	-			$	176,832			$	3,188,693			$	3,365,525
Segment income (loss) from operations			(3,802,702	)			(1,835,901	)			(2,537,821	)			(8,176,424	)
Total assets			(16,650	)			1,534,823				12,836,787				14,354,960
Capital expenditures			-				-				(4,246,770	)			(4,246,770	)
Depreciation and amortization			-				-				724,865				724,865

 

 

EVIO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 14 – COMMITTMENTS 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.

 

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,
2019			782,138
2020			970,425
2021			697,436
2022			549,390
2023			347,475
Thereafter			27,911
Total		$	2,594,726

 

NOTE 15 – REVENUE CONCENTRATION

 

The Company generated revenues of $3,789,815 and $3,365,525 for the years ended September 30, 2019 and 2018, respectively. The Company did not have any customer that represented greater than 10% of revenues during the years ended September 30, 2019 or 2018.

 

NOTE 16 – STOCK OPTIONS AND WARRANTS

 

The following tables summarizes all stock option and warrant activity for the year ended September 30, 2019 and 2018:

 

		Shares				Weighted- Average Exercise Price Per Share
Outstanding, September 30, 2017			655,000			$	0.902
Granted			4,073,000				0.767
Exercised			-				-
Forfeited			(90,000	)			0.878
Expired			-				-
Outstanding, September 30, 2018			4,638,050			$	0.784

 

		Shares				Weighted- Average Exercise Price Per Share
Outstanding, September 30, 2018			4,638,050				0.902
Granted			846,920				0.519
Exercised			-				-
Forfeited			-				-
Expired			-				-
Outstanding, September 30, 2019			5,484,970				0.742

 

 

EVIO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 16 STOCK OPTIONS AND WARRANTS (CONTINUED)

 

The following table discloses information regarding outstanding and exercisable options and warrants at September 30, 2019:

 

				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
$	0.225				200,000			$	0.225				4.71				200,000			$	0.225
$	0.400				110,000			$	0.400				1.88				110,000			$	0.400
$	0.420				330,000			$	0.420				4.30				330,000			$	0.420
$	0.500				165,000			$	0.500				1.95				162,500			$	0.500
$	0.600				627,220			$	0.600				0.37				627,220			$	0.600
$	0.650				145,000			$	0.650				3.07				36,250			$	0.650
$	0.800				3,482,750			$	0.800				1.68				3,095,250			$	0.800
$	0.850				100,000			$	0.850				3.55				-			$	0.850
$	1.050				25,000			$	1.050				4.04				-			$	1.050
$	1.260				220,000			$	1.260				2.75				110,000			$	1.260
$	1.300				10,000			$	1.300				2.05				7,500			$	1.300
$	1.386				60,000			$	1.386				2.75				30,000			$	1.386
$	1.666				10,000			$	1.666				2.84				5,000			$	1.666
	Total				5,484,970			$	0.742				1.95				4,713,720			$	0.718

 

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, 2019
Expected term of options granted			1.0-5.0 years
Expected volatility			103- 122	%
Risk-free interest rate			2.00 – 2.67	%
Expected dividend yield			0	%

 

The following table discloses information regarding outstanding and exercisable options and warrants at September 30, 2018:

 

				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				110,000			$	0.400				2.88				110,000			$	0.400
$	0.500				165,000			$	0.500				2.95				162,500			$	0.500
$	0.600				597,300			$	0.600				1.33				597,300			$	0.600
$	0.650				145,000			$	0.650				4.07				36,250			$	0.650
$	0.800				3,195,750			$	0.800				2.74				2,808,250			$	0.800
$	0.850				100,000			$	0.850				4.55				-			$	0.850
$	1.050				25,000			$	1.050				5.04				-			$	1.050
$	1.260				220,000			$	1.260				3.75				110,000			$	1.260
$	1.300				10,000			$	1.300				3.05				7,500			$	1.300
$	1.386				60,000			$	1.386				3.75				30,000			$	1.386
$	1.666				10,000			$	1.666				3.84				5,000			$	1.666
	Total				4,638,050			$	0.784				3.322				3,866,800			$	0.763

 

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, 2018
Expected term of options granted		5 years
Expected volatility			14.63	%
Risk-free interest rate			2.94	%
Expected dividend yield			0	%

 

 

EVIO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 17 – SUBSEQUENT EVENTS

 

Common Stock Issuances

 

The Company made the following issuances of common stock subsequent to September 30, 2019:

 

●	35,170,123 common shares for the conversion of $1,518,022 of principal on convertible debentures.
●	4,452,443 common shares for the conversion of $203,820 of interest on convertible debentures
●	681,183 common shares issued for the conversion of debt conversion fees of $23,000
●	7,353,538 common shares issued for deferral of executive compensation
●	385,000 common shares issued for vesting of restricted stock grants for officers and directors
●	3,930,000 common shares issued for services
●	144,928 common shares issued for settlement of lawsuit
●	26,666 common shares issued for settlement of accounts payable.

 

Convertible Notes Payable

 

On November 4, 2019, the Company entered into a convertible note payable with an unrelated party for $33,516 which included $2,000 third party fees resulting in net cash proceeds to the Company of $31,516. The convertible note payable carries interest at a rate of 8% per annum, is due on November 4, 2020 and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days.

 

On December 23, 2019, the Company entered into a convertible note payable with an unrelated party for $137,375 which included $16,3785 third party fees resulting in net cash proceeds to the Company of $121,000. The convertible note payable carries interest at a rate of 8% per annum, is due on December 23, 2020 and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days.

 

On January 13, 2020, the Company entered into a convertible note payable with an unrelated party for $52,500 which included $2,500 third party fees resulting in net cash proceeds to the Company of $50,000. The convertible note payable carries interest at a rate of 8% per annum, is due on January 13, 2021 and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days.

 

On November 4, 2019, the Company entered into a convertible note payable with an unrelated party for $33,516 which included $2,000 third party fees resulting in net cash proceeds to the Company of $31,516. The convertible note payable carries interest at a rate of 8% per annum, is due on November 4, 2020 and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days.

 

On December 23, 2019, the Company entered into a convertible note payable with an unrelated party for $137,375 which included $16,3785 third party fees resulting in net cash proceeds to the Company of $121,000. The convertible note payable carries interest at a rate of 8% per annum, is due on December 23, 2020 and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days.

 

On January 13, 2020, the Company entered into a convertible note payable with an unrelated party for $52,500 which included $2,500 third party fees resulting in net cash proceeds to the Company of $50,000. The convertible note payable carries interest at a rate of 8% per annum, is due on January 13, 2021 and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days.

 

 

EVIO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 17 SUBSEQUENT EVENTS (CONTINUED)

 

Convertible Notes Payable – Exchanged Note

 

On December 23, 2019, the Company entered into a debt purchase agreement with an unrelated party for $274,345, of which the loan payable to Palliatech, Dated September 1, 2017, outstanding and principal would be assumed by the new note holder. The new convertible note payable carries an interest rate of 10% per annum, with one year interest guaranteed, is due on February 8, 2020 and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 30% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days.

 

On December 23, 2019, the Company entered into a debt purchase agreement with an unrelated party for $274,345, of which the loan payable to Palliatech, Dated September 1, 2017, outstanding and principal would be assumed by the new note holder. The new convertible note payable carries an interest rate of 10% per annum, with one year interest guaranteed, is due on February 8, 2020 and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 30% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days.

 

Legal Proceedings

 

As disclosed in Item 3:

 

On May 9, 2019, Stephanie Head, a former part-time lab administrator for EVIO Labs Eugene, LLC, filed a wrongful termination lawsuit with the US District Court - District of Oregon, Eugene Division, Case No. 6:19-CV-00681, against EVIO Labs Eugene, LLC, EVIO, Inc. and Lori Glauser. In December, 2018, EVIO Labs Eugene, LLC terminated Stephanie Head because she was not available to work full-time. In February 2019, Ms. Head filed complaint to Oregon Bureau of Labor & Industries (“BOLI”) with allegations that she was discriminated against and unlawfully terminated. In October, 2019 BOLI found substantial evidence of unlawful employment on the basis of protected whistle-blowing, but found no substantial evidence of Ms. Head’s seven other allegations of unlawful employment practice. In April, 2019, BOLI notified EVIO Labs Eugene, LLC that BOLI elected not to pursue the charges further and closed the file. On January 28, 2020, the case was settled for $35,000, $25,000 payable in cash and $10,000 in EVIO Common Stock.

 

On February 6, 2020, MC CRE Investments, LLC landlord for the Palm Desert location, filed a Breach of Lease Agreement with the Superior Court of the State of California, County of Riverside. EVIO Labs Palm Desert has vacated the space and turned it back over to the landlord. The Company has expensed past due rents and late fees and these items are included in the liabilities in the balance sheet.

 

On or about March 5, 2020, Paul Tomaso and Jonah Barber beneficiaries for MRX Labs, LLC, filed a Breach of Promissory Note in the original principal amount of $750,000, plus late fees and penalties, with the Circuit Court of the State in Oregon, in Multnomah County against Greenhaus Analytical Labs, LLC. The Company has expensed penalties and late fees and these items are included in the liabilities in the balance sheet.

 

On or about April 30, 2020, Michele Malaret and Gordon Griswold filed, filed a Breach of Contract in the original principal amount of $500,000, with the Superior Court of California, County of Humboldt. The Company currently recognizes the fully liability on its balance sheet. There is no interest due associated with the note.

 

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

 

During the year ended September 30, 2018, the Company dismissed Sadler, Gibb & Associates, LLC and engaged BF Borgers CPA PC as its independent registered audit firm. We have not had any disagreements with our auditors on any matters of accounting principles, practices, or financial statement disclosure.

 

ITEM 9A. 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.

 

Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:

 

	1.	Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
	2.	Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of our management and directors; and
	3.	Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Management assessed the effectiveness of our internal control over financial reporting as of September 30, 2019. Based on this assessment, management concluded that the Company’s internal controls over financial reporting is not effective as a result of the identified material weakness in our internal control over financial reporting described below. In making this assessment, management used the framework set forth in the report entitled Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring.

 

 

Identified Material Weakness

 

A material weakness in our internal control over financial reporting is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected.

 

Management identified the following material weakness during its assessment of internal controls over financial reporting as of September 30, 2019:

 

Independent Directors: The Company intends to obtain at least 2 independent directors at its 2020 annual shareholder meeting. The cost associated to the addition in minimal and not deemed material.

 

No Segregation of Duties: Ineffective controls over financial reporting: The Company hired additional staff members, either as employees or consultants, during the fiscal year ending September 30, 2019. These additional staff members are responsible for making sure that information required to be disclosed in our reports filed and submitted under the Exchange Act is recorded, processed, summarized and reported as and when required and will the staff members will have segregated responsibilities with regard to these responsibilities. The costs associated with the hiring the additional staff members will increase the Company’s Sales, General and Administration (SG&A) Expense. It is anticipated the cost of the new staff members will be approximately $150,000 per year. As of September 30, 2019, we had no full-time employees with the requisite expertise in the key functional areas of finance and accounting. As a result, there is a lack of proper segregation of duties necessary to ensure that all transactions are accounted for accurately and in a timely manner.

 

No audit committee: After the election of the independent directors at the 2019 annual shareholder meeting, the Company expects that an Audit Committee will be established. The cost associated to the addition an audit committee are minimal and not deemed material.

 

Written Policies & Procedures: We need to 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.

 

Management’s Remediation Initiatives

 

As our resources allow, we will add financial personnel to our management team. We plan to prepare additional written policies and procedures for accounting and financial reporting to improve the process to close our books monthly on an accrual basis and account for all transactions, including equity transactions. Upon the addition of independent directors, we will create an audit committee made up of our independent directors.

 

As of September 30, 2019, the Company has not taken any remediation actions to address these weaknesses in our controls even though they were identified during the year. The Company hired, as soon as its financial position permitted it to do so, additional staff in its accounting department to be able to segregate the duties. The Company expects that the expense will be approximately $150,000 per year which would allow the Company to hire one new staff member.

 

(b) Changes in Internal Control over Financial Reporting

 

There were no change in internal controls over financial reporting during the year ended September 30, 2019. 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

 

ITEM 9B. OTHER INFORMATION

 

None.

 

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Our directors and executive officers and additional information concerning them are as follows:

 

Name		Age		Position
William Waldrop		52		CEO and Director
Lori Glauser		50		COO and Director
Anthony Smith, Ph.D.		50		CSO, President and Director

 

William H. Waldrop – Chairman of the Board and Chief Executive Officer

 

Mr. Waldrop is our CEO and member of the Board of Directors. Mr. Waldrop has over 20 years’ experience in corporate formation, operations, financing and leadership. In 2010, Mr. Waldrop founded Newport Commercial Advisors, which assists start-up and high-growth companies in developing and executing their business strategies. From 2006 – 2009, Mr. Waldrop was the Co-Founder and President of CMP Capital, a national commercial finance company. CMP Capital provided finance solutions for the transportation and construction industries. From 2004 – 2005, Mr. Waldrop was the President and Chief Operating Officer of College Partnership. College Partnership was publicly traded company that assists high school students with their college selection and financial aid. From 2002 – 2005, Mr. Waldrop was the CEO and President of Vision Direct Marketing, a full-service marketing company. Vision Direct Marketing was acquired by College Partnership. From 2000 – 2002, Mr. Waldrop was Vice President of Operations at Leading Edge Broadband, a start-up international telecommunications company, he designed and operated network managing call traffic between the United States and the Philippines for International Call Centers. From 1992 – 2000, Mr. Waldrop was a Senior Manager at AirTouch Cellular, now Verizon Wireless, he managed a 44-Store, $100 million annual revenue distribution channel. Mr. Waldrop received a B.S. from California State University of Long Beach, 1991 and an MBA in Finance and Entrepreneurship from the University of Southern California, 1997.

 

Lori Glauser– COO and Director

 

Ms. Glauser founded EVIO, Inc. with William Waldrop in 2014 and has served as our Chief Operating Officer and a member of the board of directors. Ms. Glauser is responsible for the strategic growth and day to day operations of EVIO, Inc. including the company’s Labs and Advisory Services divisions. Lori came to EVIO with 25 years’ experience in engineering, management consulting, and startup company management. Her expertise lies in business planning and operations, business process engineering, financial forecasting, risk analysis, customer experience, product management, and regulatory compliance. Previously, Ms. Glauser was a management consultant in the energy and water industries with Ernst & Young, IBM, Financial Times Group, and SNL Financial. She also launched two startups. Lori began her career in 1991 as a mechanical engineer, and later as management consultant with Stone & Webster, a global architect/engineering firm where she worked in the nuclear power industry. Lori has a BS in Mechanical Engineering from the University of New Hampshire and an MBA from University of Alabama.

 

Anthony Smith, Ph.D. – Director, President and Chief Science Officer

 

Executive Scientist and founder of Kenevir Technologies, LLC and Kenevir Research Labs, Dr. Anthony Smith received his Ph.D. from Oregon State University in Molecular & Cellular Biology with an emphasis on biochemistry, metabolism and nutrition. He brings over 15 years of natural product research, quality assurance, product development, GMP manufacturing, FDA & regulatory experience and analytical expertise to EVIO Labs. Prior to joining EVIO in June 2016, Mr. Smith was Founder and President of Kenevir Research from July 2014 to May June 2016; and Chief Science Officer for BIOMED Diagnostics form July 2008 to June 2014.Dr. Smith was recently appointed to the Oregon governor’s Task Force on Researching the Medicinal and Public Health Properties of Cannabis.

 

 

Code of Ethics

 

We have adopted a Code of Ethics which is designed to ensure that our directors and officers meet the highest standards of ethical conduct. The Code of Ethics requires that our directors and officers comply with all laws and other legal requirements, conduct business in an honest and ethical manner and otherwise act with integrity and in our best interest. A copy of the Company’s code of ethics has been attached the Company’s form 10K, filed August 19, 2019, Exhibit 14.1.

 

Committees of the Board of Directors

 

The Company does not presently have a separately designated audit committee, compensation committee, nominating committee, executive committee or any other committees of its Board of Directors. As such, the Board of Directors acts in those capacities. The Company believes that committees of the Board are not necessary at this time given that the Company is in its development stage. However, the Board of Directors will continue to study this matter, and the Company plans to add Board members and/or committees of the Board as its business develops.

 

Audit Committee Financial Expert

 

Neither Mr. Waldrop nor Ms. Glauser qualify as an “audit committee financial expert.” The Company believes that the cost related to retaining such a financial expert at this time is prohibitive, given its current operating and financial condition. Further, because the Company is in the development stage of its business operations, it believes the services of an audit committee financial expert are not warranted at this time.

 

ITEM 11. EXECUTIVE COMPENSATION

 

The Companies’ officers and directors have received the annual salary listed below for the services rendered on behalf of the Company:

 

		Year		Salary				Bonus				Stock Awards				All Other Compensation				Total
William Waldrop, CEO, Director (1)		2019		$	202,500			$	-			$	-			$				$	202,500
		2018			112,500				-				-				31,591				144,091
Lori Glauser, COO, Director (2)		2019			165,000				-				-								165,000
		2018			112,500				-				-				4,500				117,000
Anthony Smith, President, CSO (3)		2019			131,250				-				-				-				131,250
Paul Wright, Interim CFO (4)		2019			102,813				-				52,000				-				154,813
		2018			-				-				-				-				-
Christian Carnell, CFO (5)		2019			-				-				-				-				-
		2018			-				-				7,125				9,000				16,125

 

(1)	Mr. Waldrop deferred $157,500 of his compensation during fiscal year 2019.
(2)	Ms. Glauser deferred $133,750 of her compensation during fiscal year 2019. Ms. Glauser resigned as President as of 1/15/2020.
(3)	Mr. Smith was appointed President 1/15/2020. Mr. Smith deferred $106,250 of his compensation during fiscal year 2019.
(4)	Mr. Wright employment commenced on September 21, 2018. Mr. Wright resigned as of April 15, 2020.
(5)	Mr. Carnell stepped down from CFO in April 2018.

 

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The following table sets forth, as of the date of this filing, with respect to the holdings of: (i) each person known by us to be the beneficially owner of more than 5% of our Common Stock; (ii) each of our directors, nominees for director and executive officers; (iii) all directors and officers as a group.

 

Unless otherwise indicated below, to our knowledge, all persons named in the table have sole voting and investment power with respect to their shares of our common stock, except to the extent authority is shared by spouses under community property laws. Except as otherwise indicated in the table below, addresses of named beneficial owners are in care of the Company, 2340 W. Horizon Ridge Pkwy, Ste 120, Henderson, NV 89052.

 

Name and Address of Beneficial Owner		Title of Class		Amount and Nature of Beneficial Ownership				Percent of Common Stock (1)
William Waldrop		Common Stock			6,894,007	(2)			8.47	%
Lori Glauser		Common Stock			6,410,317	(3)			7.88	%
Anthony Smith		Common Stock			3,330,881	(4)			4.09	%
Paul Wright		Common Stock			100,000				*	%
					16,735,205				20.56	%

 

(1)	As of February 28, 2020, there were 73,898,298 shares of registrant’s common stock outstanding.
(2)	Mr. Waldrop owns Series B Preferred Stock which converts to 2,500,000 shares of Common stock and 750,000 vested options to acquire Common Stock.
(3)	Ms. Glauser owns Series B Preferred Stock which converts to 2,500,000 shares of Common stock and 450,000 vested options to acquire Common Stock.
(4)	Mr. Smith owns Series C Preferred Stock which converts to 1,500,000 shares of Common stock and 250,000 vested options to acquire Common Stock.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

 

Transactions with Related Persons

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

INDEPENDENT AUDITOR FEES

 

The following is a summary of the fees billed to us by our independent auditors for the fiscal years ended September 30, 2019 and 2018:

 

		Fiscal Year 2019				Fiscal Year 2018
Audit Fees		$	140,000			$	69,625

 

 

ITEM 15. EXHIBITS

 

Exhibit No.		Exhibit Description
3.15		EVIO Inc. Bylaws
4.1		Form of $220k promissory note, Dated 10/2/18
4.2		Form of $222.6k promissory note, Dated 11/15/18
4.3		Form of $105k promissory note, Dated 12/27/18
4.4		Form of $131k promissory note, Dated 1/14/19
4.5		Form of $265k promissory note, Dated 2/4/19
4.6		Form of $131k promissory note, Dated 2/5/19
4.7		Form of $580K exchange promissory note, Dated 2/8/19
4.8		Form of $70.9k promissory note, Dated 3/15/19
4.9		Form of $70.9k promissory note, Dated 3/15/19
4.10		Form of $70.9k promissory note, Dated 3/15/19
4.11		Form of $70.9k promissory note, Dated 3/15/19
4.12		Form of $825,930 exchange agreement, Dated 7/1/19
4.13		Form of $825,930 exchange promissory note, Dated 7/1/19
4.14		Form of $33.1k promissory note, Dated 8/8/19
4.15		Form of $33.1k promissory note, Dated 8/8/19
4.16		Form of $100k promissory note, Dated 8/29/19
4.17		Form of $110k promissory note, Dated 8/30/19
14.1		Code of Business Conduct and Ethics
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

 

	(1)	Incorporated by reference to Annual Report on Form 10-K filed with the SEC on February 24, 2017.
	(2)	Incorporated by reference to Annual Report on Form 10-K filed with the SEC on February 24, 2017.
	(3)	Incorporated by reference to Current Report on Form 8-K filed with the SEC on August 1, 2017.
	(4)	Incorporated by reference to Current Report on Form 8-K filed with the SEC on January 8, 2018.
	(5)	Incorporated by reference to Current Report on Form 8-K filed with the SEC on May 7, 2018.
	(6)	Incorporated by reference to Current Report on Form 8-K filed with the SEC on July 12, 2018.
	(7)	Incorporated by reference to Current Report on Form 8-K filed with the SEC on July 12, 2018.

 

 

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 May 19, 2020.

 

	EVIO, INC.
	By:	/s/ William Waldrop
		William Waldrop
		Chief Executive Officer
	By:	/s/ William Waldrop
		William Waldrop
		Acting 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 May 19, 2020.

 

	By:	/s/ William Waldrop
		William Waldrop
		Director & Principal Executive Officer
	By:	/s/ Lori Glauser
		Lori Glauser
		Director
	By:	/s/ Anthony Smith
		Anthony Smith
		Director