General
Risk Factors
We
have a limited operating history in an evolving industry, which makes it difficult to accurately assess our future growth prospects.
Although
we believe our management team has extensive knowledge of the cannabis industry and closely monitors changes in legislation, we also
intend to provide equipment and services in an evolving industry that may not develop as expected. Furthermore, our operations continue
to evolve under our business plan as we continually assess new strategic opportunities for our business within our industry. Assessing
the future prospects of our business is challenging in light of both known and unknown risks and difficulties we may encounter. Growth
prospects in our industry can be affected by a wide variety of factors including:
| ● | Competition
from other similar companies; |
| ● | Regulatory
limitations on the industry we primarily supply to (cannabis agriculture) we can offer and
markets we can serve; |
| ● | Other
changes in the regulation of cannabis and hemp grow, harvesting and processing; |
| ● | Changes
in cannabis industry demand and consumer behavior, which may affect the size of the agricultural
businesses we intend to serve; |
| ● | Our
ability to access adequate financing on reasonable terms and our ability to raise additional
capital in order to fund our operations; |
| ● | Challenges
with new machinery, services and markets; and |
| ● | Fluctuations
in the commodities markets. |
We
may not be able to successfully address these factors, which could negatively impact our growth, harm our business and cause our operating
results to be worse than expected.
Our
success depends on the introduction of new products, which requires substantial expenditures.
Our
long-term results depend upon our ability to introduce and market new products successfully. The success of our new products will depend
on a number of factors, including:
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the efficiency of our suppliers
in providing component parts and of our contract manufacturing facilities in producing final products; and |
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the performance and quality
of our products relative to those of our competitors. |
We
cannot predict the level of market acceptance or the amount of market share our new products will achieve. We may experience delays in
the introduction of new products. Any delays or other problems with our new product launches will adversely affect our performance. In
addition, introducing new products can result in decreases in revenues from our existing products. We expect to make substantial investments
in product development and refinement. We may need more funding for product development and refinement than is readily available, which
could adversely affect our business.
We
face significant competition, and, if we are unable to compete successfully against other agricultural equipment manufacturers, we will
lose customers and our net sales and profitability will decline.
The
agricultural equipment business is highly competitive, particularly in the United States. Established and substantially larger agricultural
equipment manufacturers, with substantially greater financial and other resources, have the capability to compete with us successfully.
Our competitors may substantially increase the resources devoted to the development and marketing of products that compete with our products.
In addition, competitive pressures in the agricultural equipment business may affect the market prices of new and used equipment, which,
in turn, may adversely affect our performance.
We
will require significant additional capital to fund our business plan.
The
Company will be required to expend significant funds to implement its business plan. The Company anticipates that it will be required
to make substantial capital expenditures for the manufacture of its equipment.
The
Company’s ability to obtain necessary funding for these purposes, in turn, depends upon a number of factors, including the status
of the national and worldwide economy and the financial markets and the availability of capital. Capital markets worldwide were adversely
affected by substantial losses by financial institutions, caused by investments in asset-backed securities and remnants from those losses
continue to impact the ability for the Company to raise capital. The Company may not be successful in obtaining the required financing
or, if it can obtain such financing, such financing may not be on terms that are favorable to us.
The
Company’s inability to access sufficient capital for its operations could have a material adverse effect on its financial condition,
results of operations, or prospects. Sales of substantial amounts of securities may have a highly dilutive effect on the Company’s
ownership or share structure. Sales of a large number of shares of the Company’s Common Shares in the public markets, or the potential
for such sales, could decrease the trading price of the Common Shares and could impair the Company’s ability to raise capital through
future sales of Common Shares.
International,
national and regional trade laws, regulations and policies and government farm programs and policies could significantly impair our profitability
and growth prospects.
International,
national and regional laws, regulations and policies directly or indirectly related to or restricting the import and export of the Company’s
products, services and technology, including protectionist policies in particular jurisdictions or for the benefit of favored industries
or sectors, could harm the Company’s ability to grow in international markets and subject the Company to civil and criminal sanctions.
Restricted access to global markets impairs the Company’s ability to export goods and services from its various manufacturing locations
around the world, and limits the ability to access raw materials and high-quality parts and components at competitive prices on a timely
basis. Trade restrictions could limit the Company’s ability to capitalize on future growth opportunities in international markets
and impair the Company’s ability to expand the business by offering new technologies, products and services. These restrictions
may affect the Company’s competitive position. Additionally, changes in government farm programs and policies, including restrictions
on cannabis and hemp cultivation and processing, can significantly influence demand for agricultural equipment.
Changing
demand for certain agricultural products could have an effect on the price of farming output and consequently the demand for certain
of our equipment and could also result in higher research and development costs related to changing machine requirements.
Negative
economic conditions and outlook can materially weaken demand for our equipment and services, limit access to funding and result in higher
funding costs.
The
demand for the Company’s products and services can be significantly reduced in an economic environment characterized by high unemployment,
cautious consumer spending, lower corporate earnings, U.S. budget issues and lower business investment. Negative or uncertain economic
conditions causing the Company’s customers to lack confidence in the general economic outlook can significantly reduce their likelihood
of purchasing the Company’s equipment. If negative economic conditions affect the overall farm economy, there could be a similar
effect on the Company’s agricultural equipment sales. In addition, uncertain or negative outlook with respect to ongoing U.S. budget
issues as well as general economic conditions and outlook can cause significant changes in market liquidity conditions. Such changes
could impact access to funding and associated funding costs, which could reduce the Company’s earnings and cash flows. Such changes
could affect the ability of the Company’s customers, contract manufacturers, suppliers and lenders to finance their respective
businesses, to access liquidity at acceptable financing costs, if at all, the availability of supplies, materials and manufacturing facilities
and on the demand for the Company’s products.
We
may encounter difficulties in fully exploiting the assets we acquired from Cryocann USA Corp and may not fully achieve, or achieve within
a reasonable time frame, expected strategic objectives and other expected benefits of the acquisitions.
Our
recent acquisition of Cryocann USA Corp assets is expected to realize strategic and other benefits, including, among other things, the
opportunity to enter the agricultural equipment industry, identify customers and provide our customers with an appealing range of products
and services. However, it is impossible to predict with certainty whether, or to what extent, these benefits will be realized or whether
we will be able to exploit the acquired assets in a timely and effective manner. For example:
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the costs of using the
assets in developing and manufacturing agricultural equipment may be higher than we expect and may require significant attention
from our management; |
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the asset acquisition and
subsequent exploitation of the assets may result in as of yet unidentified liabilities, such as infringement of third parties’
intellectual property, environmental liabilities or liabilities for violations of laws, such as the FCPA, that we did not expect; |
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our ability to successfully
carry out our growth strategies with the help of the acquired assets will be affected by, among other things, our ability to maintain
and enhance our relationships with potential customers, our ability to manufacture and distribution products, changes in the spending
patterns and preferences of customers and potential customers, fluctuating economic and competitive conditions and our ability to
retain their key personnel; |
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litigation or other claims
in connection with the acquired assets, including claims from Cryocann USA Corp customers, current or former shareholders or other
third parties; and |
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● |
our due diligence of Cryocann
USA Corp may have failed to identify all liabilities associated with the acquisition. Further, the acquired assets consisted primarily
of intellectual property, which does not have a market value, and we may not have correctly assessed the relative benefits and detriments
of making the acquisition and may have pay acquisition consideration exceeding the value of the acquired assets. |
Further
acquisitions may be necessary to realize our overall corporate strategy. There can be no assurance that we will be able to identify appropriate
acquisition targets, successfully acquire identified targets or successfully integrate the business of acquired companies or the assets
acquired to realize the full, anticipated benefits of such acquisitions. Our ability to address these issues will determine the extent
to which we are able to successfully integrate, exploit and develop the acquired assets and to realize the expected benefits of the Cryocann
USA Corp. transactions. Our failure to do so could have a material adverse effect on our performance following the transaction
Our
business results depend largely on its ability to understand its customers’ specific preferences and requirements, and to develop,
manufacture and market products that meet customer demand.
The
Company’s ability to match new product offerings to customers’ anticipated preferences for different types and sizes of equipment
and various equipment features and functionality, at affordable prices, is critical to its success. This requires a thorough understanding
of the Company’s potential customers and their needs, as well as an understanding of the cannabis and hemp cultivation dynamics
and of other agricultural commodities cultivation dynamics. Failure to deliver quality products that meet customer needs at competitive
prices ahead of competitors could have a significant adverse effect on the Company’s business.
Our
business may be directly and indirectly affected by unfavorable weather conditions or natural disasters that reduce agricultural production
and demand for agriculture equipment.
Poor
or unusual weather conditions can significantly affect the purchasing decisions of the Company’s potential customers. Natural calamities
such as regional floods, hurricanes or other storms, and droughts can have significant negative effects on agricultural production. The
resulting negative impact on farm income can strongly affect demand for agricultural equipment.
Changes
in the availability and price of certain raw materials, components and whole goods could result in production disruptions or increased
costs and lower profits on sales of our products.
The
Company requires access to various materials and components at competitive prices to manufacture and distribute its products. Changes
in the availability and price of these materials and components, which have fluctuated in the past and are more likely to fluctuate during
times of economic volatility, can significantly increase the costs of production which could have a material negative effect on the profitability
of the business, particularly if the Company, due to pricing considerations or other factors, is unable to recover the increased costs
from its customers. The Company relies on suppliers and contract manufacturers to acquire materials and components to manufacture its
products. Supply chain and contract manufacturing disruptions due to supplier or contract manufacturer financial distress, capacity constraints,
business continuity, quality, delivery or disruptions due to weather-related or natural disaster events could affect the Company’s
operations and profitability.
In
determining the required quantities of our products and the manufacturing schedule, we must make significant judgments and estimates
that are not based on any historical data. Because of the inherent nature of estimates, there could be significant differences between
our estimates and the actual amounts of products we require, which could harm our business and results of operations.
The
agricultural equipment industry is highly seasonal, and seasonal fluctuations may significantly impact our performance.
The
agricultural equipment business is highly seasonal, which may cause our quarterly results and our cash flow to fluctuate during the year.
Farmers generally purchase agricultural equipment seasonally in conjunction with the harvesting seasons. Seasonal fluctuations can significantly
impact our performance in a specific quarter, or overall.
If
we are unable to hire and retain key personnel, we may not be able to implement our business plan and our business may fail.
Our
future success depends to a large extent on our ability to attract, hire, train and retain qualified managerial, operational and other
personnel. We face significant competition for qualified and experienced employees in our industry and from other industries and, as
a result, we may be unable to attract and retain the personnel needed to successfully conduct and grow our operations. Additionally,
key personnel, including members of management, may leave and compete against us. At present, we do not have all the necessary personnel
to carry out our business plans. If we are unable to hire and retain key personnel, our business will be materially adversely affected.
Our
growth is highly dependent on the U.S. cannabis and hemp markets. New regulations causing licensing shortages and future regulations
may create other limitations that decrease the demand for our products. General regulations at state and federal in the future may adversely
impact our business.
The
base of cannabis growers in the U.S. has grown over the past 20 years since the legalization of cannabis for medical uses in states such
as California, Colorado and Washington. The U.S. cannabis market is still in its infancy and early adopter states such as California,
Colorado and Washington represent a large portion of historical industry revenues. The U.S. cannabis cultivation market is expected to
be one of the fastest growing industries in the U.S. over the next five years. If the U.S. cannabis cultivation market does not grow
as expected, our business, financial condition and results of operations could be adversely impacted. The California cannabis cultivation
market is expected to be one of the fastest growing industries in California over the next five years. If the California cannabis cultivation
market does not grow as expected, our business, financial condition and results of operations could be adversely impacted.
Cannabis
remains illegal under U.S. federal law, with cannabis listed as a Schedule I substance under the United States Controlled Substances
Act of 1970 (the “CSA”). Notwithstanding laws in various states permitting certain cannabis activities, all cannabis activities,
including possession, distribution, processing and manufacturing of cannabis and investment in, and financial services or transactions
involving proceeds of, or promoting such activities remain illegal under various U.S. federal criminal and civil laws and regulations,
including the CSA, as well as laws and regulations of several states that have not legalized some or any cannabis activities to date.
Compliance with applicable state laws regarding cannabis activities does not protect us from federal prosecution or other enforcement
action, such as seizure or forfeiture remedies, nor does it provide any defense to such prosecution or action. Cannabis activities conducted
in or related to conduct in multiple states may potentially face a higher level of scrutiny from federal authorities. Penalties for violating
federal drug, conspiracy, aiding, abetting, bank fraud and/or money laundering laws may include prison, fines, and seizure/forfeiture
of property used in connection with cannabis activities, including proceeds derived from such activities.
We
are not currently subject directly to any state laws or regulations controlling participants in the legal cannabis industry. However,
regulation of the cannabis industry does impact our potential customers in the cultivation industry and, accordingly, there can be no
assurance that changes in regulation of the industry and more rigorous enforcement by federal authorities will not have a material adverse
effect on us.
Legislation
and regulations pertaining to the use and cultivation of cannabis are enacted on both the state and federal government level within the
United States. As a result, the laws governing the cultivation and use of cannabis may be subject to change. Any new laws and regulations
limiting the use or cultivation of cannabis and any enforcement actions by state and federal governments could indirectly reduce demand
for our products and may impact our current and planned future operations.
Evolving
federal and state laws and regulations pertaining to the use or cultivation of cannabis, as well active enforcement by federal or state
authorities of the laws and regulations governing the use and cultivation of cannabis may indirectly and adversely affect our business,
our revenues and our profits. Local, state and federal cannabis laws and regulations are broad in scope and subject to evolving interpretations,
which could require the end users of certain of our products or us to incur substantial costs associated with compliance or to alter
our respective business plans. In addition, violations of these laws, or allegations of such violations, could disrupt our business and
result in a material adverse effect on our results of operation and financial condition.
Certain
of our products may be purchased for use for agricultural products other than cannabis and/or be subject to varying, inconsistent, and
rapidly changing laws, regulations, administrative practices, enforcement approaches, judicial interpretations, future scientific research
and public perception.
The
public’s perception of cannabis may significantly impact the cannabis industry’s success. Both the medical and adult-use
of cannabis are controversial topics, and there is no guarantee that future scientific research, publicity, regulations, medical opinion,
and public opinion relating to cannabis will be favorable. The cannabis industry is an early-stage business that is constantly evolving
with no guarantee of viability. Among other things, such a shift in public opinion could cause state jurisdictions to abandon initiatives
or proposals to legalize cultivation and sale of cannabis or adopt new laws or regulations restricting or prohibiting the cultivation
of cannabis where it is now legal, thereby limiting the potential customers who are engaged in the cannabis industry.
Demand
for our products may be negatively impacted depending on how laws, regulations, administrative practices, enforcement approaches, judicial
interpretations, and consumer perceptions develop. We cannot predict the nature of such developments or the effect, if any, that such
developments could have on our business.
Our
indirect involvement in the cannabis industry could affect the public’s perception of us and be detrimental to our reputation.
Damage
to our reputation can be the result of the actual or perceived occurrence of any number of events, and could include any negative publicity,
whether true or not. Cannabis has often been associated with various other narcotics, violence and criminal activities, the risk of which
is that our retailers and resellers that transact with cannabis businesses might attract negative publicity. There is also risk that
the action(s) of other participants, companies and service providers in the cannabis industry may negatively affect the reputation of
the industry as a whole and thereby negatively impact our reputation. The increased use of social media and other web-based tools used
to generate, publish and discuss user-generated content and to connect with other users has made it increasingly easier for individuals
and groups to communicate and share opinions and views with regard to cannabis companies and their activities, whether true or not and
the cannabis industry in general, whether true or not. We do not ultimately have direct control over how the cannabis industry and its
suppliers is perceived by others. Reputation loss may result in decreased investor confidence, increased challenges in developing and
maintaining community relations and an impediment to our overall ability to advance its business strategy and realize on its growth prospects,
thereby having a material adverse impact on our business.
Businesses
involved in the cannabis industry, and investments in such businesses, are subject to a variety of laws and regulations related to money
laundering, financial recordkeeping and proceeds of crimes.
We
sell our products through third party retailers and resellers. Investments in the U.S. cannabis industry are subject to a variety of
laws and regulations that involve money laundering, financial recordkeeping and proceeds of crime, including the BSA, as amended by the
Patriot Act, other anti-money laundering laws, and any related or similar rules, regulations or guidelines, issued, administered or enforced
by governmental authorities in the United States. In February 2014, the Financial Crimes Enforcement Network of the Treasury Department
issued a memorandum (the “FinCEN Memo”) providing guidance to banks seeking to provide services to cannabis businesses. The
FinCEN Memo outlines circumstances under which banks may provide services to cannabis businesses without risking prosecution for violation
of U.S. federal money laundering laws. It refers to supplementary guidance that Deputy Attorney General Cole issued to U.S. federal prosecutors
relating to the prosecution of U.S. money laundering offenses predicated on cannabis violations of the CSA and outlines extensive due
diligence and reporting requirements, which most banks have viewed as onerous. The FinCEN Memo currently remains in place, but it is
unclear at this time whether the current administration will continue to follow the guidelines of the FinCEN Memo. Such requirements
could negatively affect the ability of certain of the end users of our products to establish and maintain banking connections.
We
are subject to extensive anti-corruption laws and regulations.
The
Company’s foreign operations, if and when established, must comply with all applicable laws, which may include the U.S. Foreign
Corrupt Practices Act (FCPA), the UK Bribery Act or other anti-corruption laws. These anti-corruption laws generally prohibit companies
and their intermediaries from making improper payments or providing anything of value to improperly influence government officials or
private individuals for the purpose of obtaining or retaining a business advantage regardless of whether those practices are legal or
culturally expected in a particular jurisdiction. Recently, there has been a substantial increase in the global enforcement of anti-corruption
laws. Although the Company has a compliance program in place designed to reduce the likelihood of potential violations of such laws,
violations of these laws could result in criminal or civil sanctions and have an adverse effect on the Company’s reputation, business
and results of operations and financial condition.
Our
business, results of operations and financial condition may be adversely affected by pandemic infectious diseases, particularly the recent
novel coronavirus strain known as COVID-19.
Pandemic
infectious diseases, such as the current COVID-19 strains, may adversely impact our business, consolidated results of operations and
financial condition. The global spread of COVID-19 has created significant volatility and uncertainty and economic disruption. The extent
to which COVID-19 impacts our business, operations and financial results will depend on numerous evolving factors that we may not be
able to accurately predict, including: the duration and scope of the pandemic; governmental, business and individuals’ actions
that have been and continue to be taken in response to the pandemic; the impact of the pandemic on economic activity and actions taken
in response; the effect on our customers and customer demand our services, products and solutions; our ability to sell and provide its
services and solutions, including as a result of travel restrictions and people working from home; the ability of our customers to pay
for our services and solutions; and any closures of our offices and the offices and facilities of our customers. COVID-19, as well as
measures taken by governmental authorities to limit the spread of this virus, may interfere with the ability of our employees, suppliers,
and other business providers to carry out their assigned tasks or supply materials or services at ordinary levels of performance relative
to the requirements of our business, which may cause us to materially curtail certain of our business operations. We require additional
funding and such funding may not be available to us as a result of contracting capital markets resulting from the COVID-19 pandemic.
Any of these events could materially adversely affect our business, financial condition, results of operations and/or stock price.
Natural
disasters, pandemic outbreaks or other health crises could disrupt business and result in lower sales and otherwise adversely affect
our financial performance.
The
occurrence of one or more natural disasters, climate change, pandemic outbreaks or other health crises (including but not limited to
the COVID-19 outbreak), could adversely affect our business and financial performance. If any of these events result in the closure of
one or more of our dispensaries, extended sick leave involving our personnel, or impact key suppliers, our operations and financial performance
could be materially adversely affected through an inability to provide other support functions to our stores and through lost sales.
These events also could affect consumer shopping patterns or prevent customers from reaching our dispensaries, which could lead to lost
sales and higher markdowns, the temporary lack of an adequate work force in a market, the temporary or long-term disruption of product
availability in our dispensaries and the temporary or long-term inability to obtain technology needed to effectively run our business.
Our
business may be impacted by geopolitical events, war, terrorism, and other related business interruptions.
War,
terrorism, geopolitical uncertainties, and other related business interruptions have caused and could cause damage or disruption to international
commerce and the global economy, and thus could have a material adverse effect on the Company, its suppliers, logistics providers, manufacturing
vendors and customers. The Company’s business operations are subject to interruption by, among others, disasters, whether as a
result of war, refugee crises, fire, power shortages, nuclear power plant accidents and other industrial accidents, terrorist attacks
and other hostile acts, labor disputes, and other events beyond its control. Such events could decrease demand for the Company’s
products, make it difficult or impossible for the Company to develop, prototype, make and deliver products to its customers or to receive
components from its suppliers, and create delays and inefficiencies in the Company’s supply chain. While the Company’s suppliers
are expected to maintain safe working environments and operations, an industrial accident could occur and could result in disruption
to the Company’s business and harm to the Company’s reputation. In any event of business interruption, the Company could
incur significant losses, require substantial recovery time and experience significant expenditures in order to resume operations.
Security
breaches and other disruptions to our information technology infrastructure could interfere with our operations and could compromise
the Company’s and its customers’ and suppliers’ information, exposing us to liability that would cause the Company’s
business and reputation to suffer.
In
the ordinary course of business, the Company relies upon information technology networks and systems, some of which are managed by third
parties, to process, transmit and store electronic information, and to manage or support a variety of business processes and activities,
including supply chain, manufacturing, distribution, invoicing and collection of payments from intermediaries or other purchasers or
lessees of our equipment. We use information technology systems to record, process and summarize financial information and results of
operations for internal reporting purposes and to comply with regulatory financial reporting, legal and tax requirements. Additionally,
we collect and store sensitive data, including intellectual property, proprietary business information and the proprietary business information
of the Company’s customers and suppliers, as well as personally identifiable information of our customers and employees, in third
party data centers, “cloud” providers and on information technology networks. The secure operation of these information technology
networks, and the processing and maintenance of this information is critical to the Company’s business operations and strategy.
Such third parties, as well as the Company’s information technology networks, cloud and infrastructure may be vulnerable to damage,
disruptions or shutdowns due to attacks by hackers or breaches due to employee error or malfeasance or other disruptions during the process
of upgrading or replacing computer software or hardware, power outages, computer viruses, telecommunication or utility failures or natural
disasters or other catastrophic events. The occurrence of any of these events could compromise the respective storage networks, data
centers or cloud, and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure
or other loss of information could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the
privacy of personal information, disrupt operations, and damage our reputation, which could adversely affect the Company’s business.
Our
suppliers, contract manufacturers and customers are subject to and affected by increasingly rigorous environmental, health and safety
laws and regulations of federal, state and local authorities in the U.S. and various regulatory authorities with jurisdiction over
the Company’s operations. In addition, private civil litigation on these subjects has increased, primarily in the U.S.
Enforcement
actions arising from violations of environmental, health and safety laws or regulations can lead to investigation and defense costs,
and result in significant fines or penalties. In addition, new or more stringent requirements of governmental authorities could prevent
or restrict the Company’s operations, or those of our suppliers and customers, require significant expenditures to achieve compliance
and/or give rise to civil or criminal liability. There can be no assurance that violations of such legislation and/or regulations, or
private civil claims for damages to property or personal injury arising from the environmental, health or safety impacts of our operations,
or those of our suppliers and customers, would not have consequences that result in a material adverse effect on our business, financial
condition or results of operations.
Increasingly
stringent engine emission standards could impact our ability to manufacture and distribute certain equipment, which could negatively
affect business results.
The
Company’s equipment operations must meet increasingly stringent engine emission reduction standards, including USEPA, Interim Tier
4/Stage IIIb and Final Tier 4/Stage IV non-road diesel emission requirements in the U.S. and European Union.
We
may incur increased costs due to new or more stringent greenhouse gas emission standards designed to address climate change and could
be further impacted by physical effects attributed to climate change on its facilities, suppliers and customers.
There
is a growing political and scientific consensus that emissions of greenhouse gases (GHG) continue to alter the composition of Earth’s
atmosphere in ways that are affecting and are expected to continue to affect the global climate. These considerations may lead to international,
national, regional or local legislative or regulatory responses in the future. Various stakeholders, including legislators and regulators,
shareholders and non-governmental organizations, as well as companies in many business sectors, including the Company, are considering
ways to reduce GHG emissions. The regulation of GHG emissions from certain stationary or mobile sources could result in additional costs
to the Company or its suppliers in the form of taxes or emission allowances, facilities improvements and energy costs, which would increase
our operating costs through higher contract manufacturing, utility, transportation and materials costs. Increased input costs and compliance-related
costs could also impact customer operations and demand for our equipment. Because the impact of any future GHG legislative, regulatory
or product standard requirements on our businesses and products is dependent on the timing and design of mandates or standards, the Company
is unable to predict its potential impact at this time.
Furthermore,
the potential physical impacts of climate change on our suppliers and customers and therefore on our operations are highly uncertain
and will be particular to the circumstances developing in various geographical regions. These may include long-term changes in temperature
levels and water availability. These potential physical effects may adversely impact the demand for the Company’s products and
the cost, production, sales and financial performance of the Company’s operations.
Our
business increasingly is subject to regulations relating to privacy and data protection, and if we violate any of those regulations,
we could be subject to significant claims, penalties and damages.
Increasingly,
the United States, the European Union and other governmental entities are imposing regulations designed to protect the collection, maintenance
and transfer of personal information. For example, the European Union adopted the General Data Protection Regulation (the “GDPR”)
that imposes stringent data protection requirements and greater penalties for non-compliance beginning in May 2018. The GDPR also protects
a broader set of personal information than traditionally has been protected in the United States and provides for a right of “erasure.”
Other regulations govern the collection and transfer of financial data and data security generally. These regulations generally impose
penalties in the event of violations. While we attempt to comply with all applicable cybersecurity regulations, their implementation
is complex, and, if we are not successful, we may be subject to penalties and claims for damages from regulators and the impacted individuals.
Risks
Relating to Our Intellectual Property
Recent
laws make it difficult to predict how patents will be issued or enforced in our industry.
Changes
in either the patent laws or interpretation of the patent laws in the United States and other countries may have a significant impact
on our ability to protect our technology and enforce our intellectual property rights. There have been numerous recent changes to the
patent laws and to the rules of the United States Patent and Trademark Office (the “USPTO”), which may have a significant
impact on our ability to protect our technology and enforce our intellectual property rights. For example, the Leahy-Smith America Invents
Act, which was signed into law in 2011, includes a transition from a “first-to-invent” system to a “first-to-file”
system, and changes the way issued patents can be challenged. Certain changes, such as the institution of inter partes review and post-grant
and derivation proceedings, came into effect in 2012. Substantive changes to patent law associated with the Leahy-Smith America Invents
Act may affect our ability to obtain patents, and, if obtained, to enforce or defend them in litigation or inter partes review, or post-grant
or derivation proceedings, all of which could harm our business.
We
may not be able to adequately protect our intellectual property and other proprietary rights that are material to our business.
Our
ability to compete effectively depends in part on our rights to trademarks, patents and other intellectual property rights we own. We
have not sought to register every one of our intellectual properties either in the United States or in every country in which such intellectual
property may be used. Furthermore, because of the differences in foreign trademark, patent and other intellectual property or proprietary
rights laws, we may not receive the same protection in other countries as we would in the United States with respect to the registered
brand names and issued patents we hold. If we are unable to protect our intellectual property, proprietary information and/or brand names,
we could suffer a material adverse effect on our business, financial condition and results of operations.
Litigation
may be necessary to enforce our intellectual property rights and protect our proprietary information, or to defend against claims by
third parties that our products or services infringe their intellectual property rights. Any litigation or claims brought by or against
us could result in substantial costs and diversion of our resources. A successful claim of trademark, patent or other intellectual property
infringement against us, or any other successful challenge to the use of our intellectual property, could subject us to damages or prevent
us from providing certain products or services, or using certain of our recognized brand names, which could have a material adverse effect
on our business, financial condition and results of operations.
Obtaining
and maintaining our patent protection depends on compliance with various procedural, document submissions, fee payment and other requirements
imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for noncompliance with these requirements.
Periodic
maintenance or annuity fees on any issued patents are due to be paid to the USPTO, and/or foreign patent agencies in several stages over
the lifetime of the patent. The USPTO and various foreign governmental patent agencies require compliance with a number of procedural,
documentary, fee payments and other similar provisions during the patent application process. While an inadvertent or unintentional lapse
can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in
which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of
patent rights in the relevant jurisdiction. Noncompliance events that could result in abandonment or lapse of a patent or patent application
include, but are not limited to, failure to respond to official actions within prescribed time limits, nonpayment of fees and failure
to properly legalize and submit formal documents. If we or our licensors fail to maintain the patents and patent applications covering
our products, our competitors might be able to enter the market, which would have a material adverse effect on our business.
From
time to time, we may need to rely on licenses to proprietary technologies, which may be difficult or expensive to obtain or we may lose
certain licenses which may be difficult to replace, harming our competitive position.
We
may need to obtain licenses to patents and other proprietary rights held by third parties to develop, manufacture and market our products,
if, for example, we sought to develop our products, in conjunction with any patented technology. If we are unable to timely obtain these
licenses on commercially reasonable terms and maintain these licenses, our ability to commercially market our products, may be inhibited
or prevented, which could have a material adverse effect on our business, results of operations, financial condition and cash flows.
In
spite of our best efforts, our licensors might conclude that we have materially breached our license agreements and might therefore terminate
the license agreements, thereby removing our ability to develop and commercialize products and technology covered by these license agreements.
If these in-licenses are terminated, or if the underlying patents fail to provide the intended exclusivity, competitors may have the
freedom to market products identical to ours.
Third
parties may initiate legal proceedings alleging that we are infringing their intellectual property rights, the outcome of which would
be uncertain and could have a material adverse effect on the success of our business.
Our
success depends upon our ability to develop, manufacture, market and sell our products, and to use our proprietary technologies without
infringing the proprietary rights of third parties. We may become party to, or threatened with, future adversarial proceedings or litigation
regarding intellectual property rights with respect to our products and technology, including interference or derivation proceedings
and various other post-grant proceedings before the USPTO and/or non-United States opposition proceedings. Third parties may assert infringement
claims against us based on existing patents or patents that may be granted in the future. As a result of any such infringement claims,
or to avoid potential claims, we may choose or be compelled to seek intellectual property licenses from third parties. These licenses
may not be available on acceptable terms, or at all. Even if we are able to obtain a license, the license would likely obligate us to
pay license fees, royalties, minimum royalties and/or milestone payments and the rights granted to us could be nonexclusive, which would
mean that our competitors may be able to obtain licenses to the same intellectual property. Ultimately, we could be prevented from commercializing
a product and/or technology or be forced to cease some aspect of our business operations if, as a result of actual or threatened infringement
claims, we are unable to enter into licenses of the relevant intellectual property on acceptable terms. Further, if we attempt to modify
a product and/or technology or to develop alternative methods or products in response to infringement claims or to avoid potential claims,
we could incur substantial costs, encounter delays in product introductions or interruptions in sales.
Intellectual
property rights do not necessarily address all potential threats to our competitive advantage.
The
degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations,
and may not adequately protect our business, or permit us to maintain our competitive advantage. The following examples are illustrative:
| |
● |
Others may be able to construct
products that are similar to our products but that are not covered by the claims of the patents that we own or have exclusively licensed; |
| |
● |
We or our licensors or
strategic collaborators, if any, might not have been the first to make the inventions covered by the issued patent or pending patent
application that we own or have exclusively licensed; |
| |
● |
We or our licensors or
strategic collaborators, if any, might not have been the first to file patent applications covering certain of our inventions; |
| |
● |
Others may independently
develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual property rights; |
| |
● |
It is possible that our
pending patent applications will not lead to issued patents; |
| |
● |
Issued patents that we
own or have exclusively licensed may not provide us with any competitive advantages, or may be held invalid or unenforceable, as
a result of legal challenges by our competitors; |
| |
● |
Our competitors might conduct
research and development activities in countries where we do not have patent rights and then use the information learned from such
activities to develop competitive products for sale in our major commercial markets; |
| |
● |
We may not develop additional
proprietary technologies that are patentable; and |
| |
● |
The patents of others may
have an adverse effect on our business. |
Should
any of these events occur, they could significantly harm our business, results of operations and prospects.
We
may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.
Although
we try to ensure that our employees do not use the proprietary information or know-how of others in their work for us, we may be subject
to claims that we or these employees have used or disclosed intellectual property, including trade secrets or other proprietary information,
of any such employee’s former employer. We are not aware of any threatened or pending claims related to these matters or concerning
agreements with our employees, but in the future litigation may be necessary to defend against such claims. If we fail in defending any
such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful
in defending against such claims, litigation could result in substantial costs and be a distraction to management.
Intellectual
property disputes could cause us to spend substantial resources and distract our personnel from their normal responsibilities.
Even
if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant
expenses and could distract our personnel from their normal responsibilities. In addition, there could be public announcements of the
results of hearings, motions or other interim proceedings or developments, and if securities analysts or investors perceive these results
to be negative, it could have a substantial adverse effect on the value of our common stock. Such litigation or proceedings could substantially
increase our operating losses and reduce the resources available for development activities or any future sales, marketing or distribution
activities. We may not have sufficient financial or other resources to adequately conduct such litigation or proceedings. Some of our
competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater
financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have
a material adverse effect on our ability to compete in the marketplace.
Risks
Related to the Common Shares
The
Company’s Common Share price may be volatile and as a result investor could lose all or part of their investment.
In
addition to volatility associated with equity securities in general, the value of an investor’s investment could decline due to
the impact of any of the following factors upon the market price of the Common Shares:
| |
● |
disappointing results from
the Company’s operations or financing activities; |
| |
● |
decline in demand for its
Common Shares; |
| |
● |
downward revisions in securities
analysts’ estimates or changes in general market conditions; |
| |
● |
technological innovations
by competitors or in competing technologies; |
| |
● |
investor perception of
the Company’s industry or its prospects; and |
| |
● |
general economic trends. |
Our
Common Share price on the OTCQB has experienced significant price and volume fluctuations. Stock markets in general have experienced
extreme price and volume fluctuations, and the market prices of securities have been highly volatile. These fluctuations are often unrelated
to operating performance and may adversely affect the market price of the Common Shares. As a result, an investor may be unable to sell
any Common Shares such investor acquires at a desired price.
Potential
future sales under Rule 144 may depress the market price for our Common Shares.
In
general, under Rule 144, a person who has satisfied a minimum holding period of between 6 months and one-year and any other applicable
requirements of Rule 144, may thereafter sell such shares publicly. A significant number of the Company’s currently issued and
outstanding Common Shares held by existing shareholders, including officers and directors and other principal shareholders, are currently
eligible for resale pursuant to and in accordance with the provisions of Rule 144. The possible future sale of the Company’s Common
Shares by its existing shareholders, pursuant to and in accordance with the provisions of Rule 144, may have a depressive effect on the
price of its Common Shares in the over-the-counter market.
The
Company’s Common Shares currently deemed a “penny stock”, which may make it more difficult for investors to sell their
Common Shares.
The
SEC has adopted regulations which generally define “penny stock” to be any equity security that has a market price less than
$5.00 per Common Share or an exercise price of less than $5.00 per Common Share, subject to certain exceptions. The Company’s s
securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons
other than established customers and “accredited investors”. The term “accredited investor” refers generally
to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000, exclusive of their principal
residence, or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer,
prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a
form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The
broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer
and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s
account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer
orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s
confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these
rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and
receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the
level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny
stock rules may affect the ability of broker-dealers to trade its securities. The Company believes that the penny stock rules may discourage
investor interest in and limit the marketability of its Common Shares.
The
Company has never paid dividends on its Common Shares.
The
Company has not paid dividends on its Common Shares to date, and it does not expect to pay dividends for the foreseeable future. The
Company intends to retain its initial earnings, if any, to finance its operations. Any future dividends on Common Shares will depend
upon the Company’s earnings, its then-existing financial requirements, and other factors, and will be at the discretion of the
Board.
FINRA
has adopted sales practice requirements, which may also limit an investor’s ability to buy and sell the Company’s Common
Shares.
In
addition to the “penny stock” rules described above, FINRA has adopted rules that require that in recommending an investment
to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to
recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain
information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations
of these rules, FINRA believes that there is a high probability that speculative low-priced securities will not be suitable for at least
some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy the Company’s
Common Shares, which may limit an investor’s ability to buy and sell its stock and have an adverse effect on the market for the
Common Shares.
Investors’
interests in the Company will be diluted and investors may suffer dilution in their net book value per share of Common Shares if we issue
additional employee/director/consultant options or if we sell additional Common Shares and/or warrants to finance its operations.
In
order to further expand the Company’s operations and meet its objectives, any additional growth and/or expanded business activity
will likely need to be financed through sale of and issuance of additional Common Shares. The Company will also in the future grant to
some or all of its directors, officers, and key employees and/or consultants options to purchase Common Shares as non-cash incentives.
The issuance of any equity securities could, and the issuance of any additional Common Shares will, cause the Company’s existing
shareholders to experience dilution of their ownership interests.
If
the Company issues additional Common Shares or decides to enter into joint ventures with other parties in order to raise financing through
the sale of equity securities, investors’ interests in the Company will be diluted and investors may suffer dilution in their net
book value per share of Common Shares depending on the price at which such securities are sold.
The
issuance of additional shares of Common Shares may negatively impact the trading price of the Company’s securities.
We
have issued Common Shares in the past and will continue to issue Common Shares to finance our activities in the future. In addition,
newly issued or outstanding options and warrants to purchase Common Shares may be exercised, resulting in the issuance of additional
Common Shares. Any such issuance of additional Common Shares would result in dilution to the Company’s shareholders, and even the
perception that such an issuance may occur could have a negative impact on the trading price of the Common Shares.
The
issuance of a large number of shares of our Common Stock could significantly dilute existing stockholders and negatively impact the market
price of our Common Stock.
On
January 6, 2021, the Company entered into an Equity Purchase Agreement, with Peak One providing that, upon the terms and subject to the
conditions thereof, Peak One is committed to purchase, on an unconditional basis, shares of Common Stock (“Put Shares”) at
an aggregate price of up to $10 million over the course of the commitment period. Pursuant to the terms of the equity purchase agreement,
the purchase price for each of the Put Shares equals 89% of the Market Price on such date on which the Purchase Price is calculated.
The Market Price is defined in the EPA as the lesser of the (i) closing bid price of the Common Stock on the Principal Market on the
Trading Day immediately preceding the respective Put Date, or (ii) the lowest closing bid price of the Common Shares on the Principal
Market for any Trading Day during the Valuation Period. The Valuation Period is defined as the period of seven (7) Trading Days immediately
following the Clearing Date associated with the applicable Put Notice. The Valuation Period begins on the first Trading Day following
the Clearing Date. As a result, if we sell shares of Common Stock under the equity purchase agreement, we will be issuing Common Stock
at below market prices, which could cause the market price of our Common Stock to decline, and if such issuances are significant in number,
the amount of the decline in our market price could also be significant. In general, we are unlikely to sell shares of Common Stock under
the equity purchase agreement at a time when the additional dilution to stockholders would be substantial unless we are unable to obtain
capital to meet our financial obligations from other sources on better terms at such time. However, if we do, the dilution that could
result from such issuances could have a material adverse impact on existing stockholders and could cause the price of our common stock
to fall rapidly based on the amount of such dilution.
The
Selling Securityholders may sell a large number of shares, resulting in substantial diminution to the value of shares held by existing
stockholders.
Pursuant
to the Equity Purchase Agreement, we are prohibited from delivering a Put Notice to Peak One to the extent that the issuance of shares
would cause the Selling Securityholders to beneficially own more than 4.99% of our then-outstanding shares of common stock; provided,
however, the Selling Securityholders in their sole discretion can waive this ownership limitation up to 9.99% of our then-outstanding
shares of Common Stock. These restrictions however, do not prevent the Selling Stockholder from selling shares of Common Stock received
in connection with the Equity Line and then receiving additional shares of Common Stock in connection with a subsequent issuance. In
this way, the Selling Securityholders could sell more than 4.99% (or 9.99% if 4.99% ownership limitation is waived) of the outstanding
shares of Common Stock in a relatively short time frame while never holding more than 4.99% (or 9.99% if 4.99% ownership limitation is
waived) at any one time. As a result, existing stockholders and new investors could experience substantial diminution in the value of
their shares of Common Stock. Additionally, we do not have the right to control the timing and amount of any sales by the Selling Securityholders
of the shares issued under the Equity Line.
The
Company faces risks related to compliance with corporate governance laws and financial reporting standards.
The
Sarbanes-Oxley Act of 2002, as well as related new rules and regulations implemented by the SEC and the Public Company Accounting Oversight
Board, require changes in the corporate governance practices and financial reporting standards for public companies. These laws, rules
and regulations, including compliance with Section 404 of the Sarbanes-Oxley Act of 2002 relating to internal control over financial
reporting, referred to as Section 404, materially increase the Company’s legal and financial compliance costs and make certain
activities more time-consuming and burdensome.
Cautionary
Note
We
have sought to identify what we believe to be the most significant risks to our business, but we cannot predict whether, or to what extent,
any of such risks may be realized nor can we guarantee that we have identified all possible risks that might arise. Investors should
carefully consider all of such risk factors before making an investment decision with respect to our common stock.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Special
Note of Caution Regarding Forward-Looking Statements
Certain
statements in this report, including statements in the following discussion, are what are known as “forward looking statements”,
which are basically statements about the future. For that reason, these statements involve risk and uncertainty since no one can accurately
predict the future. Words such as “plans,” “intends,” “will,” “hopes,” “seeks,”
“anticipates,” “expects “and the like often identify such forward looking statements, but are not the only indication
that a statement is a forward-looking statement. Such forward looking statements include statements concerning our plans and objectives
with respect to the present and future operations of the Company, and statements which express or imply that such present and future
operations will or may produce revenues, income or profits. Numerous factors and future events could cause the Company to change such
plans and objectives or fail to successfully implement such plans or achieve such objectives, or cause such present and future operations
to fail to produce revenues, income or profits. Therefore, the reader is advised that the following discussion should be considered in
light of the discussion of risks and other factors contained in this Prospectus and in the Company’s other filings with the Securities
and Exchange Commission. No statements contained in the following discussion should be construed as a guarantee or assurance of future
performance or future results.
Background
and Overview
Results
of Operations
Comparison
of the fiscal years ended December 31, 2021 and December 31, 2020
Revenue
During
the fiscal year ended December 31, 2021, the Company generated no revenues as compared to $781,455 during the fiscal year ended December
31, 2020; a decrease of $781,455 or approximately 100%.
Expenses
During
the fiscal year ended December 31, 2021, the Company reported total operating expenses of $7,991,827 as compared to $6,572,017 during
the fiscal year ended December 31, 2020; an increase of $1,419,810 or approximately 22%.
Net
Loss
During
the fiscal year ended December 31, 2021, the Company reported a net loss of $12,859,643 as compared to $11,815,907 during the fiscal
year ended December 31, 2020; an increase of $1,043,736 or approximately 9%.
Comparison
of the three months ended March 31, 2022 and March 31, 2021
Revenue
During
the three months ended March 31, 2022 and 2021, the Company generated no revenues.
Expenses
During
the three months ended March 31, 2022, the Company reported total operating expenses of $2,127,790 as compared to $995,704 during the
three months ended March 31, 2021; an increase of $1,132,086 or approximately 114%.
Net
Loss
During
the three months ended March 31, 2022, the Company reported a net loss of $2,152,305 as compared to $1,046,927 during the three months
ended March 31, 2021; an increase of $1,105,378 or approximately 106%.
Liquidity
and Capital Resources
After
completion of a $10.3 million private placement in November 2021 and the conversion of $4.9 million of convertible debt to common shares,
the Company has sufficient resources to meets its existing obligations for a period of at least twelve months, and likewise sufficient
resources to implement its new business plan arising from the acquisition of the assets of Cryocann USA Corp.
Current
Assets and Total Assets
As
of March 31, 2022, the Company’s balance sheet reflects that the Company had: i) total current assets of $3,667,453, compared to
total current assets of $8,211,061 at March 31, 2021 - a decrease of $4,543,608 or approximately 55%; and ii) total assets of $13,326,693,
compared to total assets of $8,211,061 at March 31, 2021 – an increase of $5,115,632 or approximately 62%. The increase in total
assets was predominantly due to the assets acquired in the Cryocann acquisition and a note receivable from the sale of the Company’s
discontinued operations.
Current
Liabilities and Total Liabilities
As
of March 31, 2022, the Company’s balance sheet reflects that the Company had: i) total current liabilities of $1,364,905, compared
to total current liabilities of $4,693,618 at March 31, 2021 - an decrease of $3,328,713 or approximately 71%; and ii) total liabilities
of $1,573,238, compared to total liabilities of $4,791,877 at March 31, 2021 – a decrease of $3,218,639 or approximately 67%. The
decrease in current and total liabilities was predominantly due to the disposal of the Company’s discontinued operations.
Cash
Flow
For
the three months ended March 31, 2022 and 2021, the Company had net cash used in operating activities of $1,631,300 and $466,223, respectively.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As
a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the information required by
this item.
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
and Executive Officers
Our
directors and executive officers and their respective ages, positions, and biographical information are set forth below.
| Name |
|
Position |
|
Age |
| Christian Noël |
|
Chief Executive Officer & Director |
|
45 |
| Philip Mullin |
|
Chief Financial Officer |
|
68 |
| Patricia Kovacevic |
|
General Counsel, Corporate Secretary |
|
51 |
| Dr. Delon Human |
|
Chairman of the Board |
|
59 |
| Mario Gobbo |
|
Director |
|
68 |
| Mark Radke |
|
Director |
|
67 |
| Simon Langelier |
|
Director |
|
64 |
Christian
Noël, Chief Executive Officer & Director
Christian
Noel is a trusted investor and business strategist, who has held senior positions in financial and investment organizations in Montreal,
Canada, for the last 21 years. During his career, he has acquired extensive experience in risk management, tax planning, investment banking,
and financial strategy design and execution.
In
2005 he joined Richardson GMP as Vice-President and Partner. Richardson GMP is a non-bank organization that specializes in portfolio
management for high-net-worth individuals and families.
In
2014 Christian was admitted as a portfolio manager of GVC Ltd, a boutique wealth management firm based in Montreal, and was subsequently
named Partner. At GVC, he developed a deep understanding of the nascent cannabis industry, building a team to analyze investment opportunities
in all facets of the cannabis value chain, thereby providing clients with a superior range of services.
Christian
expertise spans many different industries and has performed numerous due diligence activities over the last 20 years. He specializes
in small and mid-cap companies as well as sophisticated alternative investment strategies. Christian is fluent in English and French
and possesses a vast network of relationships in North American, European, and other regional capital markets.
Philip
Mullin, Chief Financial Officer
Philip
Mullin has 30 years’ experience as CFO, COO, and in consulting and turnarounds for businesses with revenues of less than $100 million
and has served as Chief Financial Officer of the Company since June, 20219. Mr. Mullin was previously managing director of Somerset Associates
LLC, a CFO, accounting, tax and financial consulting company, and served until recently on the board of CanaQuest Medical Corp. Since
2009, he has operated primarily in consulting and interim CFO roles in multiple sectors including fintech, blockchain, drones, recycling,
medical marijuana, and electrical power generation. From 2003-09, Mr. Mullin was a partner of Tatum Partners, a human capital firm engaged
in providing CFO services. Within Tatum, Mr. Mullin served in numerous leadership roles: from 2006-09, as CFO of Zi Corporation, a leading
software development company specializing in mobile phones, which was sold in April 2009 to Nuance Communications; from 2003-06, as interim
CFO of Homax Products, Vice President Finance of Yakima Products, and as a consultant in several engagements in industrial construction,
manufacturing and air transportation. From 2001-03, he served as turnaround consultant to companies in the telecom sector during the
critical post-9/11 timeframe; from 1995-2001, he was engaged in various C-level capacities in a public entity that was restructured and
eventually became International DisplayWorks, a manufacturer of LCD displays based in Rocklin, California with operations in Shenzhen,
China, which was later sold to Flextronics.
Mr.
Mullin began his career in banking in 1982 after completing his MBA from University of Western Ontario Richard Ivey School of Business
in London, Ontario, Canada and BA in Economics from Wilfrid Laurier University, in Waterloo, Ontario, Canada.
Patricia
Kovacevic, General Counsel & Head of External Affairs
An
experienced legal and compliance department leader, Patricia I. Kovacevic’s career comprises leading senior legal and regulatory
positions with FDA-regulated multinationals, including Philip Morris International and Lorillard, as well as partner roles with large
law firms.
Her
expertise includes corporate law, compliance, M&A, US and global food, drug, nicotine and consumer goods regulation, cannabis/CBD
regulation, external affairs and the legal framework applicable to marketing, media communications, investigations, FCPA, trade sanctions,
privacy, intellectual property, product development and launch. She also led cross-disciplinary teams engaged in scientific research
efforts. She has served on various trade association bodies and conference advisory boards. Ms. Kovacevic authored several articles on
nicotine regulation, co-authored an academic treatise, “The Regulation of E-Cigarettes” and is often invited as a keynote
speaker or panelist before global conferences and government agencies public hearings.
Patricia
Kovacevic is an attorney admitted to practice in New York, before the U.S. Tax Court, before the U.S. Court of International Trade and
before the Supreme Court of the United States. She holds a Juris Doctor (Doctor of Law) degree from Columbia Law School in New York and
completed the Harvard Business School “Corporate Leader” executive education program. Ms. Kovacevic speaks several languages,
including French, Italian, Spanish, Romanian and Croatian.
Dr.
Delon Human, Chairman of the Board
Dr.
Delon Human, M.B.Ch.B., M.Prax.Med, MFGP, DCH, MBA serves as President of the Board of Directors of Cryomass Technologies Inc
He
is an experienced global business leader, published author and health & technology consultant. He serves as President of Health Diplomats,
a specialized health, technology and nutrition consulting group, operating worldwide. Health Diplomats clients include Fortune 500 companies
such as Johnson & Johnson, Pfizer, Nestlé, McDonald’s, Nicoventures, BAT, ABInBev, foundations such as the IKEA Foundation,
Rockefeller Foundation, PepsiCo Foundation; governments such as Ireland, South Africa, Kuwait and Taiwan and NGOs such as the International
Food and Beverage Alliance (IFBA).
From
2016 to 2020, he served as Director (Vice-Chairman) of the Board of Pharmacielo, a biopharmaceutical health & wellness company, from
its early phase, to its listing on the Toronto Stock Exchange. Since August 2019, he has also served on the board of Redwood Green Corporation
(now called Cryomass Technologies Inc), from December 2019 as Chairman of the Board. This company is listed on the USA OTCQB stock exchange.
In addition, he serves on the board of the Fio Corporation, a big data and medical diagnostics company.
He
has acted as adviser to three WHO Directors-General and to UN Secretary-General Ban Ki Moon. Up to 2014 he served as Secretary-General
and Special Envoy to WHO / UN of the International Food and Beverage Alliance, a group of leading food and non-alcoholic beverage companies
with a global presence (including Unilever, Nestlé, McDonald’s, Coca-Cola, PepsiCo, Ferrero, Mars, General Mills, Mondeléz
and the Bel Group). He serves on the Board of Directors / Advisory Boards of selected health, wellness and medical diagnostics companies.
Up
to 2005, Dr. Human served as secretary general of the World Medical Association (WMA), the global representative body for physicians.
He was instrumental in the establishment of the World Health Professions Alliance, an alliance of the global representative bodies of
physicians, nurses, pharmacists, dentists and physical therapists. During 2006 he was elected to serve as the secretary-general of the
Africa Medical Association (AfMA). He is a fellow of the Russian and Romanian Academies of Medical Sciences. He is a published author,
international lecturer and health care consultant specializing in global health strategy, corporate and product transformation, harm
reduction, access to healthcare and health communication. He authored the book “Wise Nicotine” in 2009, in which the preferred
future for tobacco harm reduction and the emergence of next generation nicotine products was described. Editor of the book “Caring
Physicians of the World”, a project in collaboration with Pfizer Inc.
He
was a clinician for two decades, part of the pediatric endocrinology research and diabetes unit at the John Radcliffe Hospital and was
involved in the establishment of several medical centers, a hospital and emergency clinic in South Africa.
Dr.
Human qualified as a physician in South Africa and completed his postgraduate studies in family medicine and child health in South Africa
and Oxford, England. His business studies (MBA) were completed at the Edinburgh Business School.
Mario
Gobbo, Director
Mario
Gobbo has 35 years of banking and corporate finance experience in healthcare and energy. His expertise encompasses venture capital and
private equity as well as investment banking and strategic advisory services. Mr. Gobbo currently serves as acting CFO of Xcovery, a
cancer-based biotech company and on the Supervisory Board and is Chair of Cinkarna Celje, a fine chemicals for paints (titanium dioxide)
company in Celje, Slovenia. Until recently, he was on the board of Zavarovalnica Triglav, the largest Slovene insurance company spearheading
healthcare insurance in Central Europe and was Chairman of the Board and is Chair of the Audit Committee of Helix BioPharma, a Toronto-listed
biotech company developing interesting novel complex biomolecules to combat various cancers. As an executive director, he was also on
the board of Lazard Brothers, London.
While
Managing Director for Health Care Capital Markets and Advisory with Natixis Bleichroeder in New York, from 2006 to 2009, he secured transactions
for the bank’s M&A and equity capital markets pharmaceuticals and life sciences group. He obtained mandates for several IPOs
and follow-on transactions on NASDAQ, as well as advisory assignments for health care and medical devices companies. When with the International
Finance Corporation, a World Bank Group institution dealing with private sector investments, the team he led completed several highly
successful equity and loan investments in biotech and generic pharmaceutical companies and funds in India, Latin America, China and Central
Europe. From 1993 to 2001, he was with Lazard in London, where he created and managed their Central and Eastern European operations,
including Turkey. Mr. Gobbo advised on M&A, fundraising and privatization efforts for several key firms in the region.
Mario
Gobbo holds a Bachelor of Arts in Organic Chemistry from Harvard College, a Master of Science in Biochemistry from the University of
Colorado and an MBA, a Master of Business Economics and a PhD (Management) from the Wharton School of the University of Pennsylvania.
Mark
Radke, Director
Mark
Radke is a lawyer with a distinguished career in the area of financial services, specializing in federal securities regulation. As the
Chief of Staff of the Securities and Exchange Commission under Chairman Harvey Pitt, he was responsible for that agency’s rulemaking
in response to the Sarbanes Oxley Act. In private practice, as partner at several multinational law firms, he has represented corporations,
brokerage and accounting firms, hedge funds and individuals on corporate governance, compliance, and regulatory issues involving not
only the SEC but other federal and state regulators.
He
was active in advising clients on legislative initiatives that lead to the Dodd-Frank Act of 2010, and in subsequent efforts to extend,
implement or amend various components of that and other federal securities legislation.
As
an adjunct professor at the Georgetown University Law Center, he has taught classes in aspects of securities regulation since 1999. He
holds a B.A., University of Washington, J.D., University of Baltimore, LI.M., Securities Regulation, Georgetown University Law Center.
Simon
Langelier, Director
Simon
Langelier is currently a director of Imperial Brands PLC, a British multinational company with a comprehensive portfolio of traditional
and non-combustible tobacco and nicotine products.
Previously,
in his 30-year career with Philip Morris International, Simon Langelier served in several senior positions, including President Eastern
Europe, Middle East & Africa, President Eastern Asia and President of Next Generation Products & Adjacent Businesses. He was
also Managing Director in numerous countries in Europe and Colombia.
Mr.
Langelier is currently an Honorary Professorial Fellow at Lancaster University in the U.K, a member of the Dean’s Council of that
university’s Management School and a BSc Management Sciences graduate from the same institution.
Information
Concerning the Board of Directors and Certain Committees
The
Board of Directors currently consists of five directors, four of whom the Board of Directors has determined are independent within the
meaning of the rules of the OTCQB, which the Company has adopted as its definition of independence in the Audit Committee Charter. The
Board of Directors held four regularly scheduled meetings during the 2021 fiscal year, and two special meetings during the 2021 fiscal
year. Each of the directors attended all meetings of the Board of Directors and committees on which they served during the 2021 fiscal
year. The Board of Directors does not have a formal policy governing director attendance at its annual meeting of stockholders.
The
standing committees of the Board of Directors are the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance
Committee, each of which was formed in 2019.
Audit
Committee. The purpose of the Audit Committee is to oversee (i) the integrity of our financial statements and disclosures,
(ii) our compliance with legal and regulatory requirements, (iii) the qualifications, independence and performance of our
independent auditing firm (the “External Auditor”), (iv) the performance of our External Auditors, (v) our internal
control systems, and (vi) our procedures for monitoring compliance with our Code of Business Conduct and Ethics.
The
Audit Committee held four formal meetings during fiscal year 2021. The current members of the Audit Committee are Messrs. Gobbo (Chair)
and Radke.
The
Board of Directors has determined that each member of the Audit Committee meets the independence standards set forth in Rule 10A-3 promulgated
under the Exchange Act and the independence standards set forth in the rules of the OTCQB. The Board of Directors has determined that
Mr. Gobbo qualifies as an “audit committee financial expert” as defined in Item 407(d)(5)(ii) of Regulation S-K, promulgated
under the Exchange Act.
The
Audit Committee operates under a written charter that is reviewed annually. Under the charter, the Audit Committee is required to pre-approve
the audit and non-audit services to be performed by our independent registered public accounting firm.
Our
Audit Committee meets on a regular basis, at least quarterly and more frequently as necessary. Our Audit Committee’s primary function
is to assist our Board of Directors in fulfilling its oversight responsibilities by reviewing the financial information to be provided
to stockholders and others, reviewing our system of internal controls, which management has established, overseeing the audit and financial
reporting process, including the preapproval of services performed by our independent registered public accounting firm, and overseeing
certain areas of risk management.
Compensation
Committee. The Compensation Committee reviews the compensation strategy of the Company and consults with the Chief Executive Officer,
as needed, regarding the role of our compensation strategy in achieving our objectives and performance goals and the long-term interests
of our stockholders. The Compensation Committee has direct responsibility for approving the compensation of our Chief Executive Officer
and makes recommendations to the Board with respect to our other executive officers. The term “executive officer” has the
same meaning specified for the term “officer” in Rule 16a-1(f) under the Exchange Act.
Our
Chief Executive Officer sets the compensation of anyone whose compensation is not set by the Board and reports to the Board regarding
the basis for any such compensation if requested by it.
The
Compensation Committee may retain compensation consultants, outside counsel and other advisors as the Board deems appropriate to assist
it in discharging its duties.
The
Compensation Committee held one formal meeting during fiscal year 2021. The members of the Compensation Committee are Dr. Human (Chair),
and Mr. Langelier.
The
Compensation Committee operates under a written charter that is reviewed annually.
Nominating
and Corporate Governance Committee. The Nominating and Corporate Governance Committee identifies and recommends to the Board individuals
qualified to be nominated for election to the Board and recommends to the Board the members and Chairperson for each Board committee.
In
addition to stockholders’ general nominating rights provided in our Bylaws, stockholders may recommend director candidates for
consideration by the Board. The Nominating and Corporate Governance Committee will consider director candidates recommended by stockholders
if the recommendations are sent to the Board in accordance with the procedures in the bylaws. All director nominations submitted by stockholders
to the Board for its consideration must include all of the required information set forth in our Bylaws.
Director
Qualifications. In selecting nominees for director, without regard to the source of the recommendation, the Nominating and Corporate
Governance Committee believes that each director nominee should be evaluated based on his or her individual merits, taking into account
the needs of the Company and the composition of the Board. Members of the Board should have the highest professional and personal ethics,
consistent with our values and standards and Code of Ethics. At a minimum, a nominee must possess integrity, skill, leadership ability,
financial sophistication, and capacity to help guide us. Nominees should be committed to enhancing stockholder value and should have
sufficient time to carry out their duties and to provide insight and practical wisdom based on their experiences. Their service on other
boards of public companies should be limited to a number that permits them, given their individual circumstances, to responsibly perform
all director duties. In addition, the Nominating and Corporate Governance Committee considers all applicable statutory and regulatory
requirements and the requirements of any exchange upon which our common stock is listed or to which it may apply in the foreseeable future.
Evaluation
of Director Nominees. The Nominating and Corporate Governance Committee will typically employ a variety of methods for identifying
and evaluating nominees for director. The Nominating and Corporate Governance Committee regularly assesses the appropriate size of the
Board and whether any vacancies on the Board are expected due to retirement or otherwise. In the event that vacancies are anticipated,
or otherwise arise, the Nominating and Corporate Governance Committee will consider various potential candidates for director. Candidates
may come to the attention of the Nominating and Corporate Governance Committee through current directors, stockholders, or other companies
or persons. The Nominating and Corporate Governance Committee does not evaluate director candidates recommended by stockholders differently
than director candidates recommended by other sources. Director candidates may be evaluated at regular or special meetings of the Nominating
and Corporate Governance Committee and may be considered at any point during the year.
We
do not have a formal policy with regard to the consideration of diversity in identifying director nominees, but the Nominating and Corporate
Governance Committee strives to nominate directors with a variety of complementary skills so that, as a group, the Board will possess
the appropriate talent, skills, and expertise to oversee our businesses. In evaluating director nominations, the Nominating and Corporate
Governance Committee seeks to achieve a balance of knowledge, experience, and capability on the Board. In connection with this evaluation,
the Audit and Executive Oversight Committee will make a determination of whether to interview a prospective nominee based upon the Board’s
level of interest. If warranted, one or more members of the Nominating and Corporate Governance Committee, and others as appropriate,
will interview prospective nominees in person or by telephone. After completing this evaluation and any appropriate interviews, the Nominating
and Corporate Governance Committee will recommend the director nominees after consideration of all its directors’ input. The director
nominees are then selected by a majority of the independent directors on the Board, meeting in executive session and considering the
Nominating and Corporate Governance Committee’s recommendations.
The
Nominating and Corporate Governance Committee did not hold any meetings during the fiscal year 2021. The members of the Nominating and
Corporate Governance Committee are Messrs. Radke (Chair) and Mr. Langelier.
The
Board of Directors has determined that each member of the Nominating and Corporate Governance Committee meets the independence standards
set forth in Rule 10A-3 promulgated under the Exchange Act and the independence standards set forth in the New York Stock Exchange.
The
Nominating and Corporate Governance Committee operates under a written charter that is reviewed annually.
Stockholder
and Interested Party Communications with Directors
We
provide the opportunity for our stockholders and other interested parties to communicate with any member, or all members, of our Board
of Directors by mail. To communicate with our Board of Directors, correspondence should be addressed to our Board of Directors or any
one or more individual directors or group or committee of directors by either name or title. All such correspondence should be sent to
the following address:
The
Board of Directors of Cryomass Technologies Inc
c/o
Dr. Delon Human, Chairman of the Board
1001
Bannock Street, Suite 612, Denver, CO 80204
All
communications received as described above will be opened by our Secretary for the sole purpose of determining whether the contents constitute
a communication to our directors. Any contents that are not in the nature of advertising, promotions of a product or service, or patently
offensive material will be forwarded promptly to the director or directors to whom it is addressed. In the case of communications to
our Board of Directors or to any group of directors, our Secretary will make sufficient copies of the contents to send to each addressee.
Compliance
with Section 16(a) of the Exchange Act
Section
16(a) of the Exchange Act requires the Company’s directors, executive officers and persons who beneficially own 10% or more of
a class of securities registered under Section 12 of the Exchange Act to file reports of beneficial ownership and changes in beneficial
ownership with the SEC. Directors, executive officers and greater than 10% stockholders are required by the rules and regulations of
the SEC to furnish the Company with copies of all reports filed by them in compliance with Section 16(a).
During
the fiscal year ended December 31, 2019, the Company and its officers, directors and 10% shareholders (“Reporting Persons”)
were not subject to the insider trading reports under Section 16 of the Securities Exchange Act of 1934 (the “Exchange Act”).
On March 23, 2020 the Company became a reporting company under the Exchange Act and from that date Reporting Persons will be responsible
for such filings. At time of filing, all such reports that should have been filed have been filed.
Code
of Ethics and Business Conduct
We
have adopted a Code of Ethics that applies to all employees including our principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions. Our Code of Ethics is designed to deter wrongdoing and promote:
(i) honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and
professional relationships; (ii) full, fair, accurate, timely and understandable disclosure in reports and documents that we file
with, or submit to, the SEC and in our other public communications; (iii) compliance with applicable governmental laws, rules and
regulations; (iv) the prompt internal reporting of violations of the code to an appropriate person or persons identified in the
code; and (v) accountability for adherence to the code. Our Code of Ethics is available on our website at cryomass.com.
Legal
Proceedings
We
know of no material, existing or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceeding
or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial
shareholder, is an adverse party or has a material interest adverse to our company.
Family
Relationships
There
are no family relationships among our directors or executive officers.
Involvement
in Certain Legal Proceedings
None
of our directors, executive officers, promoters or control persons has been involved in any events requiring disclosure under Item 401(f)
of Regulation S-K, except as follows:
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Shareholders of Cryomass Technologies Inc.:
Opinion
on the Financial Statements
We
have audited the accompanying consolidated balance sheets of Cryomass Technologies Inc. (the “Company”) as of December 31,
2021 and 2020 and the related consolidated statements of operations, shareholders’ equity, and cash flows for the two years in
the period ended December 31, 2021, and the related notes and schedules (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 December 31,
2021 and 2020, and the results of its operations and its cash flows for the two years in the period ended December 31, 2021 and 2020,
in conformity with accounting principles generally accepted in the United States of America.
Going
Concern Matter
The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note
3 to the financial statements, the Company has suffered recurring losses from operations that raises substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The financial statements
do not include any adjustments that might result from the outcome of this uncertainty.
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 audit,
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 provide
a reasonable basis for our opinion.
Critical
Audit Matter
Critical
audit matters are matters arising from the current-period audit of the financial statements that were communicated or required to be
communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and
(2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.
/S/
BF Borgers CPA PC
BF
Borgers CPA PC
We
have served as the Company's auditor since 2020
Lakewood,
CO
March
28, 2022
CRYOMASS
TECHNOLOGIES INC.
CONSOLIDATED
BALANCE SHEETS
| | |
As
of December 31, | |
| | |
2021 | | |
2020 | |
| ASSETS | |
| | |
| |
| Current
assets: | |
| | | |
| | |
| Cash
and cash equivalents | |
$ | 5,772,839 | | |
$ | 329,839 | |
| Accounts
receivable, net | |
| - | | |
| 540,000 | |
| Prepaid
expenses | |
| 757,383 | | |
| 60,475 | |
| Assets
held for sale, current | |
| - | | |
| 6,867,840 | |
| Total
current assets | |
| 6,530,222 | | |
| 7,798,154 | |
| | |
| | | |
| | |
| Loan
receivable | |
| 3,600,000 | | |
| - | |
| Property
and equipment, net | |
| 225,000 | | |
| - | |
| Goodwill | |
| 1,190,000 | | |
| - | |
| Intangible
assets, net | |
| 4,038,600 | | |
| - | |
| Total
assets | |
$ | 15,583,822 | | |
$ | 7,798,154 | |
| | |
| | | |
| | |
| LIABILITIES
AND SHAREHOLDERS’ EQUITY | |
| | | |
| | |
| | |
| | | |
| | |
| Current
liabilities: | |
| | | |
| | |
| Accounts
payable and accrued expenses | |
$ | 1,881,648 | | |
$ | 2,248,235 | |
| Loans
payable | |
| - | | |
| 412,560 | |
| Taxes
payable | |
| 771 | | |
| 771 | |
| Liabilities
held for sale, current | |
| - | | |
| 1,464,285 | |
| Total
current liabilities | |
| 1,882,419 | | |
| 4,125,851 | |
| Notes
payable | |
| 177,083 | | |
| 52,083 | |
| Deferred
tax liability | |
| - | | |
| 14,926 | |
| Total
liabilities | |
| 2,059,502 | | |
| 4,192,860 | |
| | |
| | | |
| | |
| Commitments
and contingencies (Note 15) | |
| | | |
| | |
| | |
| | | |
| | |
| Shareholders’
equity: | |
| | | |
| | |
| Preferred stock, $0.001 par value, 100,000 shares authorized, no shares issued and outstanding respectively | |
| - | | |
| - | |
| Common stock, $0.001 par value, 500,000,000 shares authorized, 196,949,801 and 97,005,817 shares issued and outstanding at December 31, 2021 and 2020, respectively | |
| 196,950 | | |
| 97,006 | |
| Additional
paid-in capital | |
| 41,916,207 | | |
| 19,138,947 | |
| Common
stock to be issued | |
| - | | |
| 98,535 | |
| Accumulated
deficit | |
| (28,588,837 | ) | |
| (15,729,194 | ) |
| Total
shareholders’ equity | |
| 13,524,320 | | |
| 3,605,294 | |
| Total
liabilities and shareholders’ equity | |
$ | 15,583,822 | | |
$ | 7,798,154 | |
The
accompanying notes are an integral part of these consolidated financial statements.
CRYOMASS
TECHNOLOGIES INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
| | |
For
the Years Ended
December 31, | |
| | |
2021 | | |
2020 | |
| Net
sales | |
$ | - | | |
$ | 781,455 | |
| Cost of goods sold, inclusive of provision for inventory loss of $0 and $400,787 for the years ended December 31, 2021 and 2020, respectively | |
| - | | |
| 744,279 | |
| Gross
profit | |
| - | | |
| 37,176 | |
| | |
| | | |
| | |
| Operating
expenses: | |
| | | |
| | |
| Personnel
costs | |
| 3,207,110 | | |
| 2,473,730 | |
| Sales
and marketing | |
| 44,095 | | |
| 14,854 | |
| General
and administrative | |
| 3,939,131 | | |
| 2,338,599 | |
| Legal
and professional fees | |
| 757,828 | | |
| 1,744,834 | |
| Research
and development | |
| 43,663 | | |
| - | |
| Total
operating expenses | |
| 7,991,827 | | |
| 6,572,017 | |
| Loss
from operations | |
| (7,991,827 | ) | |
| (6,534,841 | ) |
| | |
| | | |
| | |
| Other
income (expenses): | |
| | | |
| | |
| Interest
expense | |
| (2,189,959 | ) | |
| (236,912 | ) |
| Gain
/ (loss) on foreign exchange | |
| 47,144 | | |
| (88,690 | ) |
| Total
other expenses | |
| (2,142,815 | ) | |
| (325,602 | ) |
| Net loss
from continuing operations, before taxes | |
| (10,134,642 | ) | |
| (6,860,443 | ) |
| Income
taxes | |
| - | | |
| - | |
| Net loss
from continuing operations | |
| (10,134,642 | ) | |
| (6,860,443 | ) |
| Net gain / (loss) from discontinued operations, net of tax (including loss on disposal of $3,021,724) | |
| (2,725,001 | ) | |
| (4,955,464 | ) |
| Net
loss | |
$ | (12,859,643 | ) | |
$ | (11,815,907 | ) |
| | |
| | | |
| | |
| Comprehensive
loss from discontinued operations | |
| - | | |
| - | |
| Comprehensive
loss | |
$ | (12,859,643 | ) | |
$ | (11,815,907 | ) |
| | |
| | | |
| | |
| Net loss per common share: | |
| | | |
| | |
| Loss
from continuing operations - basic and diluted | |
$ | (0.06 | ) | |
$ | (0.07 | ) |
| | |
| | | |
| | |
| Gain
/ (loss) from discontinued operations - basic and diluted | |
$ | (0.02 | ) | |
$ | (0.05 | ) |
| | |
| | | |
| | |
| Loss
per common share - basic and diluted | |
$ | (0.08 | ) | |
$ | (0.12 | ) |
| | |
| | | |
| | |
| Weighted average common
shares outstanding—basic and diluted | |
| 157,509,715 | | |
| 99,863,059 | |
The
accompanying notes are an integral part of these consolidated financial statements.
CRYOMASS
TECHNOLOGIES INC.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
| |
|
Common
Stock |
|
|
Additional
Paid-In |
|
Common
Stock
to be |
|
|
Accumulated |
|
|
Total
Shareholders’ |
|
| |
|
Shares |
|
|
Amount |
|
|
Capital |
|
Issued |
|
|
Deficit |
|
|
Equity |
|
| Balance
at December 31, 2019 (Revised) |
|
|
106,216,708 |
|
|
$ |
106,216 |
|
|
$ |
16,894,103 |
|
$ |
- |
|
|
$ |
(3,913,287 |
) |
|
$ |
13,087,032 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Issuance
of common stock pursuant to separation agreement |
|
|
1,175,549 |
|
|
$ |
1,176 |
|
|
$ |
148,824 |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
150,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Issuance
of common stock pursuant to accelerated vesting of RSU’s |
|
|
600,000 |
|
|
|
600 |
|
|
|
162,440 |
|
|
- |
|
|
|
- |
|
|
|
163,040 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Stock-based
compensation - shares |
|
|
757,895 |
|
|
|
758 |
|
|
|
570,954 |
|
|
- |
|
|
|
- |
|
|
|
571,712 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Stock-based
compensation - options |
|
|
- |
|
|
|
- |
|
|
|
555,532 |
|
|
- |
|
|
|
- |
|
|
|
555,532 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Share
cancellations |
|
|
(15,350,000 |
) |
|
|
(15,350 |
) |
|
|
15,350 |
|
|
- |
|
|
|
- |
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Share
issuance from sale of common stock |
|
|
3,605,665 |
|
|
|
3,606 |
|
|
|
541,744 |
|
|
- |
|
|
|
- |
|
|
|
545,350 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Common
stock to be issued |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
98,535 |
|
|
|
- |
|
|
|
98,535 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Beneficial
Conversion Feature of Note Payable |
|
|
- |
|
|
|
- |
|
|
|
250,000 |
|
|
- |
|
|
|
- |
|
|
|
250,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net
loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
- |
|
|
|
(11,815,907 |
) |
|
|
(11,815,907 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance
at December 31, 2020 |
|
|
97,005,817 |
|
|
$ |
97,006 |
|
|
$ |
19,138,947 |
|
$ |
98,535 |
|
|
$ |
(15,729,194 |
) |
|
$ |
3,605,294 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Share
issuance from sale of common stock |
|
|
53,191,819 |
|
|
|
53,192 |
|
|
|
9,556,368 |
|
|
(98,535 |
) |
|
|
- |
|
|
|
9,511,025 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Share
issuance related to CryoCann asset purchase |
|
|
10,000,000 |
|
|
|
10,000 |
|
|
|
1,794,500 |
|
|
- |
|
|
|
- |
|
|
|
1,804,500 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Share
issuance pursuant to employment agreements |
|
|
6,701,586 |
|
|
|
6,702 |
|
|
|
894,000 |
|
|
- |
|
|
|
- |
|
|
|
900,702 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Share
issuance in exchange for extinguishment of debt |
|
|
27,121,119 |
|
|
|
27,095 |
|
|
|
5,381,308 |
|
|
- |
|
|
|
- |
|
|
|
5,408,403 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Share
issuance in exchange for services |
|
|
2,837,333 |
|
|
|
2,837 |
|
|
|
965,175 |
|
|
- |
|
|
|
- |
|
|
|
968,012 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Share
issuance for interest on note payable |
|
|
92,127 |
|
|
|
118 |
|
|
|
49,823 |
|
|
- |
|
|
|
- |
|
|
|
49,941 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Stock-based
compensation - shares |
|
|
- |
|
|
|
- |
|
|
|
784,364 |
|
|
- |
|
|
|
- |
|
|
|
784,364 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Stock-based
compensation - options |
|
|
- |
|
|
|
- |
|
|
|
968,205 |
|
|
- |
|
|
|
- |
|
|
|
968,205 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Beneficial
Conversion Feature of Note Payable |
|
|
- |
|
|
|
- |
|
|
|
515,763 |
|
|
- |
|
|
|
- |
|
|
|
515,763 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair
value of warrants issued |
|
|
- |
|
|
|
- |
|
|
|
1,867,754 |
|
|
- |
|
|
|
- |
|
|
|
1,867,754 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net
loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
- |
|
|
|
(12,859,643 |
) |
|
|
(12,859,643 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance
at December 31, 2021 |
|
|
196,949,801 |
|
|
$ |
196,950 |
|
|
$ |
41,916,207 |
|
$ |
- |
|
|
$ |
(28,588,837 |
) |
|
$ |
13,524,320 |
|
The
accompanying notes are an integral part of these consolidated financial statements.
CRYOMASS
TECHNOLOGIES INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
| | |
For
the Years Ended
December 31, | |
| | |
2021 | | |
2020 | |
| CASH
FLOWS FROM OPERATING ACTIVITIES: | |
| | | |
| | |
| Net
loss | |
$ | (10,134,642 | ) | |
$ | (6,860,443 | ) |
| Adjustments
to reconcile net loss to net cash used in operating activities from continuing operations: | |
| | | |
| | |
| Amortization
of debt discount | |
| 1,547,181 | | |
| 52,083 | |
| Depreciation
and amortization expense | |
| 43,663 | | |
| - | |
| Bad
debt expense | |
| 540,000 | | |
| - | |
| Fair
value of common stock issued pursuant to service and advisory agreements | |
| 1,011,075 | | |
| 7,500 | |
| Payable
extinguishment for services not provided | |
| 318,970 | | |
| - | |
| Provision
for inventory loss | |
| - | | |
| 400,787 | |
| Stock-based
compensation expense | |
| 2,653,271 | | |
| 1,440,284 | |
| Deferred
income tax expense | |
| (14,926 | ) | |
| 10,235 | |
| Change
in operating assets and liabilities: | |
| | | |
| | |
| Accounts
receivable | |
| - | | |
| (540,000 | ) |
| Prepaid
expenses | |
| (696,908 | ) | |
| 40,080 | |
| Inventory,
net | |
| - | | |
| (60,787 | ) |
| Accounts
payable and accrued expenses | |
| (366,587 | ) | |
| 1,493,385 | |
| Taxes
payable | |
| - | | |
| 771 | |
| Net
cash used in operating activities from continuing operations | |
| (5,098,903 | ) | |
| (4,016,105 | ) |
| Net
(used in) / provided by operating activities from discontinued operations | |
| (501,609 | ) | |
| 266,484 | |
| Net
cash used in operating activities | |
| (5,600,512 | ) | |
| (3,749,621 | ) |
| CASH
FLOWS FROM INVESTING ACTIVITIES: | |
| | | |
| | |
| Cash
Payment for CryoCann asset purchase | |
| (1,000,000 | ) | |
| - | |
| Payoff
of CryoCann loan agreement at closing | |
| (1,247,684 | ) | |
| - | |
| Purchase
of property and equipment | |
| (225,000 | ) | |
| - | |
| Net
cash used in investing activities from continuing operations | |
| (2,472,684 | ) | |
| - | |
| Net
cash used in investing activities from discontinued operations | |
| (330,560 | ) | |
| (693,255 | ) |
| Net
cash used in investing activities | |
| (2,803,244 | ) | |
| (693,255 | ) |
| CASH
FLOWS FROM FINANCING ACTIVITIES: | |
| | | |
| | |
| Proceeds
from notes payable, related parties | |
| 237,590 | | |
| - | |
| Repayment
of notes payable, related parties | |
| (237,590 | ) | |
| - | |
| Proceeds
from issuance of common stock | |
| 10,308,000 | | |
| 537,850 | |
| Proceeds
from common stock subscribed and to be issued | |
| - | | |
| 98,535 | |
| Proceeds
from loans payable, current | |
| 286,441 | | |
| - | |
| Repayment
of loans payable, current | |
| (698,800 | ) | |
| 412,560 | |
| Proceeds
from notes payable | |
| 4,900,000 | | |
| 250,000 | |
| Repayment
of seller note for acquisition | |
| (1,173,016 | ) | |
| - | |
| Related
party note disbursement | |
| (281,771 | ) | |
| - | |
| Net
cash provided by financing activities from continuing operations | |
| 13,340,854 | | |
| 1,298,945 | |
| Net
cash provided by financing activities from discontinued operations | |
| 505,902 | | |
| - | |
| Net
cash provided by financing activities | |
| 13,846,756 | | |
| 1,298,945 | |
| Net
increase / (decrease) in cash from continuing operations | |
| 5,769,267 | | |
| (2,727,395 | ) |
| Net
decrease in cash from discontinued operations | |
| (326,267 | ) | |
| (426,771 | ) |
| Cash
at beginning of period | |
| 329,839 | | |
| 3,473,770 | |
| Cash
at end of period | |
$ | 5,772,839 | | |
$ | 329,839 | |
| Supplemental
disclosure of cash flow information: | |
| | | |
| | |
| Cash
paid for interest | |
$ | 449,068 | | |
$ | 162,810 | |
| Supplemental
disclosure of non-cash investing and financing activities: | |
| | | |
| | |
| Common
stock issued pursuant to separation agreement | |
$ | - | | |
$ | 150,000 | |
| Common
stock issued pursuant to vesting of restricted stock units | |
$ | 2,851,103 | | |
$ | 163,040 | |
| Loan
receivable issued pursuant to disposal of discontinued operations | |
$ | 3,600,000 | | |
$ | - | |
The
accompanying notes are an integral part of these consolidated financial statements.
CRYOMASS
TECHNOLOGIES INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
1.
NATURE OF THE BUSINESS
Cryomass
Technologies Inc (“Cryomass Technologies” or the “Company”) began as Auto Tool Technologies Inc., which was incorporated
under the laws of the State of Nevada on May 10, 2011. The Company’s name was changed to AFC Building Technologies Inc. effective
January 10, 2014. Effective April 26, 2018, the Company changed its name to First Colombia Development Corp. Effective October 14, 2019,
the Company changed its name to Redwood Green Corp. Effective September 1, 2020, the Company changed its name to Andina Gold Corp. On
July 15, 2021, the Company entered into a plan of merger with its wholly-owned subsidiary, Cryomass Technologies Inc a Nevada corporation,
pursuant to which we agreed that subsidiary would merge with and into our company. Following the consummation of the merger, the separate
existence of the subsidiary ceased, and we continued as the surviving corporation with our name changed to Cryomass Technologies Inc.
effective August 27, 2021. Our ticker symbol changed from AGOL to CRYM.
The
Company’s principal office is located at 1001 Bannock St., Suite 612, Denver, CO 80204, and its telephone number is 303-416-7208.
The Company’s website is www.cryomass.com. Information appearing on the website is not incorporated by reference into this prospectus.
The
Company over its history has explored a number of different business opportunities.
On
May 10, 2018, the Company acquired all the issued and outstanding share capital of First Colombia Devco S.A.S. (“Devco”)
a Colombian company and began to establish various business ventures in Colombia in the agriculture and real estate development, tourism,
and infrastructure sectors before commencing to phase them out in April 2019.
On
July 1, 2019, the Company acquired 100% of the membership interests in General Extract, LLC (“General Extract”), a Colorado
limited liability company. General Extract was founded in 2015 as an importer, distributor, broker and postprocessor of hemp and hemp
derivatives. The Company acquired all of the issued and outstanding membership interests, including business plans and access to contacts.
Effective August 27, 2021, General Extract became Cryomass LLC.
On
July 15, 2019, the Company, through its wholly owned subsidiary Good Acquisition Co., entered into a Membership Interest Purchase Agreement
to acquire cannabis-related intellectual property and other assets of Critical Mass Industries LLC DBA Good Meds (“CMI” and/or
“Good Meds”), a Colorado limited liability company (“CMI Transaction”). CMI is licensed by the Marijuana Enforcement
Division of Colorado Department of Revenue to produce cannabis and cannabis products under its six licenses. These licenses allow for
cultivation, manufacturing of infused products and retail distribution. At the time the Company entered into the Membership Interest
Purchase Agreement, Colorado law prohibited public companies, including the Company, from owning cannabis licenses. Therefore, CMI spun
off certain assets acquired by the Company. Under the terms of the Membership Interest Purchase Agreement, CMI retained the cannabis
license, inventory and accounts receivable (the “Cannabis License Assets”) and continued to operate the cannabis business
related to those assets. In consideration for the transfer of the acquired assets, the Company delivered 13,553,233 shares of the Company
common stock, in addition to $1,999,770 in cash to CMI.
Good
Meds, the operating unit of CMI, is based in Denver, CO, and operates in a 60,000-square-foot cultivation and processing facility. This
facility produces cannabis for sale as dry flower and biomass input for processing into Marijuana-Infused Products (“MIP”),
such as live resin, wax and budder. Good Meds also owns and operates two medical cannabis dispensaries located in Lakewood, CO and Englewood,
CO. The business has been in operation since 2009.
CRYOMASS
TECHNOLOGIES INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Effective
December 31, 2021, we entered into a restated and amended administrative services agreement, terminated our license and marketing agreements,
and restated the asset purchase agreement with CMI and affiliates. As a result of these agreements, we disposed of all CMI-related assets
and extinguished any and all related obligations. For clarity, we have no management or operations decision-making right or responsibility,
nor any access to future economic benefits from operation of the assets. Therefore, upon commencing these agreements, we determined that
CMI no longer qualifies as a variable interest entity as of December 31, 2021.
Beginning
in March 2020, an evaluation of various strategic alternatives was followed by the decision to sell the Colorado-based assets and refocus
its attention on unique opportunities for gold exploration in Colombia. In August 2020, the Company established a wholly owned Colombian
subsidiary, Andina Gold Colombia SAS for this purpose. In December 2020, due to the death of the top geologist exploring opportunities
on behalf of the Company, and the effects of the ongoing Coronavirus pandemic, the Company determined that pursuit of gold exploration
in Colombia was no longer a practical alternative.
On
June 22, 2021, the Company entered into an Asset Purchase Agreement with Cryocann USA Corp, a California corporation (“Cryocann”),
pursuant to which Company acquired substantially all the assets of Cryocann. The aggregate purchase price was $3,500,000 million in cash
and 10,000,000 shares of Company common stock As part of the Cryocann Acquisition, we retained both Cryocann employees, who have expert
knowledge of the industry, related participants, customers and the acquired patented technology. Under their employment agreements, each
employee may receive compensation if specific performance targets are met in association with our future operating performance when the
Cryocann technology enters the market. The technology and assets acquired from Cryocann are operated from the Company’s subsidiary,
Cryomass LLC. The patented cryo-mechanical technology is for the separation of plant materials in the harvesting of hemp and cannabis,
and potentially other high value crops such as hops. We believe this technology will reduce processing costs and increases the quality
of extracted compounds. We are exploring the application of the underlying technology to a broad range of industries that handle high-value
materials and that could benefit from our precision capture methods. We anticipate that cannabis and hemp will be the first in a series
of such industries.
To
develop and commercialize the technology, we contracted with an independent engineering and manufacturing firm to refine the design of
our cryo-mechanical system for the handling of harvested hemp, cannabis and other high-value plants. The system exploits CryoMass’s
U.S.-patented process for the controlled application of liquid nitrogen to stabilize and separate the structural elements of gross plant
material. The device currently under development is scaled for highway transportability and is being optimized for the low-cost collection
of fully intact hemp and cannabis trichomes. It can be used within minutes after plants have been cut and can also efficiently capture
trichomes from fresh frozen or even dried plant parts, including trim. The device’s through-put capacity is expected to be approximately
600 kilograms of gross plant material per hour. The advanced design for the equipment has been completed, and testing
of a prototype machine is currently underway. The engineering and manufacturing firm has indicated that it has the capacity to build
10 to 15 such devices per month.
In
November we retained a second engineering and manufacturing firm to independently develop a separate machine design that applies
our patented process. We expect their work to help strengthen the power and robustness of our technology. In addition, it opens
a channel to a second manufacturing source.
The
first functional “beta” machine is expected to be ready for field testing by a third-party cannabis producer by mid-2022. The
first production-run machine is expected to be ready for use towards the end of the second quarter 2022. At that moment, we expect to
start helping our first tolling client (fee for service) increase its margins by cutting the cost of handling, processing and
refining its hemp or cannabis and increasing the resulting material’s value to formulators of end products.
CRYOMASS
TECHNOLOGIES INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Management
believes the CryoMass system will deliver a compelling combination of cost and time savings while enhancing product quality
and quantity for largescale cultivators and processors of hemp and cannabis. The use of a CryoMass system – which
can be trucked to and operated on the fields of most large hemp and cannabis growers or be permanently installed at a user’s processing
facility – should eliminate many of the costs that come with traditional practices, especially the labor, fuel and capital
costs of drying and curing hemp or cannabis that is grown for the extraction of end products. With traditional practices, harvested
plants are transported to a specially constructed drying house and then treated for a week or longer under controlled conditions of temperature
and humidity. It’s a costly method. With our system, harvested plants are simply fed into the front end of a CryoMass machine,
and minutes later fully intact trichomes are collected at the back end of the machine. With traditional practices and their seven-to-ten
days of handling and drying, a large share of a plant’s valuable trichomes break off and are lost. Then the remaining trichomes
are damaged by long exposure to oxygen and by the evaporation of their volatile terpenes. The CryoMass system, on the other
hand, stabilizes and collects fully intact trichomes at harvest, leaving no opportunity for such wasteful loss. Field-captured trichomes
are the cleanest element of a hemp or cannabis plant because, unlike the rest of the plant, trichomes do not readily take up heavy metals, pesticides or
other common soil contaminants. As a product for end-users, field-captured trichomes are closest to being contaminant free. As feedstock
for manufacturers of extracts and oils, they are the key to the purest products possible.
Because
the trichomes collected with CryoMass technology represent only 10% or so of a plant’s weight and volume, they are cheaper
to ship and store than gross plant material. For the same reason and because trichomes are free of the waxes and other unwanted
materials found in the rest of the plant, processing trichomes into oils and extracts can be far quicker, cheaper and easier
than processing gross plant material. Even trichomes captured from dried or frozen plant parts deliver this cost-saving advantage to
processors of oils and extracts. The three-dimensional advantage achievable with the CryoMass system – first-stage
cost savings, product enhancement and downstream cost savings – can as much as double a crop’s wholesale value. And in some
jurisdictions, users may enjoy a reduction in excise taxes levied on cannabis and hemp harvests, which typically are tied to the gross
weight of hemp or cannabis that is removed from the field.
Production
and processing of hemp and cannabis is a huge, worldwide industry. In the U.S., for example, the wholesale value of the cannabis crop
from just the 11 states permitting adult-use and medical cannabis exceeds $6 billion annually.1 Growth in the U.S.
and in the worldwide market is likely fed in part by the growing acceptance of medicinal cannabis products and anticipated legislative
changes in various jurisdictions worldwide.
And
that may only be chapter one of the Company’s story. Several other high-value plants, including species that are important for
health and wellness products, wrap their valuable elements in trichomes. The technology we are developing for hemp and cannabis may have
profitable application to those other species as well. We intend to find out.
In
September, we were granted an additional patent for our process from the Chinese Intellectual Property Office. We currently are
taking steps to gain further protection for our intellectual property through the European Union Intellectual Property Office and several
other international jurisdictions.
On
November 17th we announced the completion of a $10.3 million equity financing. The financing and the earlier conversion
of substantially all the company’s debt into common stock left the Company with a strong balance sheet and adequate resources for
our planned business development during the coming twelve months. In connection with the financing, 1,010,000 shares and 760,000
shares of CryoMass Technologies common stock were purchased by CEO Christian Noël and Chairman of the Board Delon Human,
respectively.
CRYOMASS
TECHNOLOGIES INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
2.
VARIABLE INTEREST ENTITY
Pursuant
to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Section 810, Consolidation
(“ASC 810”), the Company is required to include in its consolidated financial statements, the financial statements of
its variable interest entity (“VIE”). ASC 810 requires a VIE to be consolidated if that company is subject to a majority
of the risk of loss for the VIE or is entitled to receive a majority of the VIE’s residual returns. VIEs are those entities in
which a company, through contractual arrangements, bears the risk of, and enjoys the rewards normally associated with ownership of the
entity, and therefore the company is the primary beneficiary of the entity.
Under
ASC 810, a reporting entity has a controlling financial interest in a VIE, and must consolidate that VIE, if the total equity investment
at risk is not sufficient to permit the legal entity to finance its activities without additional subordinated financial support provided
by any parties, including equity holders. Beginning July 15, 2019, the Company consolidated CMI as a VIE pursuant to certain intellectual
property, administrative and consulting agreements in which the Company is deemed the primary beneficiary of CMI. Accordingly, the results
of CMI have been included in the accompanying consolidated financial statements. Effective December 31, 2021, the Company entered into
an asset purchase agreement involving its VIE with Critical Mass Industries, Inc. and John Knapp, the sole shareholder of Critical Mass
Industries, Inc., to divest its discontinued operations in cannabis cultivation, where the buyer assumes all assets and liabilities from
the Company. Therefore, with regards to both criteria discussed above, the Company no longer has the power to direct activities, absorb
losses, or receive benefits from the VIE and as such will no longer consolidate with CMI.
| CMI
Assets & Liabilities |
| | |
As
of December 31, | |
| Description | |
2021 | | |
2020 | |
| Current assets | |
| | | |
| | |
| Cash and
cash equivalents | |
$ | - | | |
$ | 196,445 | |
| Accounts receivable,
net | |
| - | | |
| 66,043 | |
| Inventory,
net | |
| - | | |
| 791,868 | |
| Total current assets | |
| - | | |
| 1,054,356 | |
| | |
| | | |
| | |
| Total assets | |
$ | - | | |
$ | 1,054,356 | |
| | |
| | | |
| | |
| Current liabilities | |
| | | |
| | |
| Accounts
payable and accrued expenses | |
$ | - | | |
$ | 211,463 | |
| Total current liabilities | |
| - | | |
| 211,463 | |
| | |
| | | |
| | |
| Total liabilities | |
| - | | |
| 211,463 | |
| Net assets | |
$ | - | | |
$ | 842,893 | |
CRYOMASS
TECHNOLOGIES INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
| CMI
Statement of Operations |
| | |
For
the Years Ended
December 31, | |
| Description | |
2021 | | |
2020 | |
| Net sales | |
$ | 5,891,894 | | |
$ | 6,860,282 | |
| Cost of goods sold,
inclusive of depreciation | |
| 4,132,696 | | |
| 4,901,237 | |
| Gross profit | |
$ | 1,759,198 | | |
$ | 1,959,045 | |
| | |
| | | |
| | |
| Operating expenses | |
| | | |
| | |
| Personnel costs | |
| 428,728 | | |
| 402,389 | |
| Sales and marketing | |
| 816,683 | | |
| 908,502 | |
| General and administrative | |
| 112,934 | | |
| 231,376 | |
| Legal and professional
fees | |
| 44,092 | | |
| 156,782 | |
| Amortization
expense | |
| - | | |
| 26,901 | |
| Total operating expenses | |
| 1,402,437 | | |
| 1,725,950 | |
| Gain from operations | |
$ | 356,761 | | |
$ | 233,095 | |
| | |
| | | |
| | |
| Other income / (expense) | |
| | | |
| | |
| Interest expense | |
| (49,803 | ) | |
| (153,592 | ) |
| Goodwill impairment | |
| - | | |
| (4,663,514 | ) |
| Intangibles impairment | |
| - | | |
| (361,218 | |
| Other
income | |
| - | | |
| - | |
| Total other income
/ (expense) | |
| (49,803 | ) | |
| (5,178,324 | ) |
| Loss on disposal
of discontinued operations | |
| (3,021,724 | ) | |
| - | |
| Net income / (loss),
before taxes | |
| (2,714,766 | ) | |
| (4,945,229 | ) |
| Income taxes | |
| (10,235 | ) | |
| (10,235 | ) |
| Net income / (loss), net of taxes | |
$ | (2,725,001 | ) | |
$ | (4,955,464 | ) |
As
a result of new agreements entered with CMI on December 31, 2021, as further detailed in Note 1 above, we disposed of all CMI-related
assets and extinguished any and all related obligations in exchange for a $3,600,000 promissory note due to us no later than December
31, 2023. When comparing the carrying value of CMI-related net assets to the value of the loan receivable, we calculated a loss on disposal
of discontinued operations of $3,021,724.
3.
GOING CONCERN UNCERTAINTY, FINANCIAL CONDITIONS AND MANAGEMENT’S PLANS
The
Company believes it has sufficient cash available to fund its anticipated level of operations for at least the next twelve months. During
the year, the Company raised $10,548,535 in common stock and $4,900,000 in convertible notes which were all converted to common stock.
While
management believes the Company has sufficient cash available to support an anticipated level of operations for at least the next twelve
months, the continuation of our company as a going concern is dependent upon the continued financial support from its shareholders, the
ability of our company to obtain necessary equity or debt financing to continue operations, the sale of assets, and ultimately the attainment
of profitable operations. For the year ended December 31, 2021, our company used $5,600,512 of cash for operating activities, incurred
a net loss of $12,859,643 and has an accumulated deficit of $28,588,837 since inception.
On
March 11, 2020, the 2019 novel coronavirus (“COVID-19) was characterized as a “pandemic.” The Company’s
operations were impacted during the year in the United States. The impact of COVID-19 developments and uncertainty with respect
to the economic effects of the pandemic has introduced significant volatility in the financial markets.
The
Company assessed certain accounting matters that require consideration of forecasted financial information, including, but not limited
to, the carrying value of the Company’s goodwill, intangible assets, and other long-lived assets, and valuation allowances in context
with the information reasonably available to the Company and the unknown future impacts of COVID-19 as of December 31, 2021 and
through the date of this report. The Company’s future assessment of the magnitude and duration of COVID-19, as well as other
factors, could result in material impacts to the Consolidated Financial Statements in future reporting periods.
CRYOMASS
TECHNOLOGIES INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
The
COVID-19 pandemic and responses to this crisis, including actions taken by federal, state and local governments, have had an impact on
the operations of the company, including, without limitation, the following: reduced staffing due to employee suspected conditions and
social distancing measures; constraints on productivity; management and staff non-essential business-related travel was constrained due
to stay-at-home orders; most employees have shifted to remote work resulting in loss of productivity; consumers visiting dispensaries
operated under license impacted by stay-at-home orders. Management continues to monitor the COVID-19 pandemic situation and federal,
state and local recommendations and will provide updates as appropriate.
4.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The
accompanying consolidated financial statements have been prepared in accordance with GAAP. The consolidated financial statements include
the accounts of the Cryomass Technologies Inc, Cryomass LLC, and CMI, a VIE for which the Company was deemed to be the primary beneficiary.
All significant intercompany balances and transactions have been eliminated in consolidation. The Company operates as one segment from
its corporate headquarters in Colorado.
Effective
December 31, 2021, the Company entered into an asset purchase agreement involving its VIE with Critical Mass Industries, Inc. and John
Knapp, the sole shareholder of Critical Mass Industries, Inc., to divest its discontinued operations in cannabis cultivation, where the
buyer assumes all assets and liabilities from the Company. Therefore, with regards to both criteria discussed above, the Company no longer
has the power to direct activities, absorb losses, or receive benefits from the VIE and as such will no longer consolidate with CMI.
Use
of Estimates
The
preparation of the Company’s financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of expenses during the reporting period. Significant estimates and assumptions reflected in these
financial statements include, but are not limited to determining the fair value of the assets acquired and liabilities assumed in acquisition,
determining the fair value and potential impairment of inventory, determining the useful lives and potential impairment of long-lived
assets and potential impairment of goodwill. The Company bases its estimates on historical experience, known trends and other market-specific
or other relevant factors that it believes to be reasonable under the circumstances. On an ongoing basis, management evaluates its estimates
when there are changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known.
Actual results could differ from those estimates.
Reclassifications
Certain
items in the consolidated financial statements were reclassified from prior periods for presentation purposes.
Cash
and Cash Equivalents
The
Company considers all highly liquid instruments with maturities of three months or less at the time of issuance to be cash equivalents.
CRYOMASS
TECHNOLOGIES INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Concentrations
of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit risk consist principally of cash. Periodically, the Company
maintains deposits in accredited financial institutions in excess of federally insured limits. The Company deposits its cash in financial
institutions that it believes have high credit quality and has not experienced any losses on such accounts. Additionally, the company
entered into a $3,600,000 loan receivable in conjunction with the disposal of discontinued operations, which is backed by the assets
of the discontinued operations, should the borrower default. Aside from these items, the Company does not believe it is exposed to any
unusual credit risk.
Purchase
Accounting for Acquisitions
We
apply the acquisition method of accounting for a business combination. In general, this methodology requires us to record assets acquired
and liabilities assumed at their respective fair values at the date of acquisition. Any amount of the purchase price paid that is in
excess of the estimated fair value of the net assets acquired is recorded as goodwill. For certain acquisitions, we also record a liability
for contingent consideration based on estimated future business performance. We monitor our assumptions surrounding these estimated future
cash flows and, if there is a significant change, would record an adjustment to the contingent consideration liability and a corresponding
adjustment to either income or expense. We determine fair value using widely accepted valuation techniques, primarily discounted cash
flow and market multiple analyses. These types of analyses require us to make assumptions and estimates regarding industry and economic
factors, the profitability of future business strategies, discount rates and cash flow.
If
actual results are not consistent with our assumptions and estimates, or our assumptions and estimates change due to new information,
we may be exposed to an impairment charge in the future. If the contingent consideration paid for any of our acquisitions differs from
the amount initially recorded, we would record either income or expense associated with the change in liability.
Variable
Interest Entities
The
Company accounts for variable interest entities in accordance with FASB ASC Topic 810, Consolidation. Management evaluates
the relationship between the Company and VIEs and the economic benefit flow of the contractual arrangement with the VIEs. Management
determines if the Company is the primary beneficiary of a VIE through a qualitative analysis that identifies which variable interest
holder has the controlling financial interest in the VIE. The variable interest holder who has both of the following has the controlling
financial interest and is the primary beneficiary: (1) the power to direct the activities of the VIE that most significantly impact the
VIE’s economic performance and (2) the obligation to absorb losses of, or the right to receive benefits from, the VIE that could
potentially be significant to the VIE. In performing our analysis, we consider all relevant facts and circumstances, including: the design
and activities of the VIE, the terms of the contracts the VIE has entered into, the nature of the VIE’s variable interests issued
and how they were negotiated with or marketed to potential investors, and which parties participated significantly in the design or redesign
of the entity. As a result of such evaluation, management concluded that the Company is the primary beneficiary of CMI and consolidates
the financial results of this entity. Effective December 31, 2021, the Company entered into an asset purchase agreement involving its
VIE with Critical Mass Industries, Inc. and John Knapp, the sole shareholder of Critical Mass Industries, Inc., to divest its discontinued
operations in cannabis cultivation, where the buyer assumes all assets and liabilities from the Company. Therefore, with regards to both
criteria discussed above, the Company no longer has the power to direct activities, absorb losses, or receive benefits from the VIE and
as such will no longer consolidate with CMI.
Accounts
Receivable, net
Accounts
receivable, net is comprised of balances due from customers and are recorded at the invoiced amount. Past due balances are determined
based on the contractual terms of the arrangements. Accounts receivable are accrued against when management determines, after considering
economic and business conditions and all means of collection efforts have been exhausted and the potential for recovery is considered
remote, that the collection of receivables is doubtful. Accounts receivable amounts, net of allowance for doubtful accounts, were $0
and $606,043 as of December 31, 2021 and 2020, respectively. This includes $0 and $66,043, respectively, related to the VIE. Uncollectible
accounts previously recorded as receivables are recognized as bad debt expense, with a corresponding decrease to accounts receivable.
Bad debt expense was $541,099 and $188,548 for the years ended December 31, 2021 and 2020, respectively. This amount includes $1,099
and $4,548, respectively, related to the VIE, which is classified as discontinued operations.
CRYOMASS
TECHNOLOGIES INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Inventory,
net
Inventory,
net is comprised of work-in-process and finished goods consisting of cannabis and cannabidiol products. Cost includes expenditures directly
related to the manufacturing process as well as suitable portions of related production overheads, based on normal operating capacity.
Inventory, net is stated at the lower of cost or net realizable value. The Company compares the cost of inventory with market value and
writes down inventories to net realizable value, if lower. In evaluating whether inventories are stated at lower of cost or net realizable
value, management considers such factors as inventories on hand, physical deterioration, obsolescence, changes in price levels, estimated
time to sell such inventories and current market conditions. Due to changing market conditions, management conducted a thorough review
of its inventory. As a result, a provision for inventory losses of $0 and $400,787 was charged against cost of goods sold during the
years ended December 31, 2021 and 2020, respectively, due to a write down of inventory to its net realizable value. This was based on
the Company’s best estimates of product sales prices and customer demand patterns. It is at least reasonably possible that the
estimates used by the Company to determine its provision for inventory losses will be materially different from the actual amounts or
results. These differences could result in materially higher than expected inventory provisions, which could have a materially adverse
effect on the Company’s results of operations and financial conditions in the near term.
Revenue
Recognition
Under
FASB Topic 606, Revenue from Contacts with Customers (“ASC 606”), the Company recognizes revenue when the customer
obtains control of promised goods or services, in an amount that reflects the consideration which is expected to be received in exchange
for those goods or services. The Company recognizes revenue following the five-step model prescribed under ASC 606: (i) identify contract(s)
with a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the
transaction price to the performance obligation(s) in the contract; and (v) recognize revenues when (or as) the Company satisfies a performance
obligation.
Discontinued
Operations
The
Company’s revenue consists of sales of cannabis and ancillary products to both retail consumers and wholesale customers. Revenue
for retail customers is recognized upon completion of the transaction in the point of sale system and satisfaction of the sale by providing
the corresponding inventory at the retail location. Revenue for wholesale customers is recognized upon acceptance of the physical goods
and confirmation by acceptance of the inventory in the regulatory marijuana enforcement tracking reporting compliance (“METRC”)
system. Revenue is recognized upon transfer of control of promised products to customers, generally as risk of loss passes, in an amount
that reflects the consideration the Company expects to receive in exchange for those products. Taxes collected from customers, which
are subsequently remitted to governmental authorities, are excluded from revenue.
Retail
customer loyalty liabilities are recognized in the period in which they are incurred and will often be retired without being utilized.
Shipping and handling costs are expensed as incurred and are included in cost of sales, which were not material for the years ended December
31, 2021 and 2020.
The
Company operates in a highly regulated environment in which state regulatory approval is required prior to the customer being able to
purchase the product, either through the Colorado Marijuana Enforcement Division for wholesale clients or the Colorado Department of
Public Health and Environment for medical patients.
Expenses
Operating
Expenses
Operating
expenses encompass personnel costs, sales and marketing expenses, general and administrative expenses, professional and legal fees and
depreciation and amortization related to the property and equipment and intangibles acquired through the acquisition of CMI and Cryocann.
Personnel costs consist primarily of consulting expense and administrative salaries and wages. Sales and marketing expenses consist primarily
of advertising and marketing, and salaries related to sales and marketing employees. General and administrative expenses are comprised
of travel expenses, accounting expenses, and board fees. Professional services are principally comprised of outside legal and professional
fees.
Discontinued
Operations
Cost
of Goods Sold, Net of Depreciation and Amortization
Cost
of goods sold primarily consisted of allocated salaries and wages of employees directly related with the production process, allocated
depreciation and amortization directly related to the production process, cultivation supplies, rent and utilities.
CRYOMASS
TECHNOLOGIES INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Other
Expense, net
Other
expense, net consisted of interest expense, other income and (loss) gain on foreign exchange.
Stock-Based
Compensation
The
fair value of restricted stock units (“RSUs”) granted are measured on the grant date using the closing price
of the Company’s common shares on the grant date. For stock options, the Company engages a valuation firm to calculate the grant
date fair value of the options issued. The Company accounts for forfeitures as they occur, rather than estimating expected forfeitures
over the course of a vesting period. All stock-based compensation costs are recorded in general and administrative expenses in the consolidated
statements of operations.
Property
and Equipment, net
Purchase
of property and equipment are recorded at cost. Improvements and replacements of property and equipment are capitalized. Maintenance
and repairs that do not improve or extend the lives of property and equipment are charged to expense as incurred. When assets are sold
or retired, their cost and related accumulated depreciation are removed from the accounts and any gain or loss is reported in the consolidated
statements of operations. Depreciation and amortization expense is recognized using the straight-line method over the estimated useful
life of each asset, as follows:
| |
|
Estimated
Useful Life |
| Computer
equipment |
|
3 – 5 years |
| Furniture
and fixtures |
|
5 – 7 years |
| Machinery
and equipment |
|
5 – 8 years |
| Leasehold
improvements |
|
Shorter of lease term or 15 years |
Goodwill
and Intangible Assets
Goodwill
represents the excess of the purchase price of an acquired entity over the fair value of identifiable tangible and intangible assets
acquired and liabilities assumed in a business combination.
Indefinite-lived
intangible assets established in connection with business combinations consists of in process research and development. Intangible assets
with indefinite lives are recorded at their estimated fair value at the date of acquisition. Once in process research and development
is placed in service, it will be amortized over the estimated useful life.
Intangible
assets with finite lives are recorded at their estimated fair value at the date of acquisition and are amortized over their estimated
useful lives using the straight-line method. Amortization of assets ceases upon designation as held for sale. The estimated useful lives
of intangible assets are detailed in the table below:
| |
|
Estimated
Useful Life |
| Patent |
|
10 years |
| In
process research and development |
|
Indefinite |
CRYOMASS
TECHNOLOGIES INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Impairment
of Goodwill and Intangible Assets
Goodwill
Goodwill
is not amortized, but instead is tested annually at December 31 for impairment and upon the occurrence of certain events or substantive
changes in circumstances.
We
account for the impairment of goodwill under the provisions of Financial Accounting Standards Board (FASB) Accounting Standard Update
2017-04 (“ASU 2017-04”), “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment” and FASB Accounting Standards Codification (ASC) 350-20-35, Intangibles – Goodwill and Other – Goodwill.
The
Company performs impairment testing for goodwill by performing the following steps: 1) evaluate the relevant events or circumstances
to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, 2) if yes to
step 1, calculate the fair value of the reporting unit and compare it with its carrying amount, including goodwill, 3) recognize impairment,
limited to the total amount of goodwill allocated to that reporting unit, equal to the excess of the carrying value of a reporting unit
over its fair value.
During
the year ended December 31, 2020, the Company concluded that goodwill resulting from the CMI transaction was impaired, resulting in a
$4,663,514 impairment charge included in net loss from discontinued operations.
In
accordance with ASC 350, as of December 31, 2021, management concluded that the goodwill resulting from the Cryocann acquisition was
not impaired.
Indefinite-Lived
Intangible Assets and Intangible Assets Subject to Amortization
Indefinite-lived
intangible assets and intangible assets subject to amortization are not amortized, but instead are tested annually at December 31 for
impairment and upon the occurrence of certain events or substantive changes in circumstances.
We
account for the impairment of indefinite-lived intangible assets under the provisions of Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC) 350-30-35, Intangibles – Goodwill and Other – General Intangibles Other Than Goodwill.
Following this guidance, the Company compares the estimated fair value of the indefinite-lived intangible assets to its carrying value.
If the carrying value exceeds the fair value, the Company recognizes impairment equal to that excess.
We
account for the impairment of intangible assets subject to amortization under the provisions of Financial Accounting Standards Board
(FASB) Accounting Standards Codification (ASC) 360-10-35, Property, Plant, and Equipment. Following this guidance, the Company
compares the estimated fair value of the intangible assets subject to amortization to its carrying value. If the carrying value exceeds
the fair value, the Company recognizes impairment equal to that excess.
During
the year ended December 31, 2020, the Company concluded that intangible assets resulting from the CMI transaction were impaired, resulting
in an impairment charge of $316,218, which is included in net loss from discontinued operations.
As
of December 31, 2021, management concluded that identifiable intangible assets resulting from the Cryocann transaction were not impaired.
Contingencies
An
initial right-of-use (“ROU”) asset and corresponding liability of $1,411,461 was recognized upon the CMI Transaction. The
Company adopted ASU Topic 842 January 1, 2019, but had no reportable operating leases at that point in time. As of December 31, 2021,
our ROU assets and liabilities associated with CMI were no longer included on the consolidated balance sheets.
CRYOMASS
TECHNOLOGIES INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Income
Taxes
The
Company uses the liability method of accounting for income taxes as set forth in ASC 740, Income Taxes. Under the liability method,
deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities
using tax rates expected to be in effect during the years in which the basis differences reverse. A valuation allowance is recorded when
it is likely that the deferred tax assets will not be realized. We assess our income tax positions and record tax benefits for all years
subject to examination based upon our evaluation of the facts, circumstances and information available at the reporting date. In accordance
with ASC 740-10, for those tax positions where there is a greater than 50% likelihood that a tax benefit will be sustained, our policy
will be to record the largest amount of tax benefit that is more likely than not to be realized upon ultimate settlement with a taxing
authority that has full knowledge of all relevant information. For those income tax positions where there is less than 50% likelihood
that a tax benefit will be sustained, no tax benefit will be recognized in the financial statements.
Fair
Value Measurements
Certain
assets and liabilities of the Company are carried at fair value under GAAP. 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. Financial assets and liabilities carried at fair value are
to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered
observable and the last is considered unobservable:
| |
● |
Level
1 — Quoted prices in active markets for identical assets or liabilities. |
| |
|
|
| |
● |
Level
2 — Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities,
quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable
or can be corroborated by observable market data. |
| |
|
|
| |
● |
Level
3 — Unobservable inputs that are supported by little or no market activity that are significant to determining the fair value
of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques. |
The
carrying values reported in the consolidated balance sheets for cash, prepaid expenses, inventories, accounts payable, notes payable,
and taxes payable approximate fair values because of the immediate or short-term maturities of these financial instruments. There were
no other assets or liabilities that require fair value to be recalculated on a recurring basis.
The
fair value of beneficial conversion features associated with convertible notes and the fair value of warrants are calculated utilizing
level 2 inputs.
When
multiple instruments are issued in a single transaction, the total proceeds from the transaction should be allocated among the individual
freestanding instruments identified. In this case, there were warrants issued in conjunction with convertible notes of $4.9 million and
$250K and the sale of common stock through subscription agreements for $679K and $10.3 million. The allocation occurs after identifying
(1) all the freestanding instruments and (2) the subsequent measurement basis for those instruments. The subsequent measurement basis
helps inform how the proceeds should be allocated. After the proceeds are allocated to the freestanding instruments, those instruments
should be further evaluated for embedded features that may need to be bifurcated or separated.
If
debt or stock is issued with detachable warrants, the guidance in ASC 470-20-25-2 (applied by analogy to stock) requires that the proceeds
be allocated to the two instruments based on their relative fair values. This method is generally appropriate if debt or stock is issued
with any other freestanding instrument that is classified in equity (such as a detachable forward contract) or as a liability but not
subject to subsequent fair value accounting.
Given
that the convertible notes and common stock that were issued with warrants are both not subject to subsequent fair value accounting treatment,
Management determined the relative fair value method shall be used for allocating the proceeds of the transaction. Under the relative
fair value method, the instrument being analyzed is allocated a portion of the proceeds based on its fair value to the sum of the fair
value of all the instruments covered int the allocation.
Management
additionally evaluated the facts and circumstances to determine whether the principal balance of the Notes ($4.9 million and $250K) approximated
their fair value. The Notes were issued entirely to unrelated third parties which were deemed to be arm’s length transactions.
In addition, the comparable interest rates for loans of similar companies as of the date of the Note issuances range from 10-15% given
the liquidity concerns of the Company. The term of the Notes issued range from 8-15 months, which would support the conclusion that the
principal balance approximates their fair value given the short-term maturities of each Note. Finally, the Warrants issued in connection
with the Notes were included akin to a “sweetener” in the offering as opposed to compensation for adjusting the interest
rate or other key terms within the Convertible Term Loan Agreements. As such, the Company concluded that the principal balance of the
Notes approximated their fair value.
The
Warrants were initially measured at fair value and subsequent fair value measurement is not required as long as the instrument continues
to be classified in equity. The proceeds from each transaction were allocated between the Notes and Warrants as well as common stock
and Warrants based on the relative fair value method.
Warrants
issued in connection with cash provided for common shares, and not convertible notes, during the fourth quarter of 2021 also followed
the same fair value assessment and treatment as noted above.
CRYOMASS
TECHNOLOGIES INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Net
Loss per Share
The
Company follows ASC 260, Earnings Per Share, which requires presentation of basic and diluted earnings per share (“EPS”)
on the face of the income statement for all entities with complex capital structures. Net earnings or loss per share is computed by dividing
net income or loss by the weighted-average number of common shares outstanding during the period, excluding shares subject to redemption
or forfeiture. The Company presents basic and diluted net earnings or loss per share. Diluted net earnings or loss per share reflect
the actual weighted average of common shares issued and outstanding during the period, adjusted for potentially dilutive securities outstanding.
Potentially dilutive securities are excluded from the computation of the diluted net loss per share if their inclusion would be anti-dilutive.
There were 2,200,003 unvested RSU’s considered potentially dilutive securities outstanding as of December 31, 2021 and 2,453,172
unvested RSU’s considered potentially dilutive securities outstanding as of December 31, 2020. Diluted net loss per share is the
same as basic net loss per share for each period.
Assets
and Liabilities of Discontinued Operations Held for Sale
Assets
and liabilities are classified as held for sale when all of the following criteria for a plan of sale have been met: (1) management,
having the authority to approve the action, commits to a plan to sell the assets; (2) the assets are available for immediate sale, in
their present condition, subject only to terms that are usual and customary for sales of such assets; (3) an active program to locate
a buyer and other actions required to complete the plan to sell the assets have been initiated; (4) the sale of the assets is probable
and is expected to be completed within one year; (5) the assets are being actively marketed for a price that is reasonable in relation
to their current fair value; and (6) actions required to complete the plan indicate that it is unlikely that significant changes to the
plan will be made or the plan will be withdrawn. When all of these criteria have been met, the assets (and liabilities) are classified
as held for sale in the balance sheet. Assets classified as held for sale are reported at the lower of their carrying value or fair value
less costs to sell. Depreciation of assets ceases upon designation as held for sale.
Recent
Accounting Pronouncements
In
August 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2020-06, Debt—Debt with
Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40).
ASU 2020-06 reduces the number of accounting models for convertible debt instruments and convertible preferred stock. The accounting
model for beneficial conversion features is removed. The ASU is effective for fiscal years beginning after December 15, 2021, including
interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15,
2020, including interim periods within those fiscal years. The Company determined that this update will impact its financial statements.
In
August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (ASC 820): Disclosure Framework-Changes to the Disclosure Requirements
for Fair Value Measurement. ASU 2018-13 removes certain disclosures, modifies certain disclosures and adds additional disclosures.
The ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019. Early
adoption is permitted. The Company has evaluated that this update will not have a material impact on its financial statements and related
disclosures.
In
January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (ASC 350), which simplifies the test for goodwill impairment.
The ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019. Early
adoption is permitted. The Company adopted this new standard on January 1, 2020.
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASC 842). In July 2018, the FASB issued ASU No.
2018-10, Codification Improvements to Topic 842, Leases (ASU 2018- 10), which provides narrow amendments to clarify how to apply certain
aspects of the new lease standard, and ASU No. 2018-11, Leases (Topic 842)-Targeted Improvements (ASU 2018-11), which addressed implementation
issues related to the new lease standard. Under ASC 842, leases are classified as either finance or operating, with classification affecting
the pattern of expense recognition in the income statement. The standard also requires disclosures to help investors and other financial
statement users better understand the amount, timing and uncertainty of cash flows arising from leases. ASU 2016-02 was effective for
annual reporting periods beginning after December 15, 2018 and interim periods within that reporting period. The Company adopted ASC
842 on January 1, 2019 and used the modified retrospective approach with the effective date as the date of initial application. Prior
period results continue to be presented under ASC 840 based on the accounting standards originally in effect for such periods.
CRYOMASS
TECHNOLOGIES INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
5.
REVENUE RECOGNITION
Disaggregated
Revenue
| | |
For
the Years Ended
December 31, | |
| | |
2021 | | |
2020 | |
| Types of Revenues: | |
| | |
| |
| Medical
retail | |
$ | - | | |
$ | 11,200 | |
| Medical
wholesale | |
| - | | |
| 700 | |
| Recreational
wholesale | |
| - | | |
| 769,555 | |
| Total
revenues | |
$ | - | | |
$ | 781,455 | |
6.
BUSINESS COMBINATIONS
Effective
June 23, 2021, the Company acquired substantially all the assets of Cryocann for $3,500,000 million in cash and 10,000,000 shares of
Company common stock, of which $1,000,000 in cash and 10,000,000 shares of Company common stock were paid at closing and a promissory
note was issued for $1,252,316 payable by Company to Cryocann on October 15, 2021, which represents the remaining Purchase Price of $2,500,000
minus the amount owed by Cryocann under a Loan Agreement dated April 23, 2021 by and between Cryocann and the Company.
The
Company concluded that the Cryocann Acquisition qualified as a business combination under ASC 805. The Company’s allocation of
the purchase price was calculated as follows:
| Cash | |
$ | 2,247,684 | |
| Common stock | |
| 1,804,500 | |
| Promissory Note | |
| 1,220,079 | |
| Total purchase price | |
$ | 5,272,263 | |
Description |
|
Fair
Value |
|
|
Weighted
average
useful life
(in years) |
|
| Assets
acquired: |
|
|
|
|
|
|
| Intangible
assets: |
|
|
|
|
|
|
| In
process research and development |
|
|
3,209,000 |
|
|
|
Indefinite |
|
| Patent |
|
|
873,263 |
|
|
|
10 |
|
| Goodwill |
|
|
1,190,000 |
|
|
|
|
|
| Total
assets acquired |
|
$ |
5,272,263 |
|
|
|
|
|
CRYOMASS
TECHNOLOGIES INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
The
following table below represents the revenue, net loss and loss per share effect of the acquired company, as reported in our pro forma
basis as if the acquisition occurred on January 1, 2021. These pro forma results are not necessarily indicative of the results that actually
would have occurred if the acquisition had occurred on the first day of the periods presented, nor does the pro forma financial information
purport to represent the results of operations for future periods.
| |
|
For
the Years Ended
December 31, |
|
| |
|
2022 |
|
|
2021 |
|
| Net
Sales |
|
$ |
7,641,737 |
|
|
$ |
7,641,737 |
|
| Net
loss |
|
$ |
(12,417,483 |
) |
|
$ |
(12,417,483 |
) |
| Net
loss per common share |
|
$ |
(0.08 |
) |
|
$ |
(0.08 |
) |
7.
DISCONTINUED OPERATIONS
In
June 2020, the Company’s board of directors adopted a plan to exit the cultivation, manufacturing of infused products and retail
distribution businesses through the sale of CMI. The Company determined that the intended sale represented a strategic shift that will
have a major effect on the Company’s operations and financial results.
The
accompanying consolidated balance sheets include the following carrying amounts of assets and liabilities related to these CMI discontinued
operations:
| | |
December 31,
2021 | | |
December 31,
2020 | |
| Assets | |
| | |
| |
| Accounts
receivable, net | |
$ | - | | |
$ | 66,043 | |
| Prepaid expenses | |
| - | | |
| 7,601 | |
| Inventory, net | |
| - | | |
| 791,868 | |
| Property and equipment,
net | |
| - | | |
| 2,714,771 | |
| Goodwill | |
| - | | |
| - | |
| Intangible assets, net | |
| - | | |
| 2,481,128 | |
| Security deposits | |
| - | | |
| 11,522 | |
| Right
of use asset, net | |
| - | | |
| 794,907 | |
| Total
current assets held for sale | |
| - | | |
| 6,867,840 | |
| | |
| | | |
| | |
| Total assets held
for sale | |
$ | - | | |
$ | 6,867,840 | |
| | |
| | | |
| | |
| Liabilities | |
| | | |
| | |
| Accounts payable and
accrued expenses | |
| - | | |
| 211,463 | |
| Taxes payable | |
| - | | |
| 22,645 | |
| Notes payable, related
parties | |
| - | | |
| 458,599 | |
| Right
of use liability | |
| - | | |
| 771,578 | |
| Total
liabilities held for sale | |
| - | | |
| 1,464,285 | |
| Net
assets | |
$ | - | | |
$ | 5,403,555 | |
CRYOMASS
TECHNOLOGIES INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
The
consolidated statements of operations include the following operating results related to these CMI discontinued operations:
| | |
Year
Ended
December 31, | |
| | |
2021 | | |
2020 | |
| Net sales | |
$ | 5,891,894 | | |
$ | 6,860,282 | |
| Cost of goods sold,
inclusive of depreciation | |
| 4,132,696 | | |
| 4,901,237 | |
| Gross
profit | |
| 1,759,198 | | |
| 1,959,045 | |
| | |
| | | |
| | |
| Operating expenses: | |
| | | |
| | |
| Personnel costs | |
| 428,728 | | |
| 402,389 | |
| Sales and marketing | |
| 816,683 | | |
| 908,502 | |
| General and administrative | |
| 112,934 | | |
| 231,376 | |
| Legal and professional
fees | |
| 44,092 | | |
| 156,782 | |
| Amortization
expense | |
| - | | |
| 26,901 | |
| Total
operating expenses | |
| 1,402,437 | | |
| 1,725,950 | |
| Gain
from operations | |
| 356,761 | | |
| 233,095 | |
| | |
| | | |
| | |
| Other income (expenses): | |
| | | |
| | |
| Interest expense | |
| (49,803 | ) | |
| (153,592 | ) |
| Goodwill impairment | |
| - | | |
| (4,663,514 | ) |
| Intangibles impairment | |
| - | | |
| (361,218 | ) |
| Other
income | |
| - | | |
| - | |
| Total
other income (expenses) | |
| (49,803 | ) | |
| (5,178,324 | ) |
| Loss on disposal of discontinued operations | |
| (3,021,724 | ) | |
| (4,945,229 | ) |
| Net gain / (loss) from discontinued operations,
before taxes | |
| (2,714,766 | ) | |
| (4,945,229 | ) |
| Income
taxes | |
| (10,235 | ) | |
| (10,235 | ) |
| Net gain / (loss) from
discontinued operations | |
$ | (2,725,001 | ) | |
$ | (4,955,464 | ) |
As
discussed in Note 2, we disposed of all CMI-related assets and extinguished any and all related obligations, resulting in a loss on disposal
of discontinued operations of $3,021,724.
CRYOMASS
TECHNOLOGIES INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
8.
PROPERTY AND EQUIPMENT, NET
Property
and equipment, net consisted of the following.
| | |
December 31,
2021 | | |
December 31,
2020 | |
| Leasehold improvements | |
$ | - | | |
$ | 2,770,385 | |
| Machinery and equipment | |
| 225,000 | | |
| 1,065,885 | |
| Furniture and fixtures | |
| - | | |
| 43,331 | |
| Construction in progress | |
| - | | |
| 227,995 | |
| | |
| 225,000 | | |
| 4,107,596 | |
| Less: Accumulated
depreciation | |
| - | | |
| (1,392,825 | ) |
| | |
$ | 225,000 | | |
$ | 2,714,771 | |
Depreciation
expense for the years ended December 31, 2021 and 2020 was $0 and $131,110, respectively. Depreciation expense was recorded in cost of
goods sold and general and administrative expense and is included in discontinued operations.
9.
GOODWILL AND INTANGIBLE ASSETS
The
carrying value of goodwill was $1,190,000 and $0, as of December 31, 2021 and December 31, 2020, respectively.
The
following tables summarize information relating to the Company’s identifiable intangible assets as of December 31, 2021.
The
Company had no identifiable intangible assets as of December 31, 2020.
| |
|
Estimated
Useful Life
(Years) |
|
Gross
Amount |
|
|
Accumulated
Amortization |
|
|
Carrying
Value |
|
| Amortized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Patent |
|
10 years |
|
|
873,263 |
|
|
|
(43,663 |
) |
|
|
829,600 |
|
| Indefinite-lived |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| In-process
research and development |
|
Indefinite |
|
|
3,209,000 |
|
|
|
- |
|
|
|
3,209,000 |
|
| Total
identifiable intangible assets |
|
|
|
$ |
4,082,263 |
|
|
$ |
(43,663 |
) |
|
$ |
4,038,600 |
|
Amortization
expense, which is included in continuing operations, was $43,663 and $0 for the years ended December 31, 2021 and 2020, respectively.
CRYOMASS
TECHNOLOGIES INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
10.
LOAN RECEIVABLE
As
a result of new agreements entered with CMI on December 31, 2021, as further detailed in Note 1 above, we received a $3,600,000 promissory
note due to us no later than December 31, 2023. In consideration of the loan receivable, we conveyed to CMI, any and all manufacturing,
grow equipment, retail-related assets and other assets Seller owns in the state of Colorado and are currently used by CMI subsidiaries
in the course of business, including client lists and appertaining intellectual property, and no other Buyer or Parent assets, as well
as all liabilities related to these assets.
11.
DEBT
On
July 27, 2020, the Company entered into a subscription agreement consisting of 1) a convertible note and 2) warrants. The 1) convertible
note has a face value of $250,000, matures August 1, 2022, and accrues interest at 8% per annum. The note is convertible into 2,500,000
shares of the Company’s common stock at a conversion price of $0.10 per share. The beneficial conversion feature is accounted for
in accordance with ASC 470-20 Debt with Conversion and Other Options and the resulting debt discount is amortized over the life
of the note. As of December 31, 2021, the net carrying amount is $177,083, which consists of the $250,000 convertible note and $72,917
unamortized debt discount. As of December 31, 2020, the net carrying amount is $52,083, which consists of the $250,000 convertible note
and $197,917 unamortized debt discount. The warrants are exercisable to purchase an additional 2,500,000 shares of common stock at $0.25
per share.
On
August 26, 2020, the Company entered into a $600,000 loan agreement, which accrues interest at 84% per annum. On January 25, 2021, the
Company refinanced this loan at 93.6%, to obtain additional funding. The loan was fully repaid on April 27, 2021, with a $412,560 loan
balance as of December 31, 2020.
On
March 18, 2021, the Company entered into a $225,000 note payable, which accrued interest at 15% per annum. The note was fully repaid
on May 7, 2021.
Between
March 29, 2021 and July 6, 2021, the Company entered into a series of similar subscription agreements with either domestic or non-US
accredited investors, respectively (each, a “Initial Tranche Subscription Agreement (US)” and, respectively, “Initial
Tranche Subscription Agreement (non-US)”) pursuant to which the Company issued and sold to certain accredited investors, in the
initial tranche of a non-brokered private placement (the “Private Placement”), an aggregate 3,000 units (“Units”),
each Unit representing (i) one $1,000 principal amount term note providing for an optional conversion into shares of Company common stock
at a price of $0.20 per share (each the “Initial Convertible Term Note”) and (ii) a common share warrant for the purchase
of 5,000 shares of Company common stock at an exercise price of $0.40 per share (each an “Initial Warrant”), for aggregate
net proceeds of $3,000,000. The Initial Convertible Term Notes and the Initial Warrants mature on March 31, 2022 and March 31, 2023,
respectively, and accrued interest at a rate of 12% per annum payable on a quarterly basis.
CRYOMASS
TECHNOLOGIES INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Between
May and July 6, 2021, the Company entered into a series of substantially similar subscription agreements with either domestic or non-US
investors (each, a “Subscription Agreement (US)”, and, respectively, “Subscription Agreement (non-US)”) pursuant
to which the Company issued and sold to certain accredited investors, in the second tranche of the Private Placement, an aggregate 1,900
units (“Units”), each Unit representing (i) one $1,000 principal amount term note (each a “Convertible Term Note”)
providing for an optional conversion into shares of Company common stock at a price of $0.20 per share and (ii) a common share warrant
for the purchase of 5,000 shares of Company common stock at an exercise price of $0.40 per share (each a “Warrant”), for
additional aggregate net proceeds of $1,900,000. The Convertible Term Notes and Warrants mature on September 30, 2022 and April 30, 2023,
respectively, and accrued interest at a rate of 12% per annum payable on a quarterly basis.
During
the year ended December 31, 2021, we recorded a $1,444,542 debt discount associated on the $4,900,000 of convertible notes, comprised
of additional paid in capital for the fair value of warrants and a beneficial conversion feature of $928,779 and $515,763, respectively.
All notes were converted during the year ended December 31, 2021, and the entire debt discount was amortized into interest expense during
the year.
On
August 20, 2021, the Company entered into a $300,000 loan agreement, which accrues interest at 91.23% per annum. Payment is due on a
weekly basis up to the maturity date of May 27, 2021. The loan was fully repaid on October 19, 2021.
12.
RELATED PARTY TRANSACTIONS
In
conjunction with the CMI Transaction, the Company assumed a note payable in which the note holder, John Knapp (“Knapp”) is
a significant shareholder in the Company. In the second quarter of 2021, the Company issued 2,500,000 shares to pay off the balance of
the note. Effective February 25, 2020, Knapp resigned as a director of Cryomass Technologies, at which time 200,000 Restricted Stock
Units were deemed to have vested and were converted into 200,000 common shares. Refer to Note 2 for additional details on the relationship
of CMI as a VIE. The outstanding balance of the notes payable, related party was $0 and $458,599 as of December 31, 2021 and December
31, 2020, respectively.
In
conjunction with the Cryocann Acquisition, the Company received a promissory note from Matt Armstrong, an employee of the Company, for
$281,771. This note receivable was issued as part of an employment agreement with Matt Armstrong, effective June 22, 2021, and was offset
against his signing bonus on October 15, 2021. There was no interest associated with the note.
On
August 19, 2021, the Company entered into a loan agreement of $237,590 with its Chief Executive Officer, Christian Noel. The note accrues
interest at 14% per annum and was repaid on October 22, 2021.
On
November 15, 2021, issued 250,000 common shares and warrants, respectively, to Christian Noel in exchange for $50,000.
CRYOMASS
TECHNOLOGIES INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
13.
SHAREHOLDERS’ EQUITY
From
June to August 2019, the Company completed a private placement for the sale of its common stock. The Company issued 14,325,005 shares
of common stock for gross proceeds of $7,162,503, or $0.50 per share, minus equity issuance costs of $72,096.
In
July 2019, the Company issued 13,553,233 shares of common stock in connection with the CMI Transaction (refer to Note 6).
During
the year ended December 31, 2019, the Company issued 790,000 shares of common stock pursuant to advisory agreements. The fair value of
$395,000 was included in legal and professional fees in the consolidated statements of operations.
In
February 2020, the Company issued 400,000 shares of common stock pursuant to accelerated vesting of RSU’s upon the resignation
of a former executive.
In
February 2020, the Company issued 200,000 shares of common stock pursuant to accelerated vesting of RSU’s upon the resignation
of a former board member.
In
March 2020, the Company issued 1,175,549 shares of common stock to a former executive per a separation agreement.
In
June 2020, four shareholders submitted 15,050,000 shares of common stock for cancellation pursuant to prior agreements among certain
shareholders. Accordingly, the Company cancelled 15,050,000 shares of common stock.
In
July 2020, the Company issued 10,000 shares of common stock to a former employee per a separation agreement.
In
July 2020, one shareholder submitted 300,000 shares of common stock for cancellation pursuant to prior agreements. Accordingly, the Company
cancelled 300,000 shares of common stock.
In
August 2020, the Company issued 60,000 shares of common stock in order to raise capital.
In
August 2020, the Company issued 757,895 shares of common stock to former board members per a separation agreement.
From
October to December 2020, the Company issued 3,535,665 shares of common stock in order to raise capital.
From
January to March 2021, the Company issued 1,491,819 shares of common stock in order to raise capital.
From
April to June 2021, the Company issued 10,000,000 shares of common stock related to the CryoCann transaction, 6,903,172 shares of common
stock pursuant to employment agreements, 2,500,000 shares of common stock in exchange for the extinguishment of debt, and 633,125 shares
of common stock in exchange for services.
From
July to September 2021, the Company issued 798,414 shares of common stock in order to raise capital, 633,707 shares of common stock in
exchange for services, and 92,127 shares of common stock for interest payment on a note payable.
From
October to December 2021, the Company issued 50,700,000 shares of common stock in order to raise capital, 1,570,501 shares of common
stock in exchange for services, and 24,621,119 shares of common stock in exchange for extinguishment of debt.
Restricted
Stock Unit Awards
The
Company adopted its 2019 Omnibus Stock Incentive Plan (the “2019 Plan”), which provides for the issuance of stock options,
stock grants and RSUs to employees, directors and consultants. The primary purpose of the 2019 Plan is to enhance the ability to attract,
motivate, and retain the services of qualified employees, officers and directors. Any RSUs granted under the 2019 Plan will be at the
discretion of the Compensation Committee of the Board of Directors. In April 2021 Board of Directors cancelled the 2019 Plan.
CRYOMASS
TECHNOLOGIES INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
A
summary of the Company’s RSU award activity for the year ended December 31, 2021 is as follows:
| | |
Restricted
Stock
Units | | |
Weighted
Average
Grant
Date Fair
Value | |
| Outstanding at December 31, 2020 | |
| 2,453,175 | | |
$ | 0.45 | |
| Granted | |
| 6,650,000 | | |
| 0.15 | |
| Vested | |
| (6,903,172 | ) | |
| 0.15 | |
| Forfeited | |
| - | | |
| - | |
| Outstanding at December
31, 2021 | |
| 2,200,003 | | |
$ | 0.45 | |
The
total fair value of RSUs vested during the years ending December 31, 2021 and 2020 was $2,851,102 and $309,790, respectively. As
of December 31, 2021 and 2020, there was $78,676 and $600,241, respectively, of unrecognized stock-based compensation cost related to
non-vested RSU’s, which is expected to be recognized over the remaining vesting period.
Stock-based
compensation expense relating to RSU’s was $1,685,066 and $734,752 for the years ending December 31, 2021 and 2020, respectively.
Stock-based compensation for the year ending December 31, 2021 consisted of equity awards forfeited, granted and vested to employees,
directors and consultants of the Company in the amount of $1,272,779, $347,275, and $65,012, respectively.
Stock
Option Awards
A
summary of the Company’s stock option activity for the year ended December 31, 2021 is as follows:
| | |
Stock
Option
Shares | | |
Weighted
Average
Exercise
Price | | |
Weighted
Average
Remaining
Contractual
Term | | |
Aggregate
Intrinsic
Value | |
| Outstanding at December 31, 2020 | |
| 3,500,000 | | |
$ | 0.16 | | |
| 8.8 | | |
$ | 581,591 | |
| Granted and vested | |
| 5,000,000 | | |
| 0.20 | | |
| 9.5 | | |
| 987,517 | |
| Forfeited | |
| - | | |
| - | | |
| - | | |
| - | |
| Outstanding at December 31, 2021 | |
| 8,500,000 | | |
$ | 0.18 | | |
| 9.2 | | |
$ | 1,579,108 | |
During
the years ended December 31, 2021 and 2020, the Company issued 5,000,000 and 3,500,000, respectively, of stock options to certain employees,
which vested immediately, for a total fair value of $968,205 and $555,532, respectively. Stock-based compensation expense relating to
stock options was $968,205 and $555,532, respectively.
Expenses
for stock-based compensation is included on the accompanying consolidated statements of operations in general and administrative expense.
During
the year ended December 31, 2021, the Company issued warrants with the option to purchase 73,950,000 common shares at an exercise price
of $0.40 per share. Of these warrants, 15,000,000 shares expire on March 31, 2023, 9,500,000 expire on April 30, 2023, 1,000,000 expire
on September 17, 2023, 7,750,000 expire on October 15, 2023, 9,510,000 expire on October 26, 2023, 190,000 expire on November 2, 2023,
27,060,000 expire on November 10, 2023, 1,940,000 expire on November 15, 2023, and 750,000 expire on November 17, 2023.
The
fair value of these warrants is $1,867,960, which is reflected in additional paid in capital.
During
the year ended December 31, 2020, the Company issued 2,500,000 and 4,525,898 warrant shares at an excersice price of $0.25 and $0.30,
respectively, which expire on August 1, 2022 and November 22, 2022, respectively.
The
fair value of these warrants is $266,383, which is reflected in additional paid in capital.
CRYOMASS
TECHNOLOGIES INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
14.
INCOME TAXES
Deferred
taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences
are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in the tax laws and rates on the date
of enactment. The Company recognizes interest and penalties related to unrecognized tax benefits within income tax expense.
The
amounts in the following table are included in net loss from discontinued operations, net of tax. The provision (benefit) for income
taxes for the years ended December 31, 2021 and 2020 consists of:
| | |
2021 | | |
2020 | |
| Current (benefit) provision | |
| | |
| |
| Federal | |
$ | - | | |
$ | - | |
| State | |
| - | | |
| - | |
| Total Current | |
| - | | |
| - | |
| | |
| | | |
| | |
| Deferred (benefit) provision | |
| | | |
| | |
| Federal | |
$ | 3,724 | | |
$ | 3,724 | |
| State | |
| 6,511 | | |
| 6,511 | |
| Total Deferred | |
$ | 10,235 | | |
$ | 10,235 | |
| | |
| | | |
| | |
| Total Provision | |
$ | 10,235 | | |
$ | 10,235 | |
The
statutory federal income tax rate (21 percent) for the years ended December 31, 2021 and 2020 is reconciled to the effective income tax
rate as follows:
| | |
2021 | | |
2020 | |
| | |
Tax | | |
Percentage | | |
Tax | | |
Percentage | |
| Income Taxes At Statutory Federal
Income Tax Rate | |
$ | (2,202,256 | ) | |
| 21.00 | % | |
$ | (2,517,221 | ) | |
| 21.00 | % |
| State Taxes, Net Of Federal Income Tax Benefit | |
| 6,511 | | |
| (0.06 | ) | |
| 6,511 | | |
| (0.05 | ) |
| Meals & Entertainment | |
| - | | |
| 0.00 | | |
| 261 | | |
| 0.00 | ) |
| Penalties and Fines | |
| - | | |
| 0.00 | | |
| - | | |
| 0.00 | |
| Return to Provision Adjustment - Permanent
Items | |
| - | | |
| 0.00 | | |
| - | | |
| 0.00 | |
| Deferred Only Adjustment | |
| - | | |
| 0.00 | | |
| (228,539 | ) | |
| 1.91 | |
| Change in Valuation Allowance | |
| 1,838,803 | | |
| (17.53 | ) | |
| 200,791 | | |
| (1.68 | ) |
| Section 280E Expense Disallowance | |
| 367,177 | | |
| (3.50 | ) | |
| 2,548,431 | | |
| (21.26 | ) |
| Other | |
| - | | |
| 0.00 | | |
| - | | |
| 0.00 | |
| Effective tax | |
$ | 10,235 | | |
| (0.10 | )% | |
$ | 10,235 | | |
| (0.09 | )% |
Deferred
tax assets and liabilities by type at December 31, 2021 and 2020 are as follows:
| Deferred
Tax Assets (Liabilities): | |
2021 | | |
2020 | |
| Stock Compensation | |
$ | (7,335 | ) | |
$ | 62,606 | |
| Stock Compensation - Options | |
| 259,057 | | |
| - | |
| Accrued Salary | |
| 44,384 | | |
| - | |
| Trademark/Trade Name | |
| (8,033 | ) | |
| (4,765 | ) |
| Developed Manufacturing Process - Extraction | |
| (53,747 | ) | |
| (31,884 | ) |
| Customer Relationships | |
| 1,947 | | |
| 1,158 | |
| Patent | |
| 3,589 | | |
| - | |
| In-Process Research & Development -
CryoCann | |
| (26,376 | ) | |
| - | |
| Goodwill - CMI | |
| 179,892 | | |
| 168,688 | |
| In-Process Research & Development -
CMI | |
| 98,135 | | |
| 105,985 | |
| Goodwill - CryoCann | |
| 3,490 | | |
| - | |
| NOL - Federal Pre-2018 | |
| 43,367 | | |
| 43,367 | |
| NOL - Federal Post-2017 | |
| 2,097,542 | | |
| 377,529 | |
| NOL - State | |
| 608,703 | | |
| 294,183 | |
| Deferred Tax Assets
(Liabilities) | |
$ | 3,244,615 | | |
$ | 1,016,867 | |
| | |
| | | |
| | |
| Valuation Allowance | |
| (3,269,776 | ) | |
| (1,031,792 | ) |
| | |
| | | |
| | |
| Net Deferred Tax Assets
(Liabilities) | |
$ | (25,160 | ) | |
$ | (14,926 | ) |
CRYOMASS
TECHNOLOGIES INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
At
December 31, 2021 and 2020, the Company had federal net operating loss carryforwards of approximately $10,194,806 and $2,004,266 that
may be offset against future taxable income from the years 2022 through 2041. State net operating losses were approximately $16,641,692
and $8,042,840 at December 31, 2021 and 2020. However, as a result of the 2017 Tax Cuts and Jobs Act (“TCJA”) and the
2020 Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), any federal net operating losses generated in years
beginning after December 31, 2017 and before January 1, 2022 can be carried forward indefinitely to offset taxable income in future periods.
The amount of NOLs with no expiration totaled $9,988,297 as of December 31, 2021. The deferred tax assets before valuation allowance
for the net operating losses were $2,749,613 and $715,079 as of December 31, 2021 and 2020. Should a change in ownership occur, the NOLs
would be subject to the limitations set forth under IRC Section 382.
Management
assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit
use of the existing deferred tax assets. On the basis of this evaluation, as of December 31, 2021, the Company has recorded a full valuation
allowance against its net deferred tax assets. The valuation allowance is estimated to be approximately $3,269,776 and $1,031,792 for
the years ended December 31, 2021 and 2020, respectively. However, because deferred tax liabilities related to indefinite lived intangibles
cannot be used as a source of income to recognize deferred tax assets with definite lives, the recorded valuation allowance exceeded
the net deferred assets resulting in an overall net deferred tax liability, as reflected in the table above.
The
Company has adopted the provisions of ASC 740 which prescribe the procedures for recognition and measurement of tax positions taken or
expected to be taken in income tax returns. As of December 31, 2021, the Company does not have an accrual relating to uncertain
tax positions. It is not anticipated that unrecognized tax benefits would significantly increase or decrease within 12 months of the
reporting date.
15.
COMMITMENTS & CONTINGENCIES
Occasionally,
the Company may be involved in claims and legal proceedings arising from the ordinary course of its business. The Company records a provision
for a liability when it believes that it is both probable that a liability has been incurred, and the amount can be reasonably estimated.
If these estimates and assumptions change or prove to be incorrect, it could have a material impact on the Company’s consolidated
financial statements. Contingencies are inherently unpredictable, and the assessments of the value can involve a series of complex judgments
about future events and can rely heavily on estimates and assumptions.
Lease
Commitments
The
Company accounts for lease transactions in accordance with Topic 842, Leases (“ASC 842”), which requires an entity
to recognize a right-of-use (“ROU”) asset and a lease liability for virtually all leases. Operating lease ROU assets and
liabilities are recognized at commencement date based on the present value of lease payments over the lease term. ROU assets represent
the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation
to make lease payments arising from the lease.
There
are no other leases that meet the reporting standards of ASU Topic 842 as the Company does not have any other leases with a term exceeding
twelve months. Other lease payments not accounted for under ASU Topic 842 total $59,051 and $73,777 for the years ended December 31,
2021 and 2020, respectively.
An
ROU asset of $1,411,461 was recognized upon the CMI Transaction. The present value of the liabilities decreased by $519,671 and $472,154
for the years ended December 31, 2021 and 2020, respectively. This balance is included in the operating section of the statement of cash
flows for the years ended December 31, 2021 and 2020. Operating lease cost was approximately $664,686 and $627,132 for the years ended
December 31, 2021 and 2020, respectively.
The
right of use assets and lease liabilities assumed from the CMI transaction were disposed of as part of the disposal of our discontinued
operations, which is described in further detail above.
The
Company does not have any leases that have not yet commenced which are significant.
CRYOMASS
TECHNOLOGIES INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Legal
Proceedings
We
know of no material, existing or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceeding
or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial
shareholder, is an adverse party or has a material interest adverse to our company.
16.
SUBSEQUENT EVENTS
On
January 10, 2022, the Company’s shareholders approved a new stock incentive plan (the “2022 Stock Incentive Plan”).
The purpose of the 2022 Stock Incentive Plan is to advance the interests of the Company and its stockholders by enabling the Company
and its subsidiaries to attract and retain qualified individuals to perform services, to provide incentive compensation for such individuals
in a form that is linked to the growth and profitability of the Company and increases in stockholder value, and to provide opportunities
for equity participation that align the interests of recipients with those of its stockholders.
Also
on January 10, 2022, the Company’s shareholders approved an amendment to the Company’s Articles of Incorporation to effect
a reverse stock split of the issued and outstanding shares of our Common Stock, par value $0.001 per share, such split to combine a whole
number of outstanding shares of our Common Stock in a range of not less than three (3) shares and not more than ten (10) shares, into
one share of Common Stock at any time prior to March 31, 2022.
On
January 12, 2022, the Company issued 735,529 shares of common stock to its three executive officers and 371,058 shares of common stock
to two directors at a stock price of $0.27.
On
January 17, 2022, Mr. Simon Langelier was elected to the Company’s Board of Directors. Mr. Langelier holds a Bachelor of Science
degree (Honors) in Management Sciences (Operational Research) from the University of Lancaster, United Kingdom. During his thirty-year
career with Philip Morris International, until 2011, Mr. Langelier served in several senior positions, including President Eastern Europe,
Middle East & Africa, President Eastern Asia and President of Next Generation Products & Adjacent Businesses. He was also Managing
Director in numerous countries in Europe and Columbia. He is currently a director of Imperial Brands PLC. Mr. Langelier is also an Honorary
Professorial Fellow at the University of Lancaster in the United Kingdom and a member of the Dean’s Council of that university’s
Management School.
Subsequent
to year end, the Company has disbursed $620,000 in loans to CMI.
CRYOMASS
TECHNOLOGIES INC.
CONSOLIDATED
FINANCIAL STATEMENTS
For
the Three and Months Ended March 31, 2022 and 2021
(EXPRESSED
IN UNITED STATES DOLLARS)
TABLE
OF CONTENTS
CRYOMASS
TECHNOLOGIES INC.
CONSOLIDATED
BALANCE SHEETS
(UNAUDITED)
| | |
March 31,
2022 | | |
December 31,
2021 | |
| ASSETS | |
| | |
| |
| Current assets: | |
| | |
| |
| Cash
and cash equivalents | |
$ | 3,594,275 | | |
$ | 5,772,839 | |
| Prepaid
expenses | |
| 73,178 | | |
| 757,383 | |
| Total
current assets | |
| 3,667,453 | | |
| 6,530,222 | |
| | |
| | | |
| | |
| Loan
receivable | |
| 4,218,831 | | |
| 3,600,000 | |
| Property
and equipment, net | |
| 233,641 | | |
| 225,000 | |
| Goodwill | |
| 1,190,000 | | |
| 1,190,000 | |
| Intangible
assets, net | |
| 4,016,768 | | |
| 4,038,600 | |
| Total
assets | |
$ | 13,326,693 | | |
$ | 15,583,822 | |
| | |
| | | |
| | |
| LIABILITIES
AND SHAREHOLDERS’ EQUITY | |
| | | |
| | |
| | |
| | | |
| | |
| Current
liabilities: | |
| | | |
| | |
| Accounts
payable and accrued expenses | |
$ | 1,364,905 | | |
$ | 1,882,419 | |
| Total
current liabilities | |
| 1,364,905 | | |
| 1,882,419 | |
| Notes
payable | |
| 208,333 | | |
| 177,083 | |
| Total
liabilities | |
| 1,573,238 | | |
| 2,059,052 | |
| | |
| | | |
| | |
| Commitments
and contingencies (Note 15) | |
| | | |
| | |
| | |
| | | |
| | |
| Shareholders’
equity: | |
| | | |
| | |
| Preferred stock, $0.001 par value, 100,000 shares authorized, no shares issued and outstanding respectively | |
| - | | |
| - | |
| Common stock, $0.001 par value, 500,000,000 shares authorized, 199,143,664 and 196,949,801 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively | |
| 199,144 | | |
| 196,950 | |
| Additional
paid-in capital | |
| 42,215,245 | | |
| 41,916,207 | |
| Common
stock to be issued | |
| 80,208 | | |
| - | |
| Accumulated
deficit | |
| (30,741,142 | ) | |
| (28,588,837 | ) |
| Total
shareholders’ equity | |
| 11,753,455 | | |
| 13,524,320 | |
| Total
liabilities and shareholders’ equity | |
$ | 13,326,693 | | |
$ | 15,583,822 | |
The
accompanying notes are an integral part of these unaudited consolidated financial statements.
CRYOMASS
TECHNOLOGIES INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
| | |
Three
Months Ended
March 31, | |
| | |
2022 | | |
2021 | |
| | |
| | |
| |
| Net sales | |
$ | - | | |
$ | - | |
| Cost of goods sold | |
| - | | |
| - | |
| Gross profit | |
| - | | |
| - | |
| | |
| | | |
| | |
| Operating expenses: | |
| | | |
| | |
| Personnel costs | |
| 335,230 | | |
| 373,714 | |
| General and administrative | |
| 295,349 | | |
| 396,470 | |
| Legal and professional fees | |
| 1,458,257 | | |
| 225,520 | |
| Amortization expense | |
| 21,832 | | |
| - | |
| Research and development | |
| 17,122 | | |
| - | |
| Total operating expenses | |
| 2,127,790 | | |
| 995,704 | |
| Loss from operations | |
| (2,127,790 | ) | |
| (995,704 | ) |
| | |
| | | |
| | |
| Other income (expenses): | |
| | | |
| | |
| Interest expense - net | |
| (36,023 | ) | |
| (202,609 | ) |
| Gain on foreign exchange | |
| 11,508 | | |
| 34,770 | |
| Total other expenses | |
| (24,515 | ) | |
| (167,839 | ) |
| Net loss from continuing operations, before
taxes | |
| (2,152,305 | ) | |
| (1,163,543 | ) |
| Income taxes | |
| - | | |
| - | |
| Net loss from continuing operations | |
| (2,152,305 | ) | |
| (1,163,543 | ) |
| Net gain from discontinued operations, net
of tax | |
| - | | |
| 116,616 | |
| Net loss | |
$ | (2,152,305 | ) | |
$ | (1,046,927 | ) |
| | |
| | | |
| | |
| Comprehensive loss from discontinued operations | |
| - | | |
| - | |
| Comprehensive loss | |
$ | (2,152,305 | ) | |
$ | (1,046,927 | ) |
| | |
| | | |
| | |
| Net loss per common share: | |
| | | |
| | |
| Loss from continuing operations
- basic and diluted | |
$ | (0.01 | ) | |
$ | (0.01 | ) |
| | |
| | | |
| | |
| Gain / (loss) from discontinued
operations - basic and diluted | |
$ | - | | |
$ | - | |
| | |
| | | |
| | |
| Loss per common share -
basic and diluted | |
$ | (0.01 | ) | |
$ | (0.01 | ) |
| | |
| | | |
| | |
| Weighted average common shares outstanding—basic and diluted | |
| 198,268,853 | | |
| 98,257,687 | |
The
accompanying notes are an integral part of these unaudited consolidated financial statements.
CRYOMASS
TECHNOLOGIES INC.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
(UNAUDITED)
| | |
Common
Stock | | |
Additional
Paid-In | | |
Common
Stock to | | |
Accumulated | | |
Total Shareholders’ | |
| | |
Shares | | |
Amount | | |
Capital | | |
Be
Issued | | |
Deficit | | |
Equity | |
| Balance
at December 31, 2020 | |
| 97,005,817 | | |
$ | 97,006 | | |
$ | 19,138,947 | | |
$ | 98,535 | | |
$ | (15,729,194 | ) | |
$ | 3,605,294 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Share
issuance from sale of common stock | |
| 1,491,819 | | |
| 1,492 | | |
| 207,043 | | |
| (98,535 | ) | |
| - | | |
| 110,000 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Stock-based
compensation | |
| - | | |
| - | | |
| 250,817 | | |
| - | | |
| - | | |
| 250,817 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Net
loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| (1,046,927 | ) | |
| (1,046,927 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Balance
at March 31, 2021 | |
| 98,497,636 | | |
$ | 98,498 | | |
$ | 19,596,807 | | |
$ | - | | |
$ | (16,776,121 | ) | |
$ | 2,919,184 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Balance
at December 31, 2021 | |
| 196,949,801 | | |
$ | 196,950 | | |
$ | 41,916,207 | | |
$ | - | | |
$ | (28,588,837 | ) | |
$ | 13,524,320 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Share
issuance in exchange for services | |
| 458,334 | | |
| 458 | | |
| 159,959 | | |
| 80,208 | | |
| - | | |
| 240,625 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Stock-based
compensation | |
| 1,735,529 | | |
| 1,736 | | |
| 139,079 | | |
| - | | |
| - | | |
| 140,815 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Net
loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| (2,152,305 | ) | |
| (2,152,305 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Balance
at March 31, 2022 | |
| 199,143,664 | | |
$ | 199,144 | | |
$ | 42,215,245 | | |
$ | 80,208 | | |
$ | (30,741,142 | ) | |
$ | 11,753,455 | |
The
accompanying notes are an integral part of these unaudited consolidated financial statements.
CRYOMASS
TECHNOLOGIES INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
| | |
For
the Three Months Ended
March 31, | |
| | |
2022 | | |
2021 | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | |
| | |
| |
| Net
loss | |
$ | (2,152,305 | ) | |
$ | (1,163,543 | ) |
| Adjustments
to reconcile net loss to net cash used in operating activities from continuing operations: | |
| | | |
| | |
| Amortization
of debt discount | |
| 31,250 | | |
| 31,250 | |
| Depreciation
and amortization expense | |
| 21,832 | | |
| - | |
| Stock-based
compensation expense | |
| 140,815 | | |
| 250,817 | |
| Fair
value of common stock issued pursuant to service and advisory agreements | |
| 160,417 | | |
| - | |
| Change
in operating assets and liabilities: | |
| | | |
| | |
| Prepaid
expenses | |
| 684,205 | | |
| 30,238 | |
| Accounts
payable and accrued expenses | |
| (517,514 | ) | |
| 190,848 | |
| Net
cash used in operating activities from continuing operations | |
| (1,631,300 | ) | |
| (660,390 | ) |
| Net
cash provided by / (used in) operating activities from disc ops | |
| - | | |
| 194,167 | |
| Net
cash used in operating activities | |
| (1,631,300 | ) | |
| (466,223 | ) |
| CASH
FLOWS FROM INVESTING ACTIVITIES: | |
| | | |
| | |
| Issuance
of loans receivable | |
| (618,831 | ) | |
| - | |
| Purchase
of property and equipment | |
| (8,641 | ) | |
| - | |
| Net
cash used in investing activities from continuing operations | |
| (627,472 | ) | |
| - | |
| Net
cash used in investing activities from discontinued operations | |
| - | | |
| (174,003 | ) |
| Net
cash used in investing activities | |
| (627,472 | ) | |
| (174,003 | ) |
| CASH
FLOWS FROM FINANCING ACTIVITIES: | |
| | | |
| | |
| Proceeds
from issuance of common stock | |
| - | | |
| 110,000 | |
| Proceeds
from common stock subscribed and to be issued | |
| 80,208 | | |
| - | |
| Proceeds
from loans payable, net of repayment | |
| - | | |
| 136,778 | |
| Proceeds
from notes payable | |
| - | | |
| 725,000 | |
| Net
cash provided by financing activities from continuing operations | |
| 80,208 | | |
| 971,778 | |
| Net
cash provided by financing activities from discontinued operations | |
| - | | |
| - | |
| Net
cash provided by financing activities | |
| 80,208 | | |
| 971,778 | |
| Net
increase / (decrease) in cash from continuing operations | |
| (2,178,564 | ) | |
| 311,388 | |
| Net
increase in cash from discontinued operations | |
| - | | |
| 20,164 | |
| Cash
at beginning of period | |
| 5,772,839 | | |
| 329,839 | |
| Cash
at end of period | |
$ | 3,594,275 | | |
$ | 661,391 | |
| Supplemental
disclosure of cash flow information: | |
| | | |
| | |
| Cash
paid for interest | |
$ | - | | |
$ | 125,065 | |
| Supplemental
disclosure of non-cash investing and financing activities: | |
| | | |
| | |
| Common
stock issued pursuant to vesting of restricted stock units | |
$ | 848,500 | | |
$ | 146,602 | |
The
accompanying notes are an integral part of these unaudited consolidated financial statements.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Nature
of the Business
Cryomass
Technologies Inc (“Cryomass Technologies” or the “Company”) owns and is developing the strategy to operate patented
cryo-mechanical technology is for the separation of plant materials in the harvesting of hemp and cannabis, and potentially other high
value crops such as hops. The system exploits CryoMass’s U.S.-patented process for the controlled application of liquid nitrogen
to stabilize and separate the structural elements of gross plant material. The device currently under development is scaled for highway
transportability and is being optimized for the low-cost collection of fully intact hemp and cannabis trichomes. The functional “beta”
machine is expected to be fully field-tested during mid-2022, followed by commercial use of the equipment including revenue generation.
2.
Variable Interest Entity
Pursuant
to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Section 810, Consolidation
(“ASC 810”), the Company is required to include in its consolidated financial statements, the financial statements of
its variable interest entity (“VIE”). ASC 810 requires a VIE to be consolidated if that company is subject to a majority
of the risk of loss for the VIE or is entitled to receive a majority of the VIE’s residual returns. VIEs are those entities in
which a company, through contractual arrangements, bears the risk of, and enjoys the rewards normally associated with ownership of the
entity, and therefore the company is the primary beneficiary of the entity.
Under
ASC 810, a reporting entity has a controlling financial interest in a VIE, and must consolidate that VIE, if the total equity investment
at risk is not sufficient to permit the legal entity to finance its activities without additional subordinated financial support provided
by any parties, including equity holders. Beginning July 15, 2019, the Company consolidated Critical Mass Industries LLC DBA Good Meds
(“CMI” and/or “Good Meds”) as a VIE pursuant to certain intellectual property, administrative and consulting
agreements in which the Company is deemed the primary beneficiary of CMI. Accordingly, the results of CMI have been included in the accompanying
consolidated financial statements.
Effective
December 31, 2021, we entered into a restated and amended administrative services agreement, terminated our license and marketing agreements,
and restated the asset purchase agreement with CMI and affiliates. As a result of these agreements, we disposed of all CMI-related assets
and extinguished any and all related obligations. For clarity, we have no management or operations decision-making right or responsibility,
nor any access to future economic benefits from operation of the assets. Therefore, upon commencing these agreements, we determined that
CMI no longer qualifies as a variable interest entity as of December 31, 2021.
| CMI
Statement of Operations |
| | |
For
the Three Months Ended
March 31, | |
| Description | |
2022 | | |
2021 | |
| Net sales | |
$ | - | | |
$ | 1,695,925 | |
| Cost of goods sold,
inclusive of depreciation | |
| - | | |
| 1,118,735 | |
| Gross profit | |
$ | - | | |
$ | 577,190 | |
| | |
| | | |
| | |
| Operating expenses | |
| | | |
| | |
| Personnel costs | |
| - | | |
| 154,460 | |
| Sales and marketing | |
| - | | |
| 226,347 | |
| General and administrative | |
| - | | |
| 28,988 | |
| Legal
and professional fees | |
| - | | |
| 21,515 | |
| Total operating expenses | |
| - | | |
| 431,310 | |
| Gain from operations | |
$ | - | | |
$ | 145,880 | |
| | |
| | | |
| | |
| Other income / (expense) | |
| | | |
| | |
| Interest
expense | |
| - | | |
| (29,264 | ) |
| Total other income
/ (expense) | |
| - | | |
| (29,264 | ) |
| Net loss | |
| - | | |
| 116,616 | |
As
a result of new agreements entered with CMI on December 31, 2021, as further detailed in Note 1 above, we disposed of all CMI-related
assets and extinguished any and all related obligations in exchange for a $3,600,000 promissory note due to us no later than December
31, 2023.
3.
Going Concern Uncertainty, Financial Conditions and Management’s Plans
The
Company believes it has sufficient cash available to fund its anticipated level of operations for at least the next twelve months. During
the year ended 2021, the Company raised $10,548,535 in common stock and $4,900,000 in convertible notes which were all converted to common
stock.
While
management believes the Company has sufficient cash available to support an anticipated level of operations for at least the next twelve
months, the continuation of our company as a going concern is dependent upon the continued financial support from its shareholders, the
ability of our company to obtain necessary equity or debt financing to continue operations, the payment of our note receivable from CMI
, and ultimately the attainment of profitable operations. For the three months ended March 31, 2022, our company used $1,631,300 of cash
for operating activities, incurred a net loss of $2,152,305 and has an accumulated deficit of $30,741,142 since inception.
On
March 11, 2020, the 2019 novel coronavirus (“COVID-19) was characterized as a “pandemic.” The Company’s
operations were impacted during the year in the United States. The impact of COVID-19 developments and uncertainty with respect
to the economic effects of the pandemic has introduced significant volatility in the financial markets.
The
Company assessed certain accounting matters that require consideration of forecasted financial information, including, but not limited
to, the carrying value of the Company’s goodwill, intangible assets, and other long-lived assets, and valuation allowances in context
with the information reasonably available to the Company and the unknown future impacts of COVID-19 as of March 31, 2022 and through
the date of this report. The Company’s future assessment of the magnitude and duration of COVID-19, as well as other factors,
could result in material impacts to the Consolidated Financial Statements in future reporting periods.
The
COVID-19 pandemic and responses to this crisis, including actions taken by federal, state and local governments, have had an impact on
the operations of the company, including, without limitation, the following: reduced staffing due to employee suspected conditions and
social distancing measures; constraints on productivity; management and staff non-essential business-related travel was constrained due
to stay-at-home orders; most employees have shifted to remote work resulting in loss of productivity; consumers visiting dispensaries
operated under license impacted by stay-at-home orders. Management continues to monitor the COVID-19 pandemic situation and federal,
state and local recommendations and will provide updates as appropriate.
4.
Summary of Significant Accounting Policies
Principles
of Consolidation
The
accompanying consolidated financial statements have been prepared in accordance with GAAP. The consolidated financial statements include
the accounts of the Cryomass Technologies Inc, Cryomass LLC, and CMI, a VIE for which the Company was deemed to be the primary beneficiary.
All significant intercompany balances and transactions have been eliminated in consolidation. The Company operates as one segment from
its corporate headquarters in Colorado.
Effective
December 31, 2021, the Company entered into an asset purchase agreement involving its VIE with Critical Mass Industries, Inc. and John
Knapp, the sole shareholder of Critical Mass Industries, Inc., to divest its discontinued operations in cannabis cultivation, where the
buyer assumes all assets and liabilities from the Company. Therefore, with regards to both criteria discussed above, the Company no longer
has the power to direct activities, absorb losses, or receive benefits from the VIE and as such will no longer consolidate with CMI.
Use
of Estimates
The
preparation of the Company’s financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of expenses during the reporting period. Significant estimates and assumptions reflected in these
financial statements include, but are not limited to determining the fair value of the assets acquired and liabilities assumed in acquisition,
determining the fair value and potential impairment of inventory, determining the useful lives and potential impairment of long-lived
assets and potential impairment of goodwill. The Company bases its estimates on historical experience, known trends and other market-specific
or other relevant factors that it believes to be reasonable under the circumstances. On an ongoing basis, management evaluates its estimates
when there are changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known.
Actual results could differ from those estimates.
Reclassifications
Certain
items in the consolidated financial statements were reclassified from prior periods for presentation purposes.
Cash
and Cash Equivalents
The
Company considers all highly liquid instruments with maturities of three months or less at the time of issuance to be cash equivalents.
Concentrations
of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit risk consist principally of cash. Periodically, the Company
maintains deposits in accredited financial institutions in excess of federally insured limits. The Company deposits its cash in financial
institutions that it believes have high credit quality and has not experienced any losses on such accounts. Additionally, the company
entered into a $3,600,000 loan receivable in conjunction with the disposal of discontinued operations at the end of 2021, which is backed
by the assets of the discontinued operations, should the borrower default. Aside from these items, the Company does not believe it is
exposed to any unusual credit risk.
Purchase
Accounting for Acquisitions
We
apply the acquisition method of accounting for a business combination. In general, this methodology requires us to record assets acquired
and liabilities assumed at their respective fair values at the date of acquisition. Any amount of the purchase price paid that is in
excess of the estimated fair value of the net assets acquired is recorded as goodwill. For certain acquisitions, we also record a liability
for contingent consideration based on estimated future business performance. We monitor our assumptions surrounding these estimated future
cash flows and, if there is a significant change, would record an adjustment to the contingent consideration liability and a corresponding
adjustment to either income or expense. We determine fair value using widely accepted valuation techniques, primarily discounted cash
flow and market multiple analyses. These types of analyses require us to make assumptions and estimates regarding industry and economic
factors, the profitability of future business strategies, discount rates and cash flow.
If
actual results are not consistent with our assumptions and estimates, or our assumptions and estimates change due to new information,
we may be exposed to an impairment charge in the future. If the contingent consideration paid for any of our acquisitions differs from
the amount initially recorded, we would record either income or expense associated with the change in liability.
Variable
Interest Entities
The
Company accounts for variable interest entities in accordance with FASB ASC Topic 810, Consolidation. Management evaluates
the relationship between the Company and VIEs and the economic benefit flow of the contractual arrangement with the VIEs. Management
determines if the Company is the primary beneficiary of a VIE through a qualitative analysis that identifies which variable interest
holder has the controlling financial interest in the VIE. The variable interest holder who has both of the following has the controlling
financial interest and is the primary beneficiary: (1) the power to direct the activities of the VIE that most significantly impact the
VIE’s economic performance and (2) the obligation to absorb losses of, or the right to receive benefits from, the VIE that could
potentially be significant to the VIE. In performing our analysis, we consider all relevant facts and circumstances, including: the design
and activities of the VIE, the terms of the contracts the VIE has entered into, the nature of the VIE’s variable interests issued
and how they were negotiated with or marketed to potential investors, and which parties participated significantly in the design or redesign
of the entity. As a result of such evaluation, management concluded that the Company was the primary beneficiary of CMI and consolidates
the financial results of this entity. Effective December 31, 2021, the Company entered into an asset purchase agreement involving its
VIE with Critical Mass Industries, Inc. and John Knapp, the sole shareholder of Critical Mass Industries, Inc., to divest its discontinued
operations in cannabis cultivation, where the buyer assumes all assets and liabilities from the Company. Therefore, with regards to both
criteria discussed above, the Company no longer has the power to direct activities, absorb losses, or receive benefits from the VIE and
as such will no longer consolidate with CMI.
Accounts
Receivable, net
Accounts
receivable, net is comprised of balances due from customers and are recorded at the invoiced amount. Past due balances are determined
based on the contractual terms of the arrangements. Accounts receivable are accrued against when management determines, after considering
economic and business conditions and all means of collection efforts have been exhausted and the potential for recovery is considered
remote, that the collection of receivables is doubtful.
Inventory,
net
Inventory,
net is comprised of work-in-process and finished goods consisting of cannabis and cannabidiol products. Cost includes expenditures directly
related to the manufacturing process as well as suitable portions of related production overheads, based on normal operating capacity.
Inventory, net is stated at the lower of cost or net realizable value. The Company compares the cost of inventory with market value and
writes down inventories to net realizable value, if lower. In evaluating whether inventories are stated at lower of cost or net realizable
value, management considers such factors as inventories on hand, physical deterioration, obsolescence, changes in price levels, estimated
time to sell such inventories and current market conditions. Due to changing market conditions, management will periodically conduct
a thorough review of its inventory and record a provision for inventory losses if necessary. This is based on the Company’s best
estimates of product sales prices and customer demand patterns. It is at least reasonably possible that the estimates used by the Company
to determine its provision for inventory losses will be materially different from the actual amounts or results. These differences could
result in materially higher than expected inventory provisions, which could have a materially adverse effect on the Company’s results
of operations and financial conditions in the near term.
Revenue
Recognition
Under
FASB Topic 606, Revenue from Contacts with Customers (“ASC 606”), the Company recognizes revenue when the customer
obtains control of promised goods or services, in an amount that reflects the consideration which is expected to be received in exchange
for those goods or services. The Company recognizes revenue following the five-step model prescribed under ASC 606: (i) identify contract(s)
with a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the
transaction price to the performance obligation(s) in the contract; and (v) recognize revenues when (or as) the Company satisfies a performance
obligation.
Discontinued
Operations
For
the three months ended March 31, 2021, Company’s revenue consisted of sales of cannabis and ancillary products to both retail consumers
and wholesale customers. Revenue for retail customers was recognized upon completion of the transaction in the point of sale system and
satisfaction of the sale by providing the corresponding inventory at the retail location. Revenue for wholesale customers was recognized
upon acceptance of the physical goods and confirmation by acceptance of the inventory in the regulatory marijuana enforcement tracking
reporting compliance (“METRC”) system. Revenue was recognized upon transfer of control of promised products to customers,
generally as risk of loss passes, in an amount that reflected the consideration the Company expected to receive in exchange for those
products. Taxes collected from customers, which was subsequently remitted to governmental authorities, were excluded from revenue.
Retail
customer loyalty liabilities were recognized in the period in which they were incurred and were often be retired without being utilized.
Shipping and handling costs were expensed as incurred and are included in cost of sales.
The
Company operated in a highly regulated environment in which state regulatory approval was required prior to the customer being able to
purchase the product, either through the Colorado Marijuana Enforcement Division for wholesale clients or the Colorado Department of
Public Health and Environment for medical patients.
Expenses
Operating
Expenses
Operating
expenses encompass personnel costs, sales and marketing expenses, research and development expenses, general and administrative expenses,
professional and legal fees and depreciation and amortization related to the property and equipment and intangibles acquired through
the acquisition of CMI and Cryocann. Personnel costs consist primarily of consulting expense and administrative salaries and wages. Sales
and marketing expenses consist primarily of advertising and marketing, and salaries related to sales and marketing employees. General
and administrative expenses are comprised of travel expenses, accounting expenses, and board fees. Professional services are principally
comprised of outside legal and professional fees.
Discontinued
Operations
Cost
of Goods Sold, Net of Depreciation and Amortization
Cost
of goods sold primarily consisted of allocated salaries and wages of employees directly related with the production process, allocated
depreciation and amortization directly related to the production process, cultivation supplies, rent and utilities.
Other
Expense, net
Other
expense, net consisted of interest expense, other income and (loss) gain on foreign exchange.
Stock-Based
Compensation
The
fair value of restricted stock units (“RSUs”) granted are measured on the grant date using the closing price
of the Company’s common shares on the grant date. For stock options, the Company engages a valuation firm to calculate the grant
date fair value of the options issued. The Company accounts for forfeitures as they occur, rather than estimating expected forfeitures
over the course of a vesting period. All stock-based compensation costs are recorded in general and administrative expenses in the consolidated
statements of operations.
Property
and Equipment, net
Purchase
of property and equipment are recorded at cost. Improvements and replacements of property and equipment are capitalized. Maintenance
and repairs that do not improve or extend the lives of property and equipment are charged to expense as incurred. When assets are sold
or retired, their cost and related accumulated depreciation are removed from the accounts and any gain or loss is reported in the consolidated
statements of operations. Depreciation and amortization expense is recognized using the straight-line method over the estimated useful
life of each asset, as follows:
| |
|
Estimated
Useful Life |
| Computer equipment |
|
3 – 5 years |
| Furniture and fixtures |
|
5 – 7 years |
| Machinery and equipment |
|
5 – 8 years |
| Leasehold improvements |
|
Shorter of lease term
or 15 years |
Goodwill
and Intangible Assets
Goodwill
represents the excess of the purchase price of an acquired entity over the fair value of identifiable tangible and intangible assets
acquired and liabilities assumed in a business combination.
Indefinite-lived
intangible assets established in connection with business combinations consists of in process research and development. Intangible assets
with indefinite lives are recorded at their estimated fair value at the date of acquisition. Once in process research and development
is placed in service, it will be amortized over the estimated useful life.
Intangible
assets with finite lives are recorded at their estimated fair value at the date of acquisition and are amortized over their estimated
useful lives using the straight-line method. Amortization of assets ceases upon designation as held for sale. The estimated useful lives
of intangible assets are detailed in the table below:
| |
|
Estimated
Useful Life |
| Patent |
|
10 years |
| In process research and development |
|
Indefinite |
Impairment
of Goodwill and Intangible Assets
Goodwill
Goodwill
is not amortized, but instead is tested annually at December 31 for impairment and upon the occurrence of certain events or substantive
changes in circumstances.
We
account for the impairment of goodwill under the provisions of Financial Accounting Standards Board (FASB) Accounting Standard Update
2017-04 (“ASU 2017-04”), “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment” and FASB Accounting Standards Codification (ASC) 350-20-35, Intangibles – Goodwill and Other – Goodwill.
The
Company performs impairment testing for goodwill by performing the following steps: 1) evaluate the relevant events or circumstances
to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, 2) if yes to
step 1, calculate the fair value of the reporting unit and compare it with its carrying amount, including goodwill, 3) recognize impairment,
limited to the total amount of goodwill allocated to that reporting unit, equal to the excess of the carrying value of a reporting unit
over its fair value.
Management
concluded that there were no events indicative of goodwill impairment during the three months ended March 31, 2022.
Indefinite-Lived
Intangible Assets and Intangible Assets Subject to Amortization
Indefinite-lived
intangible assets and intangible assets subject to amortization are not amortized, but instead are tested annually at December 31 for
impairment and upon the occurrence of certain events or substantive changes in circumstances.
We
account for the impairment of indefinite-lived intangible assets under the provisions of Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC) 350-30-35, Intangibles – Goodwill and Other – General Intangibles Other Than Goodwill.
Following this guidance, the Company compares the estimated fair value of the indefinite-lived intangible assets to its carrying value.
If the carrying value exceeds the fair value, the Company recognizes impairment equal to that excess.
We
account for the impairment of intangible assets subject to amortization under the provisions of Financial Accounting Standards Board
(FASB) Accounting Standards Codification (ASC) 360-10-35, Property, Plant, and Equipment. Following this guidance, the Company
compares the estimated fair value of the intangible assets subject to amortization to its carrying value. If the carrying value exceeds
the fair value, the Company recognizes impairment equal to that excess.
Management
concluded that there were no events indicative of identifiable intangible asset impairment during the three months ended March 31, 2022.
Income
Taxes
The
Company uses the liability method of accounting for income taxes as set forth in ASC 740, Income Taxes. Under the liability method,
deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities
using tax rates expected to be in effect during the years in which the basis differences reverse. A valuation allowance is recorded when
it is likely that the deferred tax assets will not be realized. We assess our income tax positions and record tax benefits for all years
subject to examination based upon our evaluation of the facts, circumstances and information available at the reporting date. In accordance
with ASC 740-10, for those tax positions where there is a greater than 50% likelihood that a tax benefit will be sustained, our policy
will be to record the largest amount of tax benefit that is more likely than not to be realized upon ultimate settlement with a taxing
authority that has full knowledge of all relevant information. For those income tax positions where there is less than 50% likelihood
that a tax benefit will be sustained, no tax benefit will be recognized in the financial statements.
Fair
Value Measurements
Certain
assets and liabilities of the Company are carried at fair value under GAAP. 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. Financial assets and liabilities carried at fair value are
to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered
observable and the last is considered unobservable:
| |
● |
Level 1 — Quoted
prices in active markets for identical assets or liabilities. |
| |
|
|
| |
● |
Level 2 — Observable
inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices
in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated
by observable market data. |
| |
|
|
| |
● |
Level 3 — Unobservable
inputs that are supported by little or no market activity that are significant to determining the fair value of the assets or liabilities,
including pricing models, discounted cash flow methodologies and similar techniques. |
The
carrying values reported in the consolidated balance sheets for cash, prepaid expenses, inventories, accounts payable, and notes payable
approximate fair values because of the immediate or short-term maturities of these financial instruments. There were no other assets
or liabilities that require fair value to be recalculated on a recurring basis.
The
fair value of beneficial conversion features associated with convertible notes and the fair value of warrants are calculated utilizing
level 2 inputs.
When
multiple instruments are issued in a single transaction, the total proceeds from the transaction should be allocated among the individual
freestanding instruments identified. The allocation occurs after identifying (1) all the freestanding instruments and (2) the subsequent
measurement basis for those instruments. The subsequent measurement basis helps inform how the proceeds should be allocated. After the
proceeds are allocated to the freestanding instruments, those instruments should be further evaluated for embedded features that may
need to be bifurcated or separated.
If
debt or stock is issued with detachable warrants, the guidance in ASC 470-20-25-2 (applied by analogy to stock) requires that the proceeds
be allocated to the two instruments based on their relative fair values. This method is generally appropriate if debt or stock is issued
with any other freestanding instrument that is classified in equity (such as a detachable forward contract) or as a liability but not
subject to subsequent fair value accounting.
Given
that our convertible notes and common stock that were issued with warrants are both not subject to subsequent fair value accounting treatment,
Management determined the relative fair value method shall be used for allocating the proceeds of the transaction. Under the relative
fair value method, the instrument being analyzed is allocated a portion of the proceeds based on its fair value to the sum of the fair
value of all the instruments covered int the allocation. Management additionally evaluates the facts and circumstances to determine whether
the principal balance of convertible notes approximate their fair value, which we have concluded for all convertible notes issued.
Net
Loss per Share
The
Company follows ASC 260, Earnings Per Share, which requires presentation of basic and diluted earnings per share (“EPS”)
on the face of the income statement for all entities with complex capital structures. Net earnings or loss per share is computed by dividing
net income or loss by the weighted-average number of common shares outstanding during the period, excluding shares subject to redemption
or forfeiture. The Company presents basic and diluted net earnings or loss per share. Diluted net earnings or loss per share reflect
the actual weighted average of common shares issued and outstanding during the period, adjusted for potentially dilutive securities outstanding.
Potentially dilutive securities are excluded from the computation of the diluted net loss per share if their inclusion would be anti-dilutive.
There were 1,933,982 unvested RSU’s considered potentially dilutive securities outstanding as of March 31, 2022 and 2,050,000 unvested
RSU’s considered potentially dilutive securities outstanding as of March 31, 2021. Diluted net loss per share is the same as basic
net loss per share for each period.
Recent
Accounting Pronouncements
In
August 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2020-06, Debt—Debt with
Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40).
ASU 2020-06 reduces the number of accounting models for convertible debt instruments and convertible preferred stock. The accounting
model for beneficial conversion features is removed. The ASU is effective for smaller reporting companies for fiscal years beginning
after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal
years beginning after December 15, 2020, including interim periods within those fiscal years. The Company determined that this update
will impact its financial statements.
5.
Revenue Recognition
Disaggregated
Revenue
The
following amounts relate to discontinued operations from our CMI VIE disposed of on December 31, 2021.
| | |
For
the Three Months Ended
March 31, | |
| | |
2022 | | |
2021 | |
| Types of Revenues: | |
| | |
| |
| Medical retail | |
$ | - | | |
$ | 1,130,504 | |
| Medical wholesale | |
| - | | |
| 556,310 | |
| Recreational wholesale | |
| - | | |
| 9,010 | |
| Total
revenues | |
$ | - | | |
$ | 1,130,504 | |
6. Business
Combination
On
June 22, 2021, the Company entered into an Asset Purchase Agreement with Cryocann USA Corp, a California corporation (“Cryocann”),
pursuant to which Company acquired substantially all the assets of Cryocann (the “Cryocann Acquisition”). The aggregate purchase
price was $3,500,000 million in cash and 10,000,000 shares of Company common stock and a promissory note was issued for $1,252,316 payable
by Company to Cryocann on October 15, 2021, which represents the remaining Purchase Price of $2,500,000 minus the amount owed by Cryocann
under a Loan Agreement dated April 23, 2021 by and between Cryocann and the Company.
The
Company concluded that the Cryocann Acquisition qualified as a business combination under ASC 805. The Company’s allocation of
the purchase price was calculated as follows:
| Cash | |
$ | 2,247,684 | |
| Common stock | |
| 1,804,500 | |
| Promissory Note | |
| 1,220,079 | |
| Total purchase price | |
$ | 5,272,263 | |
| Description | |
Fair
Value | | |
Weighted
average
useful life
(in years) |
| Assets acquired: | |
| | |
|
| Intangible assets: | |
| | |
|
| In
process research and development | |
| 3,209,000 | | |
Indefinite |
| Patent | |
| 873,263 | | |
10 |
| Goodwill | |
| 1,190,000 | | |
|
| Total
assets acquired | |
$ | 5,272,263 | | |
|
As
if the acquisition occurred on January 1, 2021, as reported in our pro forma basis, our net loss would have been $2,025,847 and our net
loss per common share would have been $0.02 for the three months ended March 31, 2021. Our net sales would have remained unchanged during
the period. These pro forma results are not necessarily indicative of the results that actually would have occurred if the acquisition
had occurred on the first day of the periods presented, nor does the pro forma financial information purport to represent the results
of operations for future periods.
7.
Discontinued Operations
In
June 2020, the Company’s board of directors adopted a plan to exit the cultivation, manufacturing of infused products and retail
distribution businesses through the sale of CMI. The Company determined that the intended sale represented a strategic shift that will
have a major effect on the Company’s operations and financial results.
The
consolidated statements of operations include the following operating results related to these CMI discontinued operations:
| | |
Three
Months Ended
March 31, | |
| | |
2022 | | |
2021 | |
| | |
| | |
| |
| Net
sales | |
$ | - | | |
$ | 1,695,925 | |
| Cost
of goods sold, inclusive of depreciation | |
| - | | |
| 1,118,735 | |
| Gross
profit | |
| - | | |
| 577,190 | |
| | |
| | | |
| | |
| Operating
expenses: | |
| | | |
| | |
| Personnel
costs | |
| - | | |
| 154,460 | |
| Sales
and marketing | |
| - | | |
| 226,347 | |
| General
and administrative | |
| - | | |
| 28,988 | |
| Legal
and professional fees | |
| - | | |
| 21,515 | |
| Total
operating expenses | |
| - | | |
| 431,310 | |
| Gain
/ (loss) from operations | |
| - | | |
| 145,880 | |
| | |
| | | |
| | |
| Other
income (expenses): | |
| | | |
| | |
| Interest
expense | |
| - | | |
| (29,264 | ) |
| Total
other expenses | |
| - | | |
| (29,264 | ) |
| Net gain
/ (loss) from discontinued operations, before taxes | |
| - | | |
| 116,616 | |
| Income
taxes | |
| - | | |
| - | |
| Net
gain / (loss) from discontinued operations | |
$ | - | | |
$ | 116,616 | |
8. Property
and Equipment, Net
Property
and equipment, net consisted of the following.
| | |
March 31,
2022 | | |
December 31,
2021 | |
| Leasehold improvements | |
$ | - | | |
$ | - | |
| Machinery and equipment | |
| 233,641 | | |
| 225,000 | |
| Furniture and fixtures | |
| - | | |
| - | |
| Construction in progress | |
| - | | |
| - | |
| | |
| 233,641 | | |
| 225,000 | |
| Less: Accumulated depreciation | |
| - | | |
| - | |
| | |
$ | 233,641 | | |
$ | 225,000 | |
As
of March 31, 2022, our machinery and equipment was not capable of producing a unit of product that is saleable. Depreciation expense
will be recognized once our machinery and equipment is ready for its intended use.
9.
Goodwill and Intangible Assets
The
carrying value of goodwill was $1,190,000 as of March 31, 2022 and December 31, 2021.
The
following tables summarize information relating to the Company’s identifiable intangible assets as of March 31, 2022 and December 31,
2021:
| | |
March
31, 2022 |
| | |
Estimated
Useful Life
(Years) | |
Gross
Amount | | |
Accumulated
Amortization | | |
Carrying
Value | |
| Amortized | |
| |
| | |
| | |
| |
| Patent | |
10 years | |
$ | 873,263 | | |
$ | (65,495 | ) | |
$ | 807,768 | |
| Indefinite-lived | |
| |
| | | |
| | | |
| | |
| In-process research
and development | |
Indefinite | |
| 3,209,000 | | |
| - | | |
| 3,209,000 | |
| Total
identifiable intangible assets | |
| |
$ | 4,082,263 | | |
$ | (65,495 | ) | |
$ | 4,016,768 | |
| | |
December
31, 2021 |
| | |
Estimated
Useful Life
(Years) | |
Gross
Amount | | |
Accumulated
Amortization | | |
Carrying
Value | |
| Amortized | |
| |
| | |
| | |
| |
| Patent | |
10 years | |
$ | 873,263 | | |
$ | (43,663 | ) | |
$ | 829,600 | |
| Indefinite-lived | |
| |
| | | |
| | | |
| | |
| In-process research
and development | |
Indefinite | |
| 3,209,000 | | |
| - | | |
| 3,209,000 | |
| Total
identifiable intangible assets | |
| |
$ | 4,082,263 | | |
$ | (43,663 | ) | |
$ | 4,038,600 | |
Amortization
expense was $21,832 and $0 for the three months ended March 31, 2022 and 2021, respectively.
10.
Loans Receivable
As
a result of new agreements entered with CMI on December 31, 2021, as further detailed in Note 1 above, we received a $3,600,000 promissory
note due to us no later than December 31, 2023. In consideration of the loan receivable, we conveyed to CMI, any and all manufacturing,
grow equipment, retail-related assets and other assets Seller owns in the state of Colorado and are currently used by CMI subsidiaries
in the course of business, including client lists and appertaining intellectual property, and no other Buyer or Parent assets, as well
as all liabilities related to these assets. During the quarter, the Company issued an additional $620,000 in loans to CMI.
11.
Debt
On
July 27, 2020, the Company entered into a subscription agreement consisting of 1) a convertible note and 2) warrants. The 1) convertible
note has a face value of $250,000, matures August 1, 2022, and accrues interest at 8% per annum. The note is convertible into 2,500,000
shares of the Company’s common stock at a conversion price of $0.10 per share. The beneficial conversion feature is accounted for
in accordance with ASC 470-20 Debt with Conversion and Other Options and the resulting debt discount is amortized over the life
of the note. As of March 31, 2022, the net carrying amount is $208,333, which consists of the $250,000 convertible note and $41,667 unamortized
debt discount. As of December 31, 2021, the net carrying amount is $177,083, which consists of the $250,000 convertible note and $72,917
unamortized debt discount. The 2) warrants are exercisable to purchase an additional 2,500,000 shares of common stock at $0.25 per share.
On
August 26, 2020, the Company entered into a $600,000 loan agreement, which accrues interest at 84% per annum. On January 25, 2021, the
Company refinanced this loan at 93.6%, to obtain additional funding. The loan was fully repaid on April 27, 2021.
On
March 18, 2021, the Company entered into a $225,000 note payable, which accrued interest at 15% per annum. The note was fully repaid
on May 7, 2021.
Between
March 29, 2021 and July 6, 2021, the Company entered into a series of similar subscription agreements with either domestic or non-US
accredited investors, respectively (each, a “Initial Tranche Subscription Agreement (US)” and, respectively, “Initial
Tranche Subscription Agreement (non-US)”) pursuant to which the Company issued and sold to certain accredited investors, in the
initial tranche of a non-brokered private placement (the “Private Placement”), an aggregate 3,000 units (“Units”),
each Unit representing (i) one $1,000 principal amount term note providing for an optional conversion into shares of Company common stock
at a price of $0.20 per share (each the “Initial Convertible Term Note”) and (ii) a common share warrant for the purchase
of 5,000 shares of Company common stock at an exercise price of $0.40 per share (each an “Initial Warrant”), for aggregate
net proceeds of $3,000,000. The Initial Convertible Term Notes and the Initial Warrants mature on March 31, 2022 and March 31, 2023,
respectively, and accrued interest at a rate of 12% per annum payable on a quarterly basis.
Between
May and July 6, 2021, the Company entered into a series of substantially similar subscription agreements with either domestic or non-US
investors (each, a “Subscription Agreement (US)”, and, respectively, “Subscription Agreement (non-US)”) pursuant
to which the Company issued and sold to certain accredited investors, in the second tranche of the Private Placement, an aggregate 1,900
units (“Units”), each Unit representing (i) one $1,000 principal amount term note (each a “Convertible Term Note”)
providing for an optional conversion into shares of Company common stock at a price of $0.20 per share and (ii) a common share warrant
for the purchase of 5,000 shares of Company common stock at an exercise price of $0.40 per share (each a “Warrant”), for
additional aggregate net proceeds of $1,900,000. The Convertible Term Notes and Warrants mature on September 30, 2022 and April 30, 2023,
respectively, and accrued interest at a rate of 12% per annum payable on a quarterly basis.
All
notes were converted during the fourth quarter of 2021.
On
August 20, 2021, the Company entered into a $300,000 loan agreement, which accrued interest at 91.23% per annum. Payment is due on a
weekly basis up to the maturity date of May 27, 2021. The loan was fully repaid on October 19, 2021.
12.
Related Party Transactions
In
conjunction with the Cryocann Acquisition, the Company received a promissory note from Matt Armstrong, an employee of the Company, for
$281,771. This note receivable was issued as part of an employment agreement with Matt Armstrong, effective June 22, 2021, and was offset
against his signing bonus on October 15, 2021. There was no interest associated with the note.
On
August 19, 2021, the Company entered into a loan agreement of $237,590 with its Chief Executive Officer, Christian Noel. The note accrues
interest at 14% per annum and was repaid on October 22, 2021.
On
November 15, 2021, the Company issued 250,000 common shares and warrants, respectively, to Christian Noel in exchange for $50,000. In
addition, the Company issued 760,000 common shares and warrants, respectively, to Trichome Capital Inc. in exchange for $152,000. Christian
Noel has voting and investment control of Trichome Capital Inc.
13.
Shareholders’ Equity
From
January to March 2021, the Company issued 1,491,819 shares of common stock in order to raise capital.
From
April to June 2021, the Company issued 10,000,000 shares of common stock related to the CryoCann transaction, 6,903,172 shares of common
stock pursuant to employment agreements, 2,500,000 shares of common stock in exchange for the extinguishment of debt, and 633,125 shares
of common stock in exchange for services.
From
July to September 2021, the Company issued 798,414 shares of common stock in order to raise capital, 633,707 shares of common stock in
exchange for services, and 92,127 shares of common stock for interest payment on a note payable.
From
October to December 2021, the Company issued 50,700,000 shares of common stock in order to raise capital, 1,570,501 shares of common
stock in exchange for services, and 24,621,119 shares of common stock in exchange for extinguishment of debt.
From
January to March 2022, the Company issued 458,334 shares of common stock in exchange for services, 550,000 shares of common stock for
2021 management performance bonuses, 185,529 shares of common stock for director compensation, and 1,000,000 shares of common stock for
2020 RSU grants vesting in January 2022.
Restricted
Stock Unit Awards
The
Company adopted its 2019 Omnibus Stock Incentive Plan (the “2019 Plan”), which provides for the issuance of stock options,
stock grants and RSUs to employees, directors and consultants. The primary purpose of the 2019 Plan is to enhance the ability to attract,
motivate, and retain the services of qualified employees, officers and directors. Any RSUs granted under the 2019 Plan will be at the
discretion of the Compensation Committee of the Board of Directors. On January 10, 2022, the shareholders approved the 2022 Stock Incentive
Plan which then replaced the 2019 Plan.
A
summary of the Company’s RSU award activity for the three months ended March 31, 2022 is as follows:
| | |
Restricted
Stock
Units | | |
Weighted
Average
Grant
Date
Fair Value | |
| Outstanding at December 31, 2021 | |
| 2,200,003 | | |
$ | 0.45 | |
| Granted | |
| 1,469,511 | | |
| 0.27 | |
| Vested | |
| (1,735,529 | ) | |
| 0.49 | |
| Forfeited | |
| - | | |
| - | |
| Outstanding at March 31, 2022 | |
| 1,933,982 | | |
$ | 0.27 | |
The
total fair value of RSUs vested during the three months ending March 31, 2022 and 2021 was $848,600 and $146,602, respectively.
As of March 31, 2022 and 2021, there was $187,761 and $472,087, respectively, of unrecognized stock-based compensation cost related to
non-vested RSU’s, which is expected to be recognized over the remaining vesting period.
Stock-based
compensation expense relating to RSU’s was $140,815 and $250,817 for the three months ending March 31, 2022 and 2021, respectively.
Stock-based compensation for the three months ending March 31, 2022 consisted of equity awards forfeited, granted and vested to employees,
directors and consultants of the Company in the amount of $27,179, $108,771, and $4,866, respectively. Expenses for stock-based compensation
are included on the accompanying consolidated statements of operations in general and administrative expense.
Stock
Option Awards
A
summary of the Company’s stock option activity for the three months ended March 31, 2022 is as follows:
| | |
Stock
Option
Shares | | |
Weighted
Average
Exercise
Price | | |
Weighted
Average
Remaining
Contractual
Term | | |
Aggregate
Intrinsic
Value | |
| Outstanding at December 31, 2021 | |
| 8,500,000 | | |
$ | 0.18 | | |
| 9.2 | | |
$ | 1,579,108 | |
| Granted and vested | |
| - | | |
| - | | |
| - | | |
| - | |
| Forfeited | |
| - | | |
| - | | |
| - | | |
| - | |
| Outstanding at March 31, 2022 | |
| 8,500,000 | | |
$ | 0.18 | | |
| 9.0 | | |
$ | 1,579,108 | |
During
the three months ended March 31, 2022 and 2021, the Company did not issue any stock options.
During
the year ended December 31, 2021, the Company issued warrants with the option to purchase 73,950,000 common shares at an exercise price
of $0.40 per share. Of these warrants, 15,000,000 shares expire on March 31, 2023, 9,500,000 expire on April 30, 2023, 1,000,000 expire
on September 17, 2023, 7,750,000 expire on October 15, 2023, 9,510,000 expire on October 26, 2023, 190,000 expire on November 2, 2023,
27,060,000 expire on November 10, 2023, 1,940,000 expire on November 15, 2023, and 750,000 expire on November 17, 2023.
The
fair value of these warrants is $1,867,960, which is reflected in additional paid in capital.
14. Income
Taxes
In
accordance with ASC 740-270, the Company calculates the interim tax expense based on an annual effective tax rate (“AETR”).
The AETR represents the Company’s estimated effective tax rate for the year based on full year projection of tax expense, divided
by the projection of full year pretax book loss, adjusted for discrete transactions occurring during the period. The annual effective
tax rate for the three months ended March 31, 2022 was 0.0%,
As
of March 31, 2022, the Company has recorded no income tax liability.
15. Commitments
& Contingencies
Occasionally,
the Company may be involved in claims and legal proceedings arising from the ordinary course of its business. The Company records a provision
for a liability when it believes that it is both probable that a liability has been incurred, and the amount can be reasonably estimated.
If these estimates and assumptions change or prove to be incorrect, it could have a material impact on the Company’s consolidated
financial statements. Contingencies are inherently unpredictable, and the assessments of the value can involve a series of complex judgments
about future events and can rely heavily on estimates and assumptions.
Lease
Commitments
The
Company accounts for lease transactions in accordance with Topic 842, Leases (“ASC 842”), which requires an entity
to recognize a right-of-use (“ROU”) asset and a lease liability for virtually all leases. Operating lease ROU assets and
liabilities are recognized at commencement date based on the present value of lease payments over the lease term. ROU assets represent
the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation
to make lease payments arising from the lease.
There
are no other leases that meet the reporting standards of ASU Topic 842 as the Company does not have any other leases with a term exceeding
twelve months. Other lease payments not accounted for under ASU Topic 842 total $0 and $14,392 for the three months ended March 31, 2022
and 2021, respectively.
An
ROU asset of $1,411,461 was recognized upon the CMI Transaction. The right of use assets and lease liabilities assumed from the CMI transaction
were disposed of as part of the disposal of our discontinued operations, which is described in further detail above.
The
present value of the liabilities decreased by $0 and $132,230 for the three months ended March 31, 2022 and 2021, respectively. This
balance is included in the operating section of the statement of cash flows for three months ended March 31, 2022 and 2021. Operating
lease cost was approximately $0 and $159,5254 for the three months ended March 31, 2022 and 2021, respectively.
The
Company does not have any leases that have not yet commenced which are significant.
Legal
Proceedings
We
know of no material, existing or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceeding
or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial
shareholder, is an adverse party or has a material interest adverse to our company.
16. Subsequent
Events
Subsequent
to March 31, 2022, the Company issued 1,091,667 shares of common stock. 291,667 shares were issued at $0.35 per share in exchange for
services, 800,000 shares were issued to three directors and one executive officer at $0.28 per share, and 200,000 shares were issued
to an executive officer at $0.25 per share.
Subsequent
to March 31, 2022, the Company purchased property and equipment associated with testing of our processing equipment for a total value
of $115,945.
On April
5, 2022, the Company granted 500,000 shares for director services. The shares will vest on January 1, 2023.
PART
II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item
13. Other Expenses of Issuance and Distribution.
The
estimated expenses of the offering (assuming all shares are sold), all of which are to be paid by the Registrant, are as follows:
| SEC Registration
Fee |
|
US$ |
1,342 |
|
| Printing
Expenses |
|
US$ |
0 |
|
| Accounting
Fees and Expenses |
|
US$ |
0 |
|
| Legal
Fees and Expenses |
|
US$ |
1,000 |
|
| Blue Sky
Fees/Expenses |
|
US$ |
0 |
|
| Transfer
Agent Fees |
|
US$ |
0 |
|
| TOTAL |
|
$ |
2,342 |
|
Item
14. Indemnification of Directors and Officers.
The
only statute, charter provision, bylaw, contract, or other arrangement under which any controlling person, director or officer of the
Registrant is insured or indemnified in any manner against any liability which he may incur in his capacity as such, is as follows:
Nevada
Law
Section
78.7502 of the Nevada Revised Statutes permits a corporation to indemnify any person who was or is a party or is threatened to be made
a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative,
except an action by or in the right of the corporation, by reason of the fact that he is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses, including attorneys’ fees, judgments, fines and amounts
paid in settlement actually and reasonably incurred by him in connection with the action, suit or proceeding if he:
| |
(a) |
is not liable pursuant
to Nevada Revised Statute 78.138, or |
| |
|
|
| |
(b) |
acted in good faith and
in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. |
In
addition, Section 78.7502 permits a corporation to indemnify any person who was or is a party or is threatened to be made a party to
any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason
of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses,
including amounts paid in settlement and attorneys’ fees actually and reasonably incurred by him in connection with the defense
or settlement of the action or suit if he:
| |
(a)
|
is
not liable pursuant to Nevada Revised Statute 78.138; or |
| |
|
|
| |
(b)
|
acted
in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation. |
To
the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to above, or in defense of any claim, issue or matter, the corporation is required to indemnify
him against expenses, including attorneys’ fees, actually and reasonably incurred by him in connection with the defense.
Section
78.751 of the Nevada Revised Statutes provides that such indemnification may also include payment by the Company of expenses incurred
in defending a civil or criminal action or proceeding in advance of the final disposition of such action or proceeding upon receipt of
an undertaking by the person indemnified to repay such payment if he shall be ultimately found not to be entitled to indemnification
under Section 78.751. Indemnification may be provided even though the person to be indemnified is no longer a director, officer, employee
or agent of the Company or such other entities.
Section
78.752 of the Nevada Revised Statutes allows a corporation to purchase and maintain insurance or make other financial arrangements on
behalf of any person who is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise for
any liability asserted against him and liability and expenses incurred by him in his capacity as a director, officer, employee or agent,
or arising out of his status as such, whether or not the corporation has the authority to indemnify him against such liability and expenses.
Other
financial arrangements made by the corporation pursuant to Section 78.752 may include the following:
| |
(a) |
the creation of a trust
fund; |
| |
|
|
| |
(b) |
the establishment of a
program of self-insurance; |
| |
|
|
| |
(c) |
the securing of its obligation
of indemnification by granting a security interest or other lien on any assets of the corporation; and |
| |
|
|
| |
(d) |
the establishment of a
letter of credit, guaranty or surety |
No
financial arrangement made pursuant to Section 78.752 may provide protection for a person adjudged by a court of competent jurisdiction,
after exhaustion of all appeals, to be liable for intentional misconduct, fraud or a knowing violation of law, except with respect to
the advancement of expenses or indemnification ordered by a court.
Any
discretionary indemnification pursuant to NRS 78.7502, unless ordered by a court or advanced pursuant to an undertaking to repay the
amount if it is determined by a court that the indemnified party is not entitled to be indemnified by the corporation, may be made by
the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee
or agent is proper in the circumstances. The determination must be made:
| |
(b)
|
by the board of directors
by majority vote of a quorum consisting of directors who were not parties to the action, suit or proceeding; |
| |
|
|
| |
(c)
|
if a majority vote of a
quorum consisting of directors who were not parties to the action, suit or proceeding so orders, by independent legal counsel in
a written opinion, or |
| |
|
|
| |
(d)
|
if a quorum consisting
of directors who were not parties to the action, suit or proceeding cannot be obtained, by independent legal counsel in a written
opinion. |
The
articles of incorporation and bylaws limit director liability and provide for indemnification to the fullest extent provided by Nevada
law.
Item
15. Recent Sales of Unregistered Securities
The
information required by this item has previously been filed on Form 8-K.
Item
16. Exhibits.
The
following documents are filed as part of this Registration Statement:
Exhibit
Number |
|
Description |
| (3) |
|
Articles
of Incorporation and Bylaws |
| 3.1 |
|
Articles
of Incorporation (incorporated by reference to our Registration Statement on Form S- 1 filed on May 9, 2012). |
| 3.2 |
|
Bylaws
(incorporated by reference to our Registration Statement on Form S- 1 filed on May 9, 2012). |
| 3.3 |
|
Certificate
of Amendment (incorporated by reference to our Current Report on Form 8-K filed on January 13, 2014). |
| 3.4 |
|
Certificate
of Change filed with the Nevada Secretary of State on April 12, 2018 with an effective date of April 26, 2018. (incorporated by reference
to our Current Report on Form 8-K filed on May 2, 2018) |
| 3.5 |
|
Articles
of Merger filed with the Nevada Secretary of State on April 12, 2018 with an effective date of April 26, 2018. (incorporated by reference
to our Current Report on Form 8-K filed on May 2, 2018) |
| 3.6 |
|
Articles
of Merger filed with the Nevada Secretary of State on October 14, 2019 (incorporated by reference to our Current Report on Form 8-K
filed on October 18, 2019) |
| 3.7 |
|
Articles
of Merger filed with the Nevada Secretary of State on September 1, 2020 (incorporated by reference to our Current Report on Form
8-K filed on September 3, 2020) |
| 3.8 |
|
Articles
of Merger filed with the Nevada Secretary of State on July 23, 2021 (incorporated by reference to our Current Report on Form 8-K
filed on July 27, 2021) |
| 5.1* |
|
Opinion
Regarding Legality |
| (10) |
|
Material
Contracts |
| 10.1 |
|
Asset
Purchase Agreement between Andina Gold Corp, General Extract LLC, Cryocann USA Corporation, Steve Cimini and Matt Armstrong dated
June 22, 2021 (incorporated by reference to our Current Report on Form 8-K filed on June 28, 2021) |
| 10.2 |
|
Asset
Purchase Agreement Among Critical Mass Industries LLC, Critical Mass Industries, Inc., John Knapp, Good Meds, Inc. and Cryomass Technologies
Inc dated December 31, 2021 (incorporated by reference to our Registration Statement on Form
S- 1 filed on February 14, 2022) |
| 10.3 |
|
Mutual
Termination Agreement by and among Critical Mass Industries LLC, Critical Mass Industries, Inc., John Knapp, and Good Meds, Inc dated
December 31, 2021 (incorporated by reference to our Registration Statement on Form S- 1 filed on February 14, 2022) |
| 10.4 |
|
Restated
and Amended Administrative Services Agreement by and among Critical Mass Industries LLC, Critical Mass Industries, Inc., John Knapp,
and Good Meds, Inc dated December 31, 2021 (incorporated by reference to our Registration Statement on Form S- 1 filed on February
14, 2022) |
| 10.5 |
|
2019
Omnibus Equity Incentive Plan (incorporated by reference to our Annual Report on Form 10-K for December 31, 2020) |
| 10.6 |
|
2022
Stock Incentive Plan (incorporated by reference to our Registration Statement on Form S- 1 filed on February 14, 2022) |
| 10.7 |
|
Christian Noel
Employment Agreement (incorporated by reference to our Registration Statement on Form S- 1 filed on February 14, 2022) |
| 10.8 |
|
Amendment
to Christian Noel Employment Agreement dated December 13, 2021 (incorporated by reference to our Registration Statement on Form S-
1 filed on February 14, 2022) |
| 10.9 |
|
Philip
Mullin Revised Employment Agreement (incorporated by reference to our Annual Report on Form 10-K for December 31, 2020) |
| 10.10 |
|
Amendment
to Philip Mullin Revised Employment Agreement (incorporated by reference to our Registration Statement on Form S- 1 filed on February
14, 2022) |
| 10.11 |
|
Patricia
Kovacevic Third Amended Employment Agreement (incorporated by reference to our Registration Statement on Form S- 1 filed on
February 14, 2022) |
| 10.12 |
|
Amendment
to Patricia Kovacevic Third Employment Agreement (incorporated by reference to our Registration Statement on Form S- 1 filed on February
14, 2022) |
| 10.13 |
|
Form
of Convertible Note (incorporated by reference to our Registration Statement on Form S- 1 filed on February 14, 2022) |
| 10.14 |
|
Form
of Warrant- August 1, 2020 (incorporated by reference to our Registration Statement on Form S- 1 filed on February 14, 2022) |
| 10.15 |
|
Form
of Warrant- April 2021 (incorporated by reference to our Registration Statement on Form S- 1 filed on February 14, 2022) |
| 10.16 |
|
Form
of Warrant-October 2021 (incorporated by reference to our Registration Statement on Form S- 1 filed on February 14, 2022) |
| 10.17 |
|
Form
of Warrant-November 2021 (incorporated by reference to our Registration Statement on Form S- 1 filed on February 14, 2022) |
| 10.18 |
|
Equity
Purchase Agreement with Peak One Opportunity Fund, L.P. (incorporated by reference to our
Registration Statement on Form S-1 filed on April 27, 2022) |
| 10.19 |
|
Amendment
No. 1 to Equity Purchase Agreement with Peak One Opportunity Fund, L.P. (incorporated by
reference to our Registration Statement on Form S-1 filed on April 27, 2022) |
| 21* |
|
Subsidiaries of the Registrant |
| 23.1* |
|
Consent of BF Borger CPA PC |
| 23.2 |
|
Consent
of J.P. Galda (included in Exhibit 5.1) |
| (101)* |
|
Interactive
Data Files |
| 101.INS |
|
XBRL
Instance Document |
| 101.SCH |
|
XBRL
Taxonomy Extension Schema Document |
| 101.CAL |
|
XBRL
Taxonomy Extension Calculation Linkbase Document |
| 101.DEF |
|
XBRL
Taxonomy Extension Definition Linkbase Document |
| 101.LAB |
|
XBRL
Taxonomy Extension Label Linkbase Document |
| 101.PRE |
|
XBRL
Taxonomy Extension Presentation Linkbase Document |
| 107* |
|
Filing
Fee Table |
| ** | to
be filed by amendment |
Item
17. Undertakings.
A.
The undersigned Registrant hereby undertakes:
(1)
To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement to:
(a)
include any prospectus required by Section 10(a)(3) of the Securities Act;
(b)
reflect in the prospectus any facts or events arising after the effective date of this Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in this Registration
Statement. Notwithstanding the foregoing, any increase or decrease in the volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) under the Securities Act if, in the
aggregate, the changes in volume and price represent no more than a 20% change in maximum aggregate offering price set forth in the “Calculation
of Registration Fee” table in the effective Registration Statement; and
(c)
include any additional or changed material information with respect to the plan of distribution.
(2)
That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered herein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3)
To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the
termination of the offering.
(4)
For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part
of a registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of the Registration Statement as of the time it was declared
effective.
(5)
For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
(6)
For the purpose of determining liability under the Securities Act to any purchaser:
Each
prospectus filed pursuant to Rule 424(b) under the Securities Act as part of a registration statement relating to an offering, other
than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A (§§230.430A of
this chapter), shall be deemed to be part of and included in the Registration Statement as of the date it is first used after effectiveness.
Provided however, that no statement made in a registration statement or prospectus that is part of the Registration Statement or made
in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the Registration
Statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was
made in the registration statement or prospectus that was part of the Registration Statement or made in any such document immediately
prior to such date of first use.
(7)
For the purpose of determining liability of the Registrant under the Securities Act to any purchaser in the initial distribution of securities:
The
Registrant undertakes that in a primary offering of securities of the Registrant pursuant to this Registration Statement, regardless
of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means
of any of the following communications, the Registrant will be a seller to the purchaser and will be considered to offer or sell such
securities to such purchaser:
(a)
Any preliminary prospectus or prospectus of the Registrant relating to the offering required to be filed pursuant to Rule 424 of this
chapter;
(b)
Any free writing prospectus relating to the offering prepared by or on behalf of the Registrant or used or referred to by the Registrant;
(c)
The portion of any other free writing prospectus relating to the offering containing material information about the Registrant or its
securities provided by or on behalf of the Registrant; and
(d)
Any other communication that is an offer in the offering made by the Registrant to the purchaser.
B.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other than the payment by the small business issuer of expenses
incurred or paid by a director, officer or controlling person of the small business issuer in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company
will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
C.
The undersigned Registrant hereby undertakes that:
(1)
For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed
as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time
it was declared effective.
(2)
For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.