THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS, THE NOTES THERETO AND THE OTHER FINANCIAL INFORMATION APPEARING IN THIS REPORT.
Introduction
The financial data discussed below are derived from the unaudited consolidated
financial statements of the Company as of
General Statement of Business
The Company was incorporated under the laws of the state of
The Company is in the businesses of (i) selling and distributing hydroponic containers called "GrowPods" and related products and (ii) designing, branding and selling proprietary plastic medical-grade containers that can store pharmaceuticals, herbs, teas and other solids or liquids and can grind solids and shred herbs, as well as selling other products such as humidity control inserts, smell-proof bags, lighters, and plastic lighter holders, and providing private labeling and branding for purchasers of the Company's containers and the other products.
The Company markets its products directly to businesses through its phone room and to the retail public through internet sales. The Company also markets directly to wholesalers and other businesses that resell them to other businesses and end users.
On
The acquisition of ACT represented a material change in the business strategy of the Company and an expansion of its product base. Since the inception of the Company in 2014, its intended growth strategy was to concentrate on increasing sales of Medtainers while introducing related products and services, such as humidity control inserts and printing. This approach resulted in relatively flat revenues, increasing expenses and a history of losses. Management believes that this acquisition offered the prospect of substantially increased revenues, without a comparable increase in expenses an opportunity to expand its profits significantly. The Company has announced that it is exploring with GP the acquisition of its assets and the assumption of some or all of its liabilities in exchange for shares of Common Stock (the "GP Acquisition"). Discussions are in their preliminary stages and none of the terms and conditions of the acquisition has been determined, including the number of shares of Common Stock to be issued to GP in exchange for its assets or the liabilities of GP that the Company would assume. The Company intends to structure any transaction such that its board of directors and executive officers would not be changed and that voting control of the Company would not be affected.
18
The Company's authorized capital is 100,000,000 shares of Common Stock and
10,000,000 shares of preferred stock, par value
The Company's principal place of business is located at
Going Concern
As indicated in Note 3 of the Notes to Consolidated Financial Statements, there is substantial doubt as to the ability of the Company to continue as a going concern. The Company has generated material operating losses since inception and its ability to continue as a going concern depends on the successful execution of its operating plan, which includes increasing sales of existing products - and in particular GrowPods and related products - while introducing additional products and services, controlling cost of goods sold and operation expenses, negotiating extensions of existing loans, and raising either debt or equity financing.
Need for Capital
The Company needs a substantial amount of additional capital to fund its business, including the expansion of its operations, and for repayment of its debts. No assurance can be given that any additional capital can be obtained or, if obtained, will be adequate to meet its needs. If adequate capital cannot be obtained on a timely basis and on satisfactory terms, the Company's operations could be materially negatively impacted and it may need to take certain measures to remain a going concern, or it could be forced to terminate operating.
Impact of the Covid-19 Pandemic
For more information regarding the impact of the Covid-19 pandemic on the Company, see Part II - Item 1A - Risk Factors.
Critical Accounting Policies and Estimates
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. Certain estimates could be affected by external conditions, including those unique to its industry and general economic conditions, which could affect the Company s estimates so as to cause actual results to differ materially from its estimates. The Company re-evaluates all of its accounting estimates at least quarterly, based on these conditions and records adjustments when necessary.
Significant estimates relied upon in preparing the consolidated financial statements contained in this report include revenue recognition, accounts receivable reserves, inventory and related reserves, valuations and purchase price allocations related to business combinations, expected future cash flows used to evaluate the recoverability of long-lived assets, estimated fair values of long-lived assets used to record impairment charges related to intangible assets and goodwill, amortization periods, accrued expenses, share-based compensation, and recoverability of the Company s net deferred tax assets and any related valuation allowances.
19 Fair Value Measurements
The Company has adopted the provisions of ASC Topic 820, Fair Value Measurements, which defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value and expands disclosure of fair-value measurements.
The estimated fair value of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, is carried on a historical cost basis, which approximates their fair value because of the short-term nature of these instruments. The carrying amounts of the Company s short- and long-term credit obligations approximate fair value because the effective yields on these obligations, which include contractual interest rates taken together with other features such as concurrent issuances of warrants and/or embedded conversion options, are comparable to rates of returns for instruments of similar credit risk.
ASC Topic 820 defines fair value 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. ASC Topic 820 also establishes a fair-value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC Topic 820 describes three levels of inputs that may be used to measure fair value:
Level 1 Quoted prices in active markets for identical assets or liabilities.
Level 2 Quoted prices for similar assets and liabilities in active markets or inputs that are observable.
Level 3 Inputs that are unobservable (for example, cash flow modeling inputs based on assumptions).
Significant judgment is required in evaluating whether an intangible asset has an indefinite useful life and in testing for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, and incorporating general economic and market conditions.
The Company reviews intangible assets subject to amortization quarterly to determine if any adverse conditions exist or if a change in circumstances has occurred that would indicate impairment or a change in the remaining useful life. Conditions that would indicate impairment and trigger a more frequent impairment assessment include, but are not limited to, a significant adverse change in legal factors or business climate that could affect the value of an asset or an adverse action or assessment by a regulator. If the carrying value of an intangible asset exceeds its undiscounted cash flows, the Company will write down its carrying value to its fair value in the period identified. The Company generally calculates fair value as the present value of estimated future cash flows to be generated by the asset using a risk-adjusted discount rate. If the estimate of an intangible asset's remaining useful life is changed, the Company will amortize the remaining carrying value of the intangible asset prospectively over the revised remaining useful life. The Company also evaluates intangible assets and long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. These changes include but are not limited to significant adverse changes in the business climate, market conditions, or other events, including the Covid-19 pandemic, that indicate an asset's carrying amount may not be recoverable. The recoverability of these assets is measured by comparing the carrying amount of each asset with the future undiscounted cash flows the asset is expected to generate. If the undiscounted cash flows used in the test of recoverability are less than the carrying amount of these assets, their carrying amount is reduced to fair value.
20
Pursuant to ASU No. 2017-04, Simplifying the Test for Goodwill Impairment ("ASU
No. 2017-04"), the Company evaluates and tests the recoverability of its
goodwill for impairment at least annually during the fourth quarter of each
fiscal year or more often if circumstances indicate that goodwill may not be
recoverable. The Company has conducted annual impairment tests of goodwill
during the fourth quarter of each year, commencing in the year ended
The fair value of acquired technology and patents, as well as acquired technology that the Company may develop, is determined at their acquisition date primarily using the income approach, which discounts expected future cash flows to present value. The discount rates used in the present value calculations are typically derived from a weighted-average cost-of-capital analysis and then adjusted to reflect risks inherent in the development life cycle as appropriate. Any loss resulting from an impairment test will be reflected in operating income in the Company s consolidated statements of income. The annual impairment testing process is subjective and requires judgment at many points. If these estimates or their related assumptions change in the future, the Company may be required to record impairment charges for these assets not previously recorded.
There was no impairment of intangible assets, long-lived assets or goodwill
during the nine months ended
Revenue Recognition
Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), as amended by ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net); ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing; ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients; and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, requires a company to recognize revenues when it transfers goods or services to customers in an amount that reflects the consideration that it expects to receive for them.
Under ASU No. 2014-09, as amended, the Company recognizes revenues when a customer obtains control of promised goods or services, or when they are shipped to a customer, in an amount that reflects the consideration that it expects to receive in exchange for them. The Company recognizes revenues following a five-step model: (a) it identifies contract(s) with a customer; (b) it identifies the performance obligations in the contract; (c) it determines the transaction price; (d) it allocates the transaction price to the performance obligations in the contract; and (e) it recognizes revenues when (or as) it satisfies its performance obligation.
Revenues from product sales are recognized when a customer obtains control of the Company's product, which occurs at a point in time, typically upon shipment to the customer. The Company expenses incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that it would have been recognized is one year or less or the amount is immaterial.
Taxes
The Company accounts for income taxes under FASB ASC Topic 740, Accounting for Income Taxes, under which the Company is required to recognize a current tax liability or asset for current taxes payable or refundable and a deferred tax liability or asset for the estimated future tax effects of temporary differences and carryforwards to the extent they are realizable.
21 Results of Operations
Comparison of the Three Months Ended
The following table sets forth information from the statements of operations for
the three months ended
Three Months Ended September 30, 2022 September 30, 2021 Revenues $ 634,433 $ 1,451,737 Cost of goods sold (486,892 ) (1,061,103 ) Gross profit 147,541 390,634 Operating expenses 546,759 454,292 Loss from operations (399,218 ) (63,658 ) Non-operating income (expense): Non-operating income - 138,567 Interest expense (2,887 ) (8,297 ) Net income (loss) $ (402,105 ) $ 66,612 Revenues
Revenues were
Cost of Goods Sold
Cost of goods sold for the three months ended
Operating Expenses
The following table sets forth operating expenses for the three months ended
Three Months Ended September 30, 2022 September 30, 2021 Advertising and marketing $ 20,687 $ 31,578 Bad debt 35,000 - Depreciation and amortization 75,735 69,232 Professional fees 81,026 20,520 Payroll 204,584 230,313 General and administrative 129,727 102,649 Total operating expenses $ 546,759 $ 454,292
Operating expenses were
22 Loss from Operations
Loss from operations increased from a loss of
Other Income (Expense)
For the three months ended
Net Income (Loss)
The net loss for the three months ended
Comparison of the Nine Months Ended
The following table sets forth information from the statements of operations for
the nine months ended
Nine Months Ended September 30, September 30, 2022 2021 Revenues$ 2,299,923 $ 4,083,267 Cost of goods sold (1,626,992 ) (3,102,972 ) Gross profit 672,931 980,295 Operating expenses 1,503,412 1,625,548 Loss from operations (830,481 ) (645,253 ) Non-operating income (expense): Non-operating income - 138,567 Interest expense (13,025 ) (21,087 ) Total non-operating income (expense), net (13,025 ) (117,480 ) Net loss$ (843,506 ) $ (527,773 ) Revenues
Revenues were
23 Cost of Goods Sold
Cost of goods sold for the nine months ended
Operating Expenses
Operating expenses for the nine months ended
Nine Months Ended September 30, 2022 September 30, 2021 Advertising and marketing $ 98,678 $ 64,009 Bad debt 40,750 - Depreciation and amortization 214,274 209,056 Professional fees 233,925 148,641 Share-based compensation - 270,000 Payroll 613,888 694,375 General and administrative 301,897 239,467 Total operating expenses $ 1,503,412 $ 1,625,548
Operating expenses were
Loss from Operations
Loss from operations increased from a loss of
Other Income (Expense)
For the nine months ended
Net Loss
Net loss for the nine months ended
24
Liquidity and Capital Resources
As of
During the nine months ended
The decrease in cash provided from financing activities was primarily a result of stockholder loans and proceeds from the issuance of common stock, which was partially offset by a repayment of debt.
On
In 2020, the Company received
The Company had no other material commitments for capital expenditures as of
The Company intends to devote its manpower and capital resources to increasing revenues, while working to reduce the cost of goods sold and operating expenses. Doing so depends on the successful execution of its operating plan, which includes increasing sales of existing products, introducing additional products and services, controlling cost of goods sold and operation expenses, negotiating extensions of existing loans and raising either debt or equity financing.
Off-Balance-Sheet Arrangements
The Company has no off-balance-sheet arrangements.
Recent Accounting Pronouncements
Refer to Note 2 of the accompanying financial statements.
25
© Edgar Online, source