Results of Operations
Year ended December 31, 2021 compared to year ended December 31, 2020
Revenues
We had revenues of $889,899 for the year ended December 31, 2021, as compared to
revenues of $1,029,543 for the year ended December 31, 2020.
Cost of Sales
We had a cost of sales of $279,333 on revenues of $889,899 for the year ended
December 31, 2021 versus a cost of sales of $310,685 on revenues of $1,029,543
for the year ended December 31, 2020
Operating Expenses
General and administrative were $780,462 for the year ended December 31, 2021,
as compared to $720,525 for the year ended December 31, 2020. Salaries and wages
were $370,034 for the year ended December 31, 2021 as compared to $418,697 for
the year ended December 31, 2020. The decrease in these expense categories from
2020 to 2021, reflects our shift of focus to overseas development of operations.
Professional fees were $ 889,912 for the year ended December 31, 2021, as
compared to $1,327,607 for the year ended December 31, 2020, reflecting a
decrease of $437,695. After giving effect to all of the foregoing, total
operating expenses were $2,040,408 for the year ended December 31,2021, as
compared to $2,553,980 for the year ended December 31, 2020. Accordingly, our
operating loss was $1,429,842 for the year ended December 31, 2021, as compared
to $1,835,122 for the year ended December 31, 2020. The Company recorded a loss
on impairment on assets of $87,151 in year ended December 31, 2020, related to
discontinued lease right of use assets.
Interest expense
Interest expense was $635,810 for the year ended December 31, 2021, as compared
to $602,806 for the year ended December 31, 2020, reflecting an increase of
additional debt incurred in 2021.
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Net Income (Loss)
After giving effect to an operating loss of $1,429,842 interest expense of
$635,810, amortization of debt discount of $333,296, derivative liabilities
expense of $566,080, gain on extinguishment of debt of $6,155, gain on
disposal/impairment of fixed assets of $142,844, gain on settlement $44,294,
change in derivative liabilities expense of $12,947,095 arising from the
increase of our stock prices which increased the volatility factors used in the
derivative calculations, we had net loss from non-controlling interest of
$331,009 for the year ended December 31,2021. Additionally, the Company has
accrued a tax liability of $782,107 related to potential taxes due under the IRS
Code 280E.
This compares to a net loss from non-controlling interest of $198,401 for the
year ended December 31, 2020, after giving effect to an operating loss of
$1,835,122, interest expense of $602,806, amortization of debt discount of
$241,755, derivative liabilities expense of $324,033 and loss on extinguishment
of debt of $-0- offset by other income from a change in derivative liabilities
income of $9,119,848 arising from the reduction of our stock prices which
reduced the volatility factors used in the derivative calculations. The net
income attributable to the Company for 2021 and net loss attributable to the
Company for 2020 was $11,362,219 and $12,098,821, respectively.
Liquidity and Capital Resources
During 2021 our cash position increased by $522,817 to $565,979 and our negative
working capital deficit was $7,458,348.
As of December 31, 2021, our working capital consisted of cash of $565,979,
inventories of $51,484 and prepaid expenses of $13,967 as compared to cash of
$43,162, inventories of $47,618 and prepaid expenses of $ 12,135 as of December
31, 2020.
Our current liabilities include accounts payable and accrued expenses of
$918,148, accounts payable and accrued expenses-related parties of $141,990
accrued interest of $1,152,783 current portion of lease liability of $79,875,
tax liability of $782,107 convertible notes payable- net of discount of $25,000,
notes payable of $9,312 and derivative liabilities of $4,980,563 as compared to
accrued expenses of $988,247, accounts payable and accrued expenses-related
parties of $846,111 accrued interest of $616,329, current portion of lease
liability of $149,896, convertible notes payable- net of discount of $363,243,
notes payable of $9,312 and derivative liabilities of $17,328,904 as of December
31, 2020.
The following table sets forth the major sources and uses of cash for the years
ended December 31, 2021 and 2020:
2021 2020
Net cash provided by (used in) operating activities $ (1,043,482) $ (289,617 )
Net cash provided by (used in) investing activities $ 1,274,018 $ (31,688 )
Net cash provided by financing activities
$ 296,000 $ 277,500
Net (decrease) increase in cash $ 526,536 $ (43,805 )
Cash Used in Operating Activities
During 2021, we had cash of $1,043,482 used in operating activities, as compared
to cash used in operations of $289,617 in 2020.
Cash Provided by (Used in) Investing Activities
During 2021, we had cash of $1,274,018 provided by investing activities, as
compared to $31,688 used in investing activities in 2020. Expenditures in 2021
and 2020 consisted of property and equipment.
Cash Provided by Financing Activities
During 2021, $466,000 of convertible debt was issued, with repayment of $205,000
and we sold $35,000 of restricted stock, as compared to $265,000 of convertible
debt and $12,500 in restricted stock in 2020.
Additional Capital
As of December 31, 2021 we had cash of $565,979 and a working capital deficiency
of $7,458,348 as compared to cash of $43,805 and a working capital deficiency of
$20,199,127 at December 31, 2020.
Management believes that it will require additional capital, in addition to
anticipated revenues from operations to fund expansion of the Company's
operations and ultimately achieve profitability. The Company intends to seek
such additional capital from further private offerings of equity and/or debt
securities. However, we may not be successful in raising additional capital on
commercially reasonable terms, if and when needed, in which case our business,
financial condition, cash flows and results of operations may be materially and
adversely affected.
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Critical Accounting Estimates
The following are deemed to be the most significant accounting estimates
affecting us and our results of operations:
Revenue Recognition
Effective January 1, 2018, the Company adopted ASC 606 - Revenue from Contracts
with Customers. Under ASC 606, the Company recognizes revenue from the
commercial sales of products, licensing agreements and contracts to perform
pilot studies by applying the following steps: (1) identify the contract with a
customer; (2) identify the performance obligations in the contract; (3)
determine the transaction price; (4) allocate the transaction price to each
performance obligation in the contract; and (5) recognize revenue when each
performance obligation is satisfied. For the comparative periods, revenue has
not been adjusted and continues to be reported under ASC 605 - Revenue
Recognition. Under ASC 605, revenue is recognized when the following criteria
are met: (1) persuasive evidence of an arrangement exists; (2) the performance
of service has been rendered to a customer or delivery has occurred; (3) the
amount of fee to be paid by a customer is fixed and determinable; and (4) the
collectability of the fee is reasonably assured.
To confirm, all of our OLCC licensed cannabis retail sales operations are
conducted and operated on a "cash and carry" basis- product(s) from our
inventory accounts are sold to the customer(s) and the customer settles the
account at time of receipt of product via cash payment at our retail store; the
transaction is recorded at the time of sale in our point of sale software
system. Revenue is only reported after product has been delivered to the
customer and the customer has paid for the product with cash.
To date the only other revenue we have received is for ATM transactions and
revenue from this activity is only reported after we receive payment via check
from the ATM service provider company.
Fair value of financial instruments
The Company follows the provisions of ASC 820. This Topic defines fair value,
establishes a measurement framework and expands disclosures about fair value
measurements. We apply these provisions to estimate the fair value of our
financial instruments including cash, accounts payable and accrued expenses, and
notes payable.
Income Taxes
The Company accounts for income taxes in accordance with ASC 740, Accounting for
Income Taxes, as clarified by ASC 740-10, Accounting for Uncertainty in Income
Taxes. Our deferred income taxes are determined based on the estimated future
tax effects of differences between the financial statement and tax basis of
assets and liabilities given the provisions of enacted tax laws. Deferred income
tax provisions and benefits are based on changes to the assets or liabilities
from year to year. In providing for deferred taxes, the Company considers tax
regulations of the jurisdictions in which the Company operates, estimates of
future taxable income, and available tax planning strategies. If tax
regulations, operating results or the ability to implement tax-planning
strategies vary, adjustments to the carrying value of deferred tax assets and
liabilities may be required. Valuation allowances are recorded related to
deferred tax assets based on the "more likely than not" criteria of ASC 740.
ASC 740-10 requires that the Company recognize the financial statement benefit
of a tax position only after determining that the relevant tax authority would
more likely than not sustain the position following an audit. For tax positions
meeting the "more-likely-than-not" threshold, the amount recognized in the
financial statements is the largest benefit that has a greater than 50 percent
likelihood of being realized upon ultimate settlement with the relevant tax
authority.
We are subject to certain tax risks and treatments that could negatively impact
our results of operations
Section 280E of the Internal Revenue Code, as amended, prohibits businesses from
deducting certain expenses associated with trafficking controlled substances
(within the meaning of Schedule I and II of the Controlled Substances Act). The
IRS has invoked Section 280E in tax audits against various cannabis businesses
in the U.S. that are permitted under applicable state laws. Although the IRS
issued a clarification allowing the deduction of certain expenses, the scope of
such items is interpreted very narrowly and the bulk of operating costs and
general administrative costs are not permitted to be deducted. While there are
currently several pending cases before various administrative and federal courts
challenging these restrictions, there is no guarantee that these courts will
issue an interpretation of Section 280E favorable to cannabis businesses.
Provision for Income Taxes
We recorded a provision for income taxes in the amount of $782,107 during the
year ended December 31, 2021 compared to $0 during the year ended December 31,
2020. Although we have net operating losses that we believe are available to us
to offset this entire tax liability, which arises under Section 280E of the Code
because we are a cannabis company, as a conservative measure, we have accrued
this liability.
Recently Issued Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the FASB or other
standard setting bodies that are adopted by the Company as of the specified
effective date. Unless otherwise discussed, the Company believes that the effect
of recently issued standards that are not yet effective will not have a material
effect on its consolidated financial position or results of operations upon
adoption.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU
2016-02). Under ASU No. 2016-2, an entity is required to recognize right-of-use
assets and lease liabilities on its balance sheet and disclose key information
about leasing arrangements. ASU No. 2016-02 offers specific accounting guidance
for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors
are required to disclose qualitative and quantitative information about leasing
arrangements to enable a user of the financial statements to assess the amount,
timing and uncertainty of cash flows arising from leases. For public companies,
the Company adopted this standard on January 1, 2019 using the modified
retrospective method. The new standard provides a number of optional practical
expedients in transition. The Company elected the package of practical
expedients', which permitted the Company not to reassess under the new standard
its prior conclusions about lease identification, lease classification and
initial direct costs; and all of the new standard's available transition
practical expedients. On adoption, the Company recognized a right of use asset
of $638,593, operating lease liabilities of $638,593, based on the present value
of the remaining minimum rental payments under current leasing standards for its
existing operating lease. The new standard also provides practical expedients
for a company's ongoing accounting. The Company elected the short-term lease
recognition exemption for its leases. For those leases with a lease term of 12
months or less, the Company will not recognize ROU assets or lease liabilities.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260);
Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging
(Topic 815): (Part I) Accounting for Certain Financial Instruments with Down
Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily
Redeemable Financial Instruments of Certain Nonpublic Entities and Certain
Mandatorily Redeemable Noncontrolling Interests with a Scope Exception" to
simply the accounting for certain instruments with down round features. The
amendments require companies to disregard the down round feature when assessing
whether the instrument is indexed to its own stock, for purposes of determining
liability or equity classification. Further, companies that provide earnings per
share ("EPS") data will adjust the basic EPS calculation for the effect of the
feature when triggered and will also recognize the effect of the trigger within
equity. The standard is effective for public companies for fiscal years, and
interim periods within those fiscal years, beginning after December 15, 2018.
Early adoption is permitted. The Company adopted this new standard on January 1,
2019 and did not have a material impact on the Company's consolidated financial
statements.
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In August 2018, the FASB issued ASU No. 2018-13, "Fair Value Measurement (Topic
820)." This standard modifies disclosure requirements related to fair value
measurement and is effective for all entities for fiscal years, and interim
periods within those There are no other recently issued accounting
pronouncements that the Company has yet to adopt that are expected to have a
material effect on its financial position, results of operations, or cash flows.
fiscal years, beginning after December 15, 2019. Early adoption is permitted.
Implementation on a prospective or retrospective basis varies by specific
disclosure requirement. The standard also allows for early adoption of any
removed or modified disclosures upon issuance while delaying adoption of the
additional disclosures until their effective date. The Company is currently
assessing the impact of adopting this standard on its consolidated financial
statements.
In December 2019, the FASB issued ASU No. 2019-12, "Simplifying the Accounting
for Income Taxes (Topic 740)". This standard simplifies the accounting for
income taxes. This standard is effective for fiscal years beginning after
December 15, 2020, including interim periods within those fiscal years. Early
adoption is permitted for all entities, The Company is currently assessing the
impact of adopting this standard on its consolidated financial statements.
Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements that have or are reasonably likely
to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to investors.
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