The foregoing numbers are subject to the review of the Company's auditors; after completion of the review, the Company will file an amended form 10-Q/A.
Business Overview
The Company is a
Panacea, which was founded by
22
In the third quarter of fiscal year 2021 we obtained additional registration on
two more of our six brands and our mark. Panacea engaged
Currently Panacea sells over 60 different product SKUs of CBD and CBG products. In addition, we offer "white label" licensing to retail businesses and contract manufacturing services to smaller CBD companies. In the sales area we were able to close a significant transaction with a national convenience store and we shipped out our first purchase order of products in August, 2021.
We were also engaged by a third-party company to develop various formulations for pet products and human products. We plan to manufacture their products for sale in the 4th quarter.
Our Industrial Hemp Supply
Panacea's 2021 crop is being grown in
Partnership with Universities
The grand opening of the
Company Information Technology Infrastructure
The ERPCannabis system is based on an SAP architecture and was used to develop the base installation. All financial, human resource, payroll, procurement, production planning and materials management business processes are represented in this system. In addition, the system is linked to our e-Commerce website www.panacealife.com. This system allows us to update product costing and determine inventory levels which will be critical as the company expands. In addition, sophisticated financial and payroll processing are inherent in the solution; thus, offering investors detailed accounting results related to company investments. We plan to expand on the use of this infrastructure for acquisitions and service offerings.
Results of Operations
Set forth below is the discussion of the results of operations of the Company
for the three months ended
23
Three Months Ended
Net Revenues
The Company is principally engaged in the business of producing and selling
products made from industrial hemp. Revenue consists of sales of our six
category of brand products, white label and contract manufacturing sales to
other CBD companies, raw material sales (distillate and isolate), tolling
products, and leasing space. During the three months ended
Cost of Sales
The primary components of cost of sales include the cost of manufacturing the
CBD products. For the three months ended
Operating Expenses
Production related operating expenses were
General and administrative expenses (G&A) were
Nine Months Ended
Net Revenues
During the nine months ended
Also, the rental income received of
Cost of Sales
The primary components of cost of sales include the cost of the CBD product. For
the nine months ended
Operating Expenses
Production related expenses were
General and administrative expenses were
24 Summary of Cash Flows
Cash flows from operating activities
The largest source of operating cash is from our customers. A large majority of
our customers purchase CBD on-line, so credit card payments are collected and
paid within 1-2 business days. Other white label and contract manufacturing
customers pay before the products are released. Some larger customers have
either net 10, 2% or 30 day net terms. Net cash used in operating activities was
Cash flows from investing activities
Cash received from
Cash flows from financing activities
Net cash provided by financing activities for the nine months ended
Liquidity and Capital Resources
On
We may not have sufficient cash resources to sustain our operations for the next
12 months, particularly if the large sales agreements and purchase orders we
have do not result in the revenue anticipated. We may be dependent on obtaining
financing from one or more debt or equity offerings or further loans from
These unaudited condensed consolidated financial statements are presented on the basis that the Company will continue as a going concern. The going concern concept contemplates the realization of assets and satisfaction of liabilities in the normal course of business. No adjustment has been made to the carrying amount and classification of the Company's assets and the carrying amount of its liabilities based on the going concern uncertainty. These factors raise substantial doubt about the Company's ability to continue as a going concern for a period of 12 months from the issuance date of this report. Management cannot provide assurance that the Company will ultimately achieve profitable operations or become cash flow positive or raise additional debt and/or equity capital. In addition, due to insufficient revenue, we will need to obtain further funding through public or private equity offerings, debt financing, collaboration arrangements or other sources in order to maintain active business operations. We currently do not have sufficient cash flow to pay our ongoing financial obligations on a consistent basis. The issuance of any additional shares of common stock, preferred stock or convertible securities could be substantially dilutive to our stockholders. In addition, adequate additional funding may not be available to us on acceptable terms, or at all. If we are unable to raise capital, we will be forced to borrow additional sums from our Chief Executive Officer or delay, reduce or eliminate our research and development programs, we may not be able to continue as a going concern, and we may be forced to discontinue operations. These unaudited condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Off Balance Sheet Arrangements
As of
25
Potential Impacts of the COVID-19 Pandemic on Our Business Operations
As disclosed in Note 2, the COVID-19 pandemic has had a notable impact on general economic conditions, including but not limited to the temporary closures of many businesses, "shelter in place" and other governmental regulations, reduced business and consumer spending due to both job losses and reduced investing activity, among many other effects attributable to the COVID-19 pandemic, and there continue to be many unknowns. During 2020, COVID-19 had a significant impact on Panacea's CBD operations. Recognizing the sudden need for personal protective equipment, Panacea shifted its business to importing and selling PPE hand sanitizers and masks.
The Delta variant which is having a significant impact in
Potential Impacts of Certain Current and Proposed Regulations on Our Business and Operations
Recently, a bill titled the
Many people are increasingly turning to CBD products for several reasons: CBD is non-psychoactive, so it does not produce a "high" like THC, there are few known contraindications, the properties of different cannabinoids can positively affect a wide range of ailments, and cannabinoids work directly and indirectly with the body's endocannabinoid system to create balance known as homeostasis. As demand increases, we believe the FDA must provide more clarity about CBD's legalization, and this bill is a promising first step.
For now, many companies that produce hemp-derived CBD products including Panacea undertake to abide by the same regulations as any other dietary supplements like ingredient filings, good manufacturing practices (GMP), and labeling and marketing provisions. Panacea will continue to sell CBD and other hemp-derived products while still awaiting a clear path from the FDA about how CBD products can be marketed and used.
Cautionary Statement Regarding Forward-Looking Statements
This quarterly report on Form 10-Q (this "Report") contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about our new operations in the hemp industry through Panacea, our expected revenue growth, our future plans and developments with respect to PPE products and the COVID-19 pandemic, our human resources following our recent acquisition of Panacea, proposed federal legislation and its potential impact on the CBD industry, our business relationship with XXII, our plans to raise capital, and our liquidity. Words such as "expects," "anticipates," "plans," "believes," "seeks," "estimates," "could," "would," "may," "intends," "targets" and similar expressions or variations of such words are intended to identify forward-looking statements but are not the exclusive means of identifying forward-looking statements in this Report. The identification of certain statements as "forward-looking" is not intended to mean that other statements not specifically identified are not forward-looking. All statements other than statements about historical facts are statements that could be deemed forward-looking statements, including, but not limited to, statements that relate to our future revenue, product development, customer demand, market acceptance, growth rate, competitiveness, gross margins, and expenditures.
Although forward-looking statements in this Report reflect the good faith
judgment of our management, such statements can only be based on facts and
factors currently known by us. Consequently, forward-looking statements are
inherently subject to risks and uncertainties discussed under the heading "Risk
Factors" within Part I, Item 1A of the Report for the three and nine months
ended
26
Critical Accounting Estimates and New Accounting Pronouncements
New Accounting Pronouncements
See Note 2, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES to the unaudited condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Critical Accounting Estimates
The discussion and analysis of the Company's financial condition and results of operations is based upon the Company's condensed consolidated financial statements, which have been prepared in accordance with US GAAP. The preparation of the Company's condensed consolidated financial statements requires its management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures. The Company's management bases its estimates, assumptions and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Different assumptions and judgments would change the estimates used in the preparation of the Company's condensed consolidated financial statements which, in turn, could change the results from those reported. In addition, actual results may differ from these estimates and such differences could be material to the Company's financial position and results of operations.
Critical accounting estimates are those that the Company's management considers the most important to the portrayal of the Company's financial condition and results of operations because they require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company's critical accounting estimates in relation to its condensed consolidated financial statements include those related to:
?Goodwill and intangible assets ? Fair value of marketable securities ? Incremental Borrowing Rate used Right of Use Asset Calculations ? Business combinations
We allocate the cost of acquired companies to the identifiable tangible and intangible assets acquired and liabilities assumed, with the remaining amount classified as goodwill. The identification and valuation of these intangible assets and the determination of the estimated useful lives at the time of acquisition, as well as the completion of impairment tests, require significant management judgments and estimates. These estimates are made based on, among other factors, review of projected future operating results and business plans, economic projections, anticipated highest and best use of future cash flows and the cost of capital. The use of alternative estimates and assumptions could increase or decrease the estimated fair value of goodwill and other intangible assets, and potentially result in a different impact to our results of operations. Further, changes in business strategy and/or market conditions may significantly impact these judgments and thereby impact the fair value of these assets, which could result in an impairment of the goodwill or intangible assets.
27
Fair value of marketable securities
Marketable securities are recorded at fair value using the quoted market prices and changes in fair value are recorded as net realized gains or losses in comprehensive income. We monitor these investments for impairment and make appropriate reductions in carrying values as necessary.
Incremental Borrowing Rate used Right of Use Asset Calculations
We determine if a contract is a lease or contains a lease at the inception of the contract and reassess that conclusion if the contract is modified. All leases are assessed for classification as an operating lease or a finance lease. Operating lease right-of-use, or ROU, assets are included in non-current other assets on our consolidated balance sheet. Operating lease liabilities are separated into a current portion, included within other accrued liabilities on our consolidated balance sheet, and a non-current portion, included within other long-term liabilities on our consolidated balance sheet. We do not have any finance lease ROU assets or liabilities. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. We do not obtain and control the right to use the identified asset until the lease commencement date.
Our lease liabilities are recognized at the applicable lease commencement date based on the present value of the lease payments required to be paid over the lease term. Because the interest rate implicit in the lease is not readily determinable, we generally use our incremental borrowing rate to discount the lease payments to present value. The estimated incremental borrowing rate is derived from information available at the lease commencement date. We factor in publicly available data for instruments with similar characteristics when calculating our incremental borrowing rates. Our ROU assets are also recognized at the applicable lease commencement date. The ROU asset equals the carrying amount of the related lease liability, adjusted for any lease payments made prior to lease commencement and lease incentives provided by the lessor. Variable lease payments are expensed as incurred and do not factor into the measurement of the applicable ROU asset or lease liability.
Business Combinations
We have applied significant estimates and judgments in order to determine the fair value of the identified assets acquired, liabilities assumed and goodwill recognized in connection with our business combinations to ensure the value of the assets and liabilities acquired are recognized at fair value as of the acquisition date. In measuring the fair value, we utilize valuation techniques consistent with the market approach, income approach, or cost approach.
The valuation of the identifiable assets and liabilities includes assumptions made in performing the valuation, such as projected revenue, weighted average cost of capital, discount rates, estimated useful lives, and other relevant assessments. These assessments can be significantly affected by our estimates, judgments, and assumptions. If actual results are not consistent with our estimates, judgments, or assumptions, or if additional or new information arises in the future that affects our fair value estimates, then adjustments to our initial fair value estimates may have a material impact to our purchase accounting or our results of operations. If actual results are not consistent with our estimates, judgments, or assumptions, or if additional or new information arises in the future, beyond our one-year measurement period, that affects our fair value estimates, then adjustments to our initial fair value estimates may have a material impact to our results of operations.
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