Statements in this report which express "belief," "plan" "anticipation" or "expectation," as well as other similar or other statements which are not historical facts, are forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or anticipated results, including those that may be set forth below and elsewhere in this report. Examples of these uncertainties and risks include, but are not limited to:
• access to sufficient debt or equity capital to meet our operating and
financial needs; • the extent of dilution of the holdings of our existing stockholders upon the
issuance, conversion or exercise of securities issued as part of our capital
raising efforts; • the effectiveness and ultimate market acceptance of our products and our
ability to generate sufficient sales revenues to sustain our growth and
strategy plans; • whether our products in development will prove safe, feasible and effective; • legislation and changing regulatory rules directed at our industry; • whether and when we or any potential strategic partners will obtain required
regulatory approvals in the markets in which we plan to operate; • our need to achieve manufacturing scale-up in a timely manner, and our need to
provide for the efficient manufacturing of sufficient quantities of our
products;
• the lack of immediate alternate sources of supply for some critical components
of our products; • our ability to establish and protect the proprietary information on which we
base our products, including our patent and intellectual property position; • the need to fully develop the marketing, distribution, customer service and
technical support and other functions critical to the success of our product
lines;
• the dependence on potential strategic partners or outside investors for
funding, development assistance, clinical trials, distribution and marketing
of some of our products; • other risks and uncertainties described from time to time in our publicly filed reports: and disruption in the economic and financial conditional primarily from the impact of past terrorist attacks inthe United States , threat of future attacks, police and military activities overseas and other disruptive worldwide pandemic, political and economic events and environmental and weather conditions.
The following discussion should be read in conjunction with our financial statements and notes thereto included elsewhere in this report.
OVERVIEW
The Company's primary business is hemp CBD oil/isolate extraction, wholesaling of CBD oils and isolate, and production and sales of hemp-derived CBD consumer brands. The Company's brand development strategy will be to leverage existing Company resources into creating online sales, licensing opportunities and a distribution network for proprietary legal hemp.
Current Operations
The Company constructed a new, state-of-the-art facility in New
Marketing
The market for consumer products produced with CBD derived from hemp is expected to increase substantially over the next five years, and we believe we are well positioned to be a significant player in this space. The Company is building a high-volume, low cost ingredient supply chain of consistent CBD distillate and isolate and believe that our proprietary technology system will allow us to be best positioned to protect gross margins in our wholesale ingredient supply business when more traditional commoditized pricing takes shape in the market over time.
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We intend to grow our business by launching multiple web-based platforms to educate and sell direct to consumers the Company's owned and licensed brands that focus on CBD derived from hemp products and continuing to develop and expand our own proprietary branded retail line of products.
Product Development
Our HALO.5 Simulated Moving Bed Chromatography System (SMB) is an integrated 6-column SMB system designed for isolation and purification of chemical compounds at a high rate of productivity as compared to single column batch chromatography. The Company is extracting and refining essential oils and compounds of interest from certified hemp cultivars through the use of its proprietary processing technology and methodology. We currently work with qualified labs and contract formulators to formulate our products. We seek to create unique product formulas that will be recognized by consumers and the industry for their point of difference and efficacy of ingredients.
Competition
Our competition is primarily companies that manufacture and produce CBD derived from hemp consumer products. This is a broad market and encompasses startup companies and well-established companies with international brands. Despite the significant competition in this industry from larger, well-established and well-capitalized companies, we believe that the emerging nature of this industry, our consumer products experience and our ability to leverage the flexibility of a start-up may give us some advantages. Specifically, without a large organizational structure we expect to establish a broader product offering more quickly and in a cost-effective manner. There are no assurances, however, that we will ever be successful in effectively competing in this market segment.
Intellectual Property
Our HALO.5 Simulated Moving Bed Chromatography System (SMB) is an integrated 6-column SMB system designed for isolation and purification of chemical compounds at a high rate of productivity as compared to single column batch chromatography. It has powerful simulation software (Optional Ypso-Facto Chromworks®) as well as an integrated DAD UV/VIS photometric detectors that allow for rapid and accurate method development. All of this is combined with application support for specific applications such as cannabinoid isolation and mitigation. The HALO.5 is a powerful tool for rapid production of purified chemical compounds. We believe that through this device our products can be made more quickly, more purified, and less expensively than our competitors.
Government Regulation
We are subject to local and federal laws in our operating jurisdictions. A range
of federal regulations govern our product development, manufacturing,
distribution, sales and marketing, including the
CBD
Cannabinoids (CBD) are chemical compounds found in the cannabis plant. Hemp is a cannabis plant and where our CBD is derived from. CBD has been studied as to its therapeutic attributes. Taking CBD mimics and augments the effects of compounds in the body called endogenous cannabinoids. Endocannabinoids are part of the regulatory system called the endocannabinoid system. The endocannabinoid system plays important roles in the central nervous system and in regulating a broad range of physiological processes that affect our everyday experience - our mood, our energy level, our intestinal fortitude, immune activity, blood pressure, bone density, glucose metabolism, how we experience pain, stress, hunger, and more. Studies have shown that CBD is non-psychoactive unlike tetrahydrocannabinol (THC).
16 Table of Contents Farm Bill
On
As a consequence of the 2018 Farm Bill, hemp has now been permanently removed
from the Controlled Substances Act (CSA). It is now deemed an agricultural
commodity, no longer able to be classified as a controlled substance, like
marijuana. Furthermore, by redefining hemp to include its "extracts,
cannabinoids and derivatives,"
Accordingly, the
We believe that the 2018 Farm Bill should give comfort to federally regulated institutions, pharmacies, banks, merchant services, credit card companies, e-commerce sites and advertising platforms, to conduct commerce with the hemp and hemp CBD industry
The
The
The FDA appears committed to pursuing an efficient regulatory framework for allowing product developers that meet the requirements under their authorities to lawfully market these types of products. However, despite these steps by the FDA there are other factors which are beyond our control, which could jeopardize our ability to successfully market our planned products. Any such setback would have a material adverse effect on our business and prospects.
Critical Accounting Policies
Our material accounting policies, which we believe are the most critical to investors understanding of our financial results and condition, are discussed below. Because we are still early in our enterprise development, the number of these policies requiring explanation is limited. As we begin to generate increased revenue from different sources, we expect that the number of applicable policies and complexity of the judgments required will increase.
Revenue Recognition: ASC 606 Revenue from Contracts with Customers establishes a single and comprehensive framework which sets out how much revenue is to be recognized, and when. The core principle is that a vendor should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the vendor expects to be entitled in exchange for those goods or services. Revenue will now be recognized by a vendor when control over the goods or services is transferred to the customer. In contrast, Revenue based revenue recognition around an analysis of the transfer of risks and rewards; this now forms one of a number of criteria that are assessed in determining whether control has been transferred. The application of the core principle in ASC 606 is carried out in five steps: Step 1 - Identify the contract with a customer: a contract is defined as an agreement (including oral and implied), between two or more parties, that creates enforceable rights and obligations and sets out the criteria for each of those rights and obligations. The contract needs to have commercial substance and it is probable that the entity will collect the consideration to which it will be entitled. Step 2 - Identify the performance obligations in the contract: a performance obligation in a contract is a promise (including implicit) to transfer a good or service to the customer. Each performance obligation should be capable of being distinct and is separately identifiable in the contract. Step 3 - Determine the transaction price: transaction price is the amount of consideration that the entity can be entitled to, in exchange for transferring the promised goods and services to a customer, excluding amounts collected on behalf of third parties. Step 4 - Allocate the transaction price to the performance obligations in the contract: for a contract that has more than one performance obligation, the entity will allocate the transaction price to each performance obligation separately, in exchange for satisfying each performance obligation. The acceptable methods of allocating the transaction price include adjusted market assessment approach, expected cost plus a margin approach, and, the residual approach in limited circumstances. Discounts given should be allocated proportionately to all performance obligations unless certain criteria are met and reallocation of changes in standalone selling
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prices after inception is not permitted. Step 5 - Recognize revenue as and when the entity satisfies a performance obligation: the entity should recognize revenue at a point in time, except if it meets any of the three criteria, which will require recognition of revenue over time: the entity's performance creates or enhances an asset controlled by the customer, the customer simultaneously receives and consumes the benefit of the entity's performance as the entity performs, and the entity does not create an asset that has an alternative use to the entity and the entity has the right to be paid for performance to date.
Valuation of Deferred Taxes:We account for income taxes in accordance with the liability method. Under the liability method, we recognize deferred assets and liabilities based upon anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. We establish a valuation allowance to the extent that it is more likely than not that deferred tax assets will not be utilized against future taxable income.
Valuation of Equity Instruments Granted to Employee, Service Providers and Investors: On the date of issuance, the instruments are recorded at their fair value as determined using the Binomial Option Pricing Model.
Allowance for Accounts Receivable: We estimate losses from the inability of our distributors to make required payments and periodically review the payment history of each of our distributors, as well as their financial condition, and revise our reserves as a result.
Inventory Valuation: All inventories are stated at lower of cost or net realizable value, with cost determined substantially on a "first-in, first-out" basis. Selling, general, and administrative expenses are not inventoried, but are charged to expense when purchased.
RESULTS OF OPERATIONS
Three months ended
Sales Revenue, Cost of Sales and Gross Loss: Revenues from the sale of our
products for the three months ended
General and Administrative Expense: General and administrative expenses for the
three months ended
Payroll and Related: Payroll and related increased by
Professional Fees: Professional fees decreased to
Depreciation expense: Depreciation expense was
Interest Expense: Interest expense for the three months ended
Net Loss: As a result of the foregoing, we realized a net loss of
There was no income tax benefit recorded for the years ended
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LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have raised capital through the public and private sale
of debt and equity and funding from collaborative arrangements. At
We will be required to raise additional funds through public or private financing, additional collaborative relationships or other arrangements. We cannot be certain that our existing and available capital resources will be sufficient to satisfy our funding requirements through 2022. We are evaluating various options to raise additional funds, including new equity and loans and no assurance can be given that we will be successful.
Our financial statements have been prepared and presented on a basis assuming we will continue as a going concern. The above factors raise substantial doubt about our ability to continue as a going concern, as more fully discussed in Note 1 to the condensed consolidated financial statements contained herein.
Off-Balance Sheet Arrangements
We have no material off-balance sheet arrangements, no special purpose entities, and no activities that include non-exchange-traded contracts accounted for at fair value.
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