Item
1. Financial Statements (unaudited)
MALACHITE
INNOVATIONS, INC.
CONSOLIDATED
BALANCE SHEETS
See
accompanying notes to the consolidated financial statements.
MALACHITE
INNOVATIONS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
See
accompanying notes to the consolidated financial statements.
MALACHITE
INNOVATIONS, INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
(Unaudited)
| |
Three Months Ended September 30, 2021 | |
| |
Common Stock | | |
| | |
| | |
| |
| |
Number of Shares | | |
Amount | | |
Additional Paid-in Capital | | |
Accumulated Deficit | | |
Total | |
Balance as of June 30, 2021 | |
| 50,700,147 | | |
$ | 50,700 | | |
$ | 48,286,942 | | |
$ | (48,039,944 | ) | |
$ | 297,698 | |
Shares issued for cash | |
| 500,000 | | |
| 500 | | |
| 118,500 | | |
| - | | |
| 119,000 | |
Net loss | |
| - | | |
| - | | |
| - | | |
| (504,358 | ) | |
| (504,358 | ) |
Balance as of September 30, 2021 | |
| 51,200,147 | | |
$ | 51,200 | | |
$ | 48,405,442 | | |
$ | (48,544,302 | ) | |
$ | (87,660 | ) |
| |
Nine Months Ended September 30, 2022 | |
| |
Common Stock | | |
| | |
| | |
| |
| |
Number of Shares | | |
Amount | | |
Additional Paid-in Capital | | |
Accumulated Deficit | | |
Total | |
Balance as of December 31, 2021 | |
| 51,450,147 | | |
$ | 51,450 | | |
$ | 48,707,587 | | |
$ | (49,140,678 | ) | |
$ | (381,641 | ) |
Shares issued for cash | |
| 21,666,667 | | |
| 21,667 | | |
| 3,228,333 | | |
| - | | |
| 3,250,000 | |
Shares issued in exchange for Range | |
| 5,000,000 | | |
| 5,000 | | |
| 745,000 | | |
| - | | |
| 750,000 | |
Net loss | |
| - | | |
| - | | |
| - | | |
| (1,010,776 | ) | |
| (1,010,776 | ) |
Balance as of September 30, 2022 | |
| 78,116,814 | | |
$ | 78,117 | | |
$ | 52,680,920 | | |
$ | (50,151,454 | ) | |
$ | 2,607,583 | |
| |
Nine Months Ended September 30, 2021 | |
| |
Common Stock | | |
| | |
| | |
| |
| |
Number of Shares | | |
Amount | | |
Additional Paid-in Capital | | |
Accumulated Deficit | | |
Total | |
Balance as of December 31, 2020 | |
| 50,840,147 | | |
$ | 50,840 | | |
$ | 48,127,953 | | |
$ | (47,067,078 | ) | |
$ | 1,111,715 | |
Balance | |
| 50,840,147 | | |
$ | 50,840 | | |
$ | 48,127,953 | | |
$ | (47,067,078 | ) | |
$ | 1,111,715 | |
Shares issued for cash | |
| 500,000 | | |
| 500 | | |
| 118,500 | | |
| - | | |
| 119,000 | |
Cancellation of common shares | |
| (140,000 | ) | |
| (140 | ) | |
| 140 | | |
| - | | |
| - | |
Fair value of vested stock options | |
| - | | |
| - | | |
| 158,849 | | |
| - | | |
| 158,849 | |
Net loss | |
| - | | |
| - | | |
| - | | |
| (1,477,224 | ) | |
| (1,477,224 | ) |
Balance as of September 30, 2021 | |
| 51,200,147 | | |
$ | 51,200 | | |
$ | 48,405,442 | | |
$ | (48,544,302 | ) | |
$ | (87,660 | ) |
Balance | |
| 51,200,147 | | |
$ | 51,200 | | |
$ | 48,405,442 | | |
$ | (48,544,302 | ) | |
$ | (87,660 | ) |
See
accompanying notes to the consolidated financial statements.
MALACHITE
INNOVATIONS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
See
accompanying notes to the consolidated financial statements.
MALACHITE
INNOVATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Malachite
Innovations, Inc. (the “Company”) was incorporated in the State of Nevada on June 29, 2007.
Originally
founded in 2007 as Legend Mining Inc., the Company began operations as a mineral extraction exploration business. In 2011, the Company
changed its name to Stevia First Corp. and pursued a new strategy focused on developing stevia-based additives for the food and beverage
industry. In 2015, the Company changed its name to Vitality Biopharma, Inc. and pursued a new strategy focused on developing cannabinoid-based
prodrugs anticipated to treat inflammatory conditions of the gastrointestinal tract by unlocking the therapeutic properties of cannabinoids
but without their unwanted psychoactive side effects.
In
October 2021, the Company changed its name to Malachite Innovation, Inc. and reorganized its corporate structure and created the following
two wholly-owned operating subsidiaries: (i) Graphium Biosciences, Inc., a Nevada corporation (“Graphium”), into which the
Company contributed all of its drug development assets; and (ii) Daedalus Ecosciences, Inc., a Nevada corporation (“Daedalus”).
Graphium plans to focus its business activities on the health and wellness of people, with a particular focus on advancing the Company’s
broad portfolio of over 100 glycosylated cannabinoid prodrugs. Daedalus plans to focus its business activities on the health and wellness
of the planet through ESG investments, with a particular focus on deploying technological innovations and eco-friendly solutions to remedy
difficult environmental situations in economically challenged communities.
In
May 2022, Daedalus acquired Range Environmental Resources, Inc., a West Virginia corporation (“Range Environmental”) and
Range Natural Resources, Inc., a West Virginia corporation (“Range Natural” and together with Range Environmental, the “Range
Entities”). The Range Entities provide land reclamation, water restoration and environmental consulting services to mining and
non-mining customers throughout the Appalachian region with the goal of returning land to pre-mining conditions or repurposing the land
for natural, commercial, agricultural or recreational use. The Range Entities’ water restoration services seek to improve rivers,
streams and discharges through novel and innovative treatment applications to help customers meet their various regulatory standards
and requirements. The Range Entities also provide environmental consulting services to customers typically in connection with land reclamation
and water restoration projects and as an additional value-add service, sells water treatment chemicals manufactured by third parties
to their customers.
Going
Concern
The
accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of business. As reflected in the accompanying financial statements, during the nine
months ended September 30, 2022, the Company incurred a net loss of $1,010,776 and used $568,536 of cash in the Company’s operating
activities. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year of
the date that the financial statements are issued. The financial statements do not include any adjustments that might be necessary should
the Company be unable to continue as a going concern.
The
ability to continue as a going concern is dependent on the Company attaining and maintaining profitable operations in the future and/or
raising additional capital to meet its obligations and repay its liabilities arising from normal business operations when they come due.
The Company estimates, as of September 30, 2022, that it has sufficient funds to operate the business for 18 months given its cash balance
of $1,156,799, line of credit availability of $1,000,000, the availability of $4,830,050 under its $5,000,000 equity financing line via
an executed securities purchase agreement, and revenues being generated by the Range Entities. Although the Company’s existing
cash balances are estimated to be sufficient to fund its currently planned level of operations, the Company is actively seeking additional
financing and other sources of capital to accelerate the funding and execution of its growth strategy and value creation plan. However,
these estimates could differ if the Company encounters unanticipated difficulties, or if its estimates of the amount of cash necessary
to operate its business prove to be wrong, and the Company uses its available financial resources faster than it currently expects.
No assurance can be given that any future financing or capital, if needed, will be available or, if available, that it will be on terms
that are satisfactory to the Company.
Basis
of Presentation
The
consolidated financial statements include the accounts of the Company and its wholly-owned direct subsidiaries, Graphium Biosciences,
Inc., Daedalus Ecosciences, Inc., and Vitality Healthtech, Inc. (dissolved in May 2021), and its wholly-owned indirect subsidiaries,
Range Environmental Resources, Inc. and Range Natural Resources, Inc., and have been prepared in accordance with accounting principles
generally accepted in the United States of America. Intercompany balances and transactions have been eliminated in consolidation. The
Company’s fiscal year end is December 31.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. The
more significant estimates and assumptions by management include, among others, assumptions used in valuing assets acquired in business
acquisitions, reserves for accounts receivable, assumptions used in valuing equity instruments issued for services, the valuation allowance
for deferred tax assets, and accruals for potential liabilities. Actual results could differ from those estimates.
Revenue
Recognition
The
Company applies the following standards and recognizes revenue when (1) services have been provided pursuant to an agreed-upon equipment
and labor hourly rate sheet or a fixed amount for a project, (2) products have been shipped to and accepted by the customer, and (3)
amounts are reasonably assured of collection, including the consideration of the customer’s ability and intention to pay when the
amount is due. The Company primarily invoices customers and recognizes revenue on a periodic basis for equipment and labor hours provided
to a customer on a particular job based on an agreed-upon hourly rate sheet or a fixed amount for a project. The Company also invoices
customers and recognizes revenue for equipment mobilization fees and materials and supplies required to complete a project. The Company
invoices for the sales of chemicals and recognizes revenue when the products are delivered to the customer’s designated site. Costs
for equipment, labor and chemicals are generally expensed as incurred since the projects are generally short-term and not subject to
a contract.
The
Company’s performance obligations are satisfied at the point in time when the services are performed or when products are received
by the customer, which is when the customer has title and the significant risks and rewards of ownership.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with an original maturity of three months or less at the date of acquisition to be cash
equivalents. From time to time, the Company’s cash account balances exceed the balances covered by the Federal Deposit Insurance
System. The Company has never suffered a loss due to such excess balances.
Accounts
Receivable
Trade
accounts receivable are stated at the amount management expects to collect from the balances outstanding at the end of each fiscal period
reflected in the consolidated balance sheets. Based on management’s assessment, it has concluded that losses on balances outstanding
as of those dates will be immaterial and, therefore, no allowances were recorded for the three or nine months ended September 30, 2022
or September 30, 2021.
Equipment
Equipment
is carried at cost. Expenditures for maintenance and repairs are charged to cost of services. Additions and betterments are capitalized.
The cost and related accumulated depreciation of equipment sold or otherwise disposed of are removed from the accounts and any gain or
loss is reflected in the current year’s earnings.
SCHEDULE
OF EQUIPMENT
| |
September 30,
2022 | | |
December 31,
2021 | |
| |
| | |
| |
Equipment | |
$ | 1,683,406 | | |
$ | - | |
Depreciation expense | |
$ | 187,923 | | |
$ | - | |
The
Company provides for depreciation of equipment using the straight-line method for both financial reporting and federal income tax purposes
over the estimated six-year useful lives of the equipment.
The
Company assesses the recoverability of its property, plant, and equipment by determining whether the depreciation of the assets over
their remaining lives can be recovered through projected future cash flows generated by the assets. There were no assets identified for
impairment.
Fair
Value of Financial Instruments
FASB
ASC 825 “Financial Instruments” requires that the Company disclose estimated fair values of financial instruments. Financial
instruments held by the Company include, among others, accounts receivable, accounts payable and long-term debt. The carrying amounts
reported in the balance sheets for assets and liabilities qualifying as financial instruments are a reasonable estimate of fair value.
Leases
FASB
ASC 842 “Leases” requires the Company to determine whether a contract is, or contains, a lease at inception. Right-of-use
assets represent the Company’s right to use an underlying asset during the lease term, and lease liabilities represent the Company’s
obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at lease commencement
based upon the estimated present value of unpaid lease payments over the lease term. The Company uses its incremental borrowing rate
based on the information available at lease commencement in determining the present value of unpaid lease payments.
Income
Taxes
The
Company follows the asset and liability method of accounting for income taxes. Under this method, deferred income tax assets and liabilities
are recognized for the estimated tax consequences attributable to differences between the financial statement carrying values and their
respective income tax basis (temporary differences). The effect on deferred income tax assets and liabilities of a change in tax rates
is recognized as income (loss) in the period that includes the enactment date.
Stock-Based
Compensation
The
Company periodically issues stock options and restricted stock awards to employees and non-employees in non-capital raising transactions
for services. The Company accounts for such grants issued and vesting based on FASB ASC 718 “Compensation-Stock Compensation”
whereby the value of the award is measured on the date of grant and recognized for employees as compensation expense on the straight-line
basis over the vesting period. Recognition of compensation expense for non-employees is in the same period and manner as if the Company
had paid cash for the services. The Company recognizes the fair value of stock-based compensation within its Consolidated Statements
of Operations with classification depending on the nature of the services rendered.
The
fair value of the Company’s stock options is estimated using the Black-Scholes-Merton Option Pricing model, which uses certain
assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or restricted stock, and future
dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes-Merton Option Pricing model and based
on actual experience. The assumptions used in the Black-Scholes-Merton Option Pricing model could materially affect compensation expense
recorded in future periods.
Basic
and Diluted Loss Per Share
Basic
loss per share is computed by dividing the net loss applicable to common stockholders by the weighted average number of outstanding common
shares during the period. Shares of restricted stock are included in the basic weighted average number of common shares outstanding from
the time they vest. Diluted loss per share is computed by dividing net loss applicable to common stockholders by the weighted average
number of common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential
common shares had been issued. Shares of restricted stock are included in the diluted weighted average number of common shares outstanding
from the date they are granted unless they are antidilutive. Diluted loss per share excludes all potential common shares if their effect
is anti-dilutive. The following potentially dilutive shares were excluded from the shares used to calculate diluted earnings per share
as their inclusion would be anti-dilutive:
SCHEDULE OF ANTI-DILUTIVE SECURITIES EXCLUDED FROM COMPUTATION OF EARNINGS PER SHARE
| |
September 30,
2022 | | |
December 31,
2021 | |
Options | |
| 6,742,544 | | |
| 6,882,544 | |
Warrants | |
| 22,313,335 | | |
| 646,668 | |
Total | |
| 29,055,879 | | |
| 7,529,212 | |
Patents
and Patent Application Costs
Although
the Company believes that its patents and underlying technology have continuing value, the future benefits to be derived from
the patents is uncertain. Accordingly, patent costs are expensed as incurred.
Research
and Development
Research
and development costs consist primarily of fees paid to consultants and outside service providers, patent fees and costs, and other expenses
relating to the acquisition, design, development and testing of the Company’s treatments and product candidates. Research and development
costs are expensed as incurred.
Segments
As
of October 1, 2021, the Company began operating under two segments: (i) Graphium Biosciences, Inc., a wholly-owned subsidiary of the
Company, will report the operating results of its health and wellness innovations serving people, with a particular focus on advancing
its broad portfolio of over 100 glycosylated cannabinoid prodrugs, and (ii) Daedalus Ecosciences, Inc., a wholly-owned subsidiary of
the Company, will report the operating results of its health and wellness innovations serving the planet, with a particular focus on
deploying technological innovations and eco-friendly solutions to remedy difficult environmental situations in economically challenged
communities.
In
accordance with FASB ASC 280 “Segment Reporting”, the Company’s chief operating decision maker has been identified
as the Chief Executive Officer of the Company, who reviews operating results to make decisions about allocating resources and assessing
performance for the entire Company. Existing guidance, which is based on a management approach to segment reporting, establishes requirements
to report selected segment information quarterly and to report annually entity-wide disclosures about products and services, major customers,
and the countries in which the entity holds material assets and reports revenue. All material operating units qualify for aggregation
under “Segment Reporting” due to their similar customer base and similarities in: economic characteristics; nature of products
and services; and procurement, manufacturing, and distribution processes.
Recent
Accounting Pronouncements
In
June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires entities to
use a forward-looking approach based on current expected credit losses to estimate credit losses on certain types of financial instruments,
including trade receivables. This may result in the earlier recognition of allowances for losses. ASU 2016-13 is effective for the Company
beginning April 1, 2023, and early adoption is permitted. The Company does not believe the potential impact of the new guidance and related
codification improvements will be material to its financial position, results of operations and cash flows.
Other
recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public
Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s
present or future financial statements.
2.
ACQUISITION OF RANGE ENVIRONMENTAL RESOURCES AND RANGE NATURAL RESOURCES
In
May 2022, the Company and its wholly-owned subsidiary, Daedalus Ecosciences, Inc., entered into a share purchase agreement with Range
Environmental Resources, Inc. (“Range Environmental”), and Range Natural Resources, Inc. (“Range Natural”, and
collectively with Range Environmental, the “Range Entities”), and the two (2) shareholders of the Range Entities (the “Range
Shareholders”) (the “Share Purchase Agreement”), under which the Company issued a total of 10,000,000 shares of the
Company’s common stock to the Range Shareholders and Daedalus Ecosciences paid cash consideration of $1,000,000 to the Range Shareholders
for 80% of the outstanding common stock of each of the Range Entities.
Subsequent
to entering into the Share Purchase Agreement, the Company discovered that Joshua Justice, one of the Range Shareholders (“Justice”),
made certain misrepresentations in the Share Purchase Agreement. On July 12, 2022, the Company entered into a Separation Agreement, by
and among the Company, Daedalus Ecosciences, the Range Entities, and Justice and his spouse (the “Separation Agreement”)
pursuant to which Justice: a) acknowledged that his employment with the Range Entities was terminated for cause effective June 30, 2022;
b) returned the 5,000,000 shares of the Company’s common stock that had been issued to him under the terms of the Share Purchase
Agreement; c) transferred his 10% interest in each of the Range Entities to Daedalus Ecosciences; and d) paid Daedalus Ecosciences cash
in an amount of $250,000. As a result, only 5,000,000 of the Company’s common stock issued to the Range Shareholders is considered
to have been issued in exchange for 90% of the outstanding common stock of each of the Range Entities.
Subsequently,
on October 11, 2022, Daedalus Ecosciences and Jeremy Starks, the remaining Range Shareholder (“Starks”), entered into a share
purchase agreement, effective as of May 11, 2022 (the “Starks Agreement”), pursuant to which Starks exchanged his 10% common
stock ownership of the Range Entities for 10% of the Cash Dividends and Sale Proceeds (as both terms are defined in the Starks Agreement)
of the Range Entities, as a result of which, the Range Entities are now wholly-owned subsidiaries of Daedalus Ecosciences and the Range
Entities are reported as wholly-owned indirect subsidiaries of the Company in the financial statements made part of this Form 10-Q. No
other changes were made to the consideration received by Starks as part of the Share Purchase Agreement and he remains as President
of each of the Range Entities.
The
Company accounted for the transaction as a business combination in accordance ASC 805 “Business Combinations”. The Company
has performed an allocation of the purchase price paid for the assets acquired and the liabilities assumed. The fair values of the assets
acquired are set forth below. The allocation of the purchase price is based on management’s estimates.
SCHEDULE
OF BUSINESS ACQUISITION ALLOCATION OF PURCHASE PRICE
| |
| | |
Fair value of assets acquired: | |
| | |
Cash | |
$ | 15,827 | |
Accounts receivables | |
| 889,919 | |
Property and equipment | |
| 628,000 | |
Goodwill | |
| 751,421 | |
Total assets acquired | |
| 2,285,167 | |
Fair value of liabilities assumed | |
| (785,167 | ) |
Purchase price | |
$ | 1,500,000 | |
Cash consideration | |
| 750,000 | |
Common stock consideration | |
| 750,000 | |
Total purchase price | |
$ | 1,500,000 | |
Acquisition transaction costs incurred | |
$ | 20,592 | |
Goodwill
has an assigned value of $751,421 and represents the value of the Range Entities’ brand reputation,
customer base and employee relations.
3.
GOODWILL
Goodwill
increased to $751,421 at September 30, 2022. There had been no goodwill at December 31, 2021. The increase in goodwill was driven by
the addition of the Range Entities in the period and represents the value of the Range Entities’
brand reputation, customer base and employee relations. Goodwill by reportable segment is as follows:
SCHEDULE
OF GOODWILL
| |
September 30, 2022 | | |
December 31, 2021 | |
ESG Operations Segment: | |
| | | |
| | |
Beginning Balance | |
$ | - | | |
$ | - | |
Acquisitions | |
| 751,421 | | |
| - | |
Adjustments | |
| - | | |
| - | |
Ending Balance | |
$ | 751,421 | | |
$ | - | |
4.
EQUITY
Issuance
of Common Stock and Warrants
In
May 2022, the Company entered into two securities purchase agreements providing for the issuance and sale by the Company of (i) 20,000,000
shares of the Company’s common stock (the “May Shares”) at a price of $0.15 per share and (ii) warrants to purchase
up to an additional 20,000,000 shares of the Company’s common stock (the “May Warrants”, and the shares issuable upon
exercise of the Warrants, the “May Warrant Shares”) at a price of $0.60 per share. The May Warrants expire on May 10, 2027.
The aggregate proceeds to the Company from the sale of the May Shares and May Warrants was $3,000,000.
In
August 2022, the Company entered into a securities purchase agreement providing for the issuance and sale by the Company of (i) 1,666,667
shares of the Company’s common stock (the “August Shares”) at a price of $0.15 per share and (ii) warrants to purchase
up to an additional 1,666,667 shares of the Company’s common stock (the “August Warrants”, and the shares issuable
upon exercise of the Warrants, the “August Warrant Shares”) at a price of $0.60 per share. The August Warrants expire on
August 26, 2027. The aggregate proceeds to the Company from the sale of the August Shares and August Warrants was $250,000.
In
May 2022, the Company purchased 90% of the outstanding common stock of each of the Range Entities for a combination of Company shares
and cash, as described in Note 2. Only 5,000,000 of the Company’s common stock issued to the Range Shareholders is considered outstanding
as of September 30, 2022, in order to reflect the effects of the Separation Agreement.
5.
STOCK OPTIONS
A
summary of the Company’s stock option activity during the nine months ended September 30, 2022 is as follows:
SCHEDULE OF STOCK OPTION ACTIVITY
| | |
Shares | | |
Weighted Average Exercise Price | |
Balance outstanding at December 31, 2021 | | |
| 6,882,544 | | |
$ | 0.69 | |
Granted | | |
| - | | |
| - | |
Exercised | | |
| - | | |
| - | |
Expired | | |
| (140,000 | ) | |
| 1.12 | |
Cancelled | | |
| - | | |
| - | |
Balance outstanding at September 30, 2022 | | |
| 6,742,544 | | |
$ | 0.68 | |
Balance exercisable at September 30, 2022 | | |
| 6,742,544 | | |
$ | 0.68 | |
A
summary of the Company’s stock options outstanding and exercisable as of September 30, 2022 is as follows:
SCHEDULE OF STOCK OPTIONS OUTSTANDING AND EXERCISABLE
| | |
Number of
Options | | |
Weighted
Average
Exercise Price | | |
Weighted
Average Grant-
date Stock Price | |
Options Outstanding, September 30, 2022 | | |
| 1,150,000 | | |
$ | 0.277 | | |
$ | 0.277 | |
| | |
| 750,000 | | |
$ | 0.30 | | |
$ | 0.30 | |
| | |
| 2,000,000 | | |
$ | 0.35 | | |
$ | 0.35 | |
| | |
| 1,664,542 | | |
$ | 0.50 | | |
$ | 0.50 | |
| | |
| 128,000 | | |
$ | 0.96 | | |
$ | 0.96 | |
| | |
| 350,834 | | |
$ | 1.50 – 1.95 | | |
$ | 1.50 – 1.95 | |
| | |
| 597,500 | | |
$ | 2.00 – 2.79 | | |
$ | 2.00 – 2.79 | |
| | |
| 83,334 | | |
$ | 3.10 – 3.80 | | |
$ | 3.10 – 3.80 | |
| | |
| 18,334 | | |
$ | 4.00 – 4.70 | | |
$ | 4.00 – 4.70 | |
| | |
| 6,742,544 | | |
| | | |
| | |
Options Exercisable, September 30, 2022 | | |
| 1,150,000 | | |
$ | 0.277 | | |
$ | 0.277 | |
| | |
| 750,000 | | |
$ | 0.30 | | |
$ | 0.30 | |
| | |
| 2,000,000 | | |
$ | 0.35 | | |
$ | 0.35 | |
| | |
| 1,664,542 | | |
$ | 0.50 | | |
$ | 0.50 | |
| | |
| 128,000 | | |
$ | 0.96 | | |
$ | 0.96 | |
| | |
| 350,834 | | |
$ | 1.50 – 1.95 | | |
$ | 1.50 – 1.95 | |
| | |
| 597,500 | | |
$ | 2.00 – 2.79 | | |
$ | 2.00 – 2.79 | |
| | |
| 83,334 | | |
$ | 3.10 – 3.80 | | |
$ | 3.10 – 3.80 | |
| | |
| 18,334 | | |
$ | 4.00 – 4.70 | | |
$ | 4.00 – 4.70 | |
| | |
| 6,742,544 | | |
| | | |
| | |
There
is no remaining unamortized cost of the outstanding stock-based awards at September 30, 2022. At September 30, 2022, the 6,742,544 outstanding
stock options had no intrinsic value.
6.
WARRANTS
A
summary of the Company’s warrant activity during the nine months ended September 30, 2022 is as follows:
SCHEDULE OF WARRANTS ACTIVITY
| |
Shares | | |
Weighted Average Exercise Price | |
Balance outstanding at December 31, 2021 | |
| 646,668 | | |
$ | 0.93 | |
Granted | |
| 21,666,667 | | |
| 0.60 | |
Exercised | |
| - | | |
| - | |
Expired/Cancelled | |
| - | | |
| - | |
Balance outstanding and exercisable at September 30, 2022 | |
| 22,313,335 | | |
$ | 0.61 | |
At
September 30, 2022, the 22,313,335 outstanding stock warrants had no intrinsic value.
7.
NOTES PAYABLE
Range
Environmental was granted a loan (the “PPP loan”) from United Bank for $109,435 on March 9, 2021, pursuant to the Paycheck
Protection Program (the “PPP”) under the CARES Act.
The
PPP loan had a maturity date of March 9, 2023 and bore interest at a rate of 1% per annum, with the first six months of interest deferred.
On
August 19, 2022, Range Environmental received notice that the U.S. Small Business Administration (“SBA”) had reviewed the
forgiveness application of Range Environmental’s PPP loan and provided forgiveness of the entire principal of the PPP loan plus
accrued interest. The Company recognized a gain on extinguishment
of the PPP loan of $109,435 during the three and nine months ended September 30, 2022.
On
June 17, 2020, Range Environmental was granted an SBA Disaster Loan in the amount of $150,000 with an interest rate of 3.75% per annum.
On September 14, 2022, the Company paid the entire balance
due on this loan of $162,575, including $12,575 in accrued interest.
The
Company had no notes payable outstanding as of September 30, 2022.
8.
LINE OF CREDIT
In
November 2021, the Company obtained an unsecured revolving line of credit with a bank with a limit of $1,000,000. The line of credit
has a maturity date of November 30, 2022, and bears interest at one percent (1%) above the prime rate. As of September 30, 2022, there
was no balance due under the line of credit.
9.
EQUITY LINE
In
August 2021, the Company entered into a $5,000,000 equity line transaction with Triton Funds, LP (“Triton”) providing for
the issuance and sale by the Company to Triton of a number of shares of the Company’s common stock having an aggregate value of
up to $5,000,000 and warrants to purchase up to an equal number of shares of the Company’s common stock. In its sole discretion
and subject to certain agreed upon funding conditions, the Company may submit, from time to time, notices obligating Triton to purchase
shares with a value of up to $250,000 until the financing arrangement expires on December 31, 2022 or Triton has purchased the $5,000,000
of shares pursuant to the equity line transaction. As of September 30, 2022, $4,830,050 was available under this equity line.
10.
GAIN ON EXTINGUISHMENT OF ADVANCE
In
July 2018, the Company received a payment from a third party in the amount of $296,653. Since the Company has not been able to confirm
the nature of this payment, it had previously recorded this payment as an advance that was included in current liabilities. At March
31, 2021, the Company, after consultation with outside legal counsel, determined that any claim to recover that payment was time barred
by the statute of limitations and the Company recorded relief of this liability and a gain from debt extinguishment of $296,653 during
the nine months ended September 30, 2021.
11.
LONG-TERM DEBT OBLIGATIONS
Long-term
debt consists of debt on vehicles and equipment, which serves as the collateral. Interest rates range from 3.69% to 8.99% for 2022. The
debt matures from 2022 through 2028. The aggregate amount of the debt was $1,166,674 at September 30, 2022, $396,939 of which is due
within one year of September 30, 2022, and $769,735 is due after September 30, 2023.
A
summary of payments due under the long-term debt by year is as follows:
SCHEDULE
OF MATURITIES OF LONG TERM DEBT
| |
| | |
2022 (due between 10/1/22 and 9/30/23) | |
$ | 396,939 | |
2023 (due between 10/1/23 and 9/30/24) | |
| 418,407 | |
2024 (due between 10/1/24 and 9/30/25) | |
| 300,969 | |
2025 (due between 10/1/25 and 9/30/26) | |
| 37,380 | |
2026 (due between 10/1/26 and 9/30/27) | |
| 12,647 | |
2027 and later (due on or after 10/1/27) | |
| 332 | |
Total long-term debt | |
$ | 1,166,674 | |
12.
OPERATING LEASE
The
Company has an operating lease agreement for one piece of equipment leased by Range Environmental with a remaining lease term
of 31 months. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company accounts for the lease
and non-lease components of its lease as a single lease component. Lease expense is recognized on a straight-line basis over the lease
term.
Under
FASB ASC 842, an operating lease right-of-use (“ROU”) asset and liability is 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 our obligation to make lease payments arising from the lease. Generally, the implicit rate
of interest in arrangements is not readily determinable and the Company utilizes its incremental borrowing rate in determining the present
value of lease payments. The Company’s incremental borrowing rate is a hypothetical rate based on its understanding of what its
credit rating would be. The operating lease ROU asset includes any lease payments made and excludes lease incentives.
The
components of lease expense and supplemental cash flow information related to leases for the period are as follows:
SCHEDULE
OF COMPONENTS OF LEASE EXPENSE
| |
Three Months Ended September 30, 2022 | |
Lease Cost | |
| | |
Operating lease cost (included in general and administrative expenses in the Company’s unaudited consolidated statements of operations) | |
$ | 12,945 | |
| |
| | |
Other Information | |
| | |
Cash paid for amounts included in the measurement of lease liabilities for the three months ended September 30, 2022 | |
$ | 12,945 | |
Weighted average remaining lease term – operating leases (in years) | |
| 2.6 | |
Average discount rate – operating leases | |
| 6.0 | % |
The
supplemental balance sheet information related to leases for the period is as follows:
SCHEDULE
OF LEASES SUPPLEMENTAL BALANCE SHEET INFORMATION
| |
At September 30,
2022 | |
Operating leases | |
| | |
Long-term right-of-use asset | |
$ | 109,248 | |
| |
| | |
Short-term operating lease liability | |
$ | - | |
Long-term operating lease liability | |
| 109,248 | |
Total operating lease liabilities | |
$ | 109,248 | |
Maturities
of the Company’s lease liabilities are as follows:
SCHEDULE OF MATURITIES OF LEASE LIABILITIES
Year Ending December 31 | |
Operating Lease | |
2022 (remaining 3 months) | |
$ | 12,945 | |
2023-2025 | |
| 107,877 | |
Total lease payments | |
| 120,822 | |
Less: Imputed interest/present value discount | |
| (11,574 | ) |
Present value of lease liabilities | |
$ | 109,248 | |
Lease
expenses related to leases with a duration of one year or less were $8,746 and $8,013 during the three months ended September 30, 2022
and September 30, 2021, respectively. Lease expenses related to leases with a duration of one year or less were $25,417 and $23,733 during
the nine months ended September 30, 2022 and September 30, 2021, respectively.
13.
MAJOR CUSTOMER AND CONCENTRATION OF CREDIT RISK
Sales
to the Company’s largest customer were 74% and 73% of total sales for the three and nine months ended September 30, 2022, respectively.
Accounts
receivable from the same customer were 61% of total accounts receivable and unbilled receivables as of September 30, 2022.
14.
COMMITMENTS AND CONTINGENCIES
The
Company received a letter in February 2021 from counsel for the Company’s director’s and officer’s insurance carrier
(the “insurer”) demanding that the Company reimburse the insurer for sums advanced by the insurer to a former director of
the Company as defense costs in connection with a claim purportedly arising under a previous director’s and officer’s insurance
policy. The Company believes it has no liability for this claim on the basis of, among other things, Nevada law, the Company’s
governing documents and the language of the policy. Accordingly, as of September 30, 2022, no contingent liability has been recorded
in the Company’s consolidated statements of financial condition for this matter.
15.
SEGMENT INFORMATION
FASB
ASC 280 “Segment Reporting” establishes standards for reporting information about operating segments on a basis consistent
with the Company’s internal organizational structure as well as information about services, categories, business segments and major
customers in financial statements. The Company has two reportable segments that are based on the following business units:
● |
Therapeutic
Operations – research and development primarily related to the advancement of the Company’s cannabinoid-based drug development
program |
|
|
● |
ESG
Operations – development and operation of businesses addressing the health and wellness of people and the planet, with a particular
focus on deploying technological innovations and eco-friendly solutions to remedy difficult environmental situations in economically
challenged communities |
In
accordance with FASB ASC 820, the Company’s chief operating decision-maker has been identified as the Chief Executive Officer,
who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Existing
guidance, which is based on a management approach to segment reporting, establishes requirements to report selected segment information
quarterly and to report annually entity-wide disclosures about products and services, major customers and the countries in which the
entity holds material assets and reports revenue. All material operating units qualify for aggregation under FASB ASC 820 due to their
similar customer base and similarities in: economic characteristics; nature of products and services; and procurement, manufacturing
and distribution processes.
The
Company had no inter-segment sales for the periods presented.
Summarized
financial information concerning the Company’s reportable segments is shown as below:
SCHEDULE
OF FINANCIAL INFORMATION OF REPORTABLE SEGMENT
By
Categories
| |
| | |
| | |
| | |
| |
| |
For the Three Months Ended September 30, 2022 | |
| |
Therapeutic Operations | | |
ESG Operations | | |
Corporate | | |
Total | |
| |
| | |
| | |
| | |
| |
Revenue | |
$ | - | | |
$ | 1,547,258 | | |
$ | - | | |
$ | 1,547,258 | |
Cost of services | |
| - | | |
| 1,189,475 | | |
| - | | |
| 1,189,475 | |
Gross profit | |
| - | | |
| 357,783 | | |
| - | | |
| 357,783 | |
Net income (loss) | |
| (106,744 | ) | |
$ | 213,865 | | |
$ | (226,737 | ) | |
$ | (119,616 | ) |
| |
| | | |
| | | |
| | | |
| | |
Total assets | |
| 8,334 | | |
| 3,518,019 | | |
| 681,298 | | |
| 4,207,651 | |
Capital expenditures for long-lived assets | |
$ | - | | |
$ | 135,495 | | |
$ | - | | |
$ | 135,495 | |
| |
| | |
| | |
| | |
| |
| |
For the Nine Months Ended September 30, 2022 | |
| |
Therapeutic Operations | | |
ESG Operations | | |
Corporate | | |
Total | |
| |
| | |
| | |
| | |
| |
Revenue | |
$ | - | | |
$ | 2,186,617 | | |
$ | - | | |
$ | 2,186,617 | |
Cost of services | |
| - | | |
| 1,763,882 | | |
| - | | |
| 1,763,882 | |
Gross profit | |
| - | | |
| 422,735 | | |
| - | | |
| 422,735 | |
Net income (loss) | |
| (340,297 | ) | |
$ | 153,719 | | |
$ | (824,198 | ) | |
$ | (1,010,776 | ) |
| |
| | | |
| | | |
| | | |
| | |
Total assets | |
| 8,334 | | |
| 3,518,019 | | |
| 681,298 | | |
| 4,207,651 | |
Capital expenditures for long-lived assets | |
$ | - | | |
$ | 1,243,328 | | |
$ | - | | |
$ | 1,243,328 | |
| |
| | |
| | |
| | |
| |
| |
For the Three Months Ended September 30, 2021 | |
| |
Therapeutic Operations | | |
ESG Operations | | |
Corporate | | |
Total | |
| |
| | |
| | |
| | |
| |
Net loss | |
$ | (67,838 | ) | |
$ | - | | |
$ | (436,520 | ) | |
$ | (504,358 | ) |
| |
| | | |
| | | |
| | | |
| | |
Total assets | |
| - | | |
| - | | |
| 68,011 | | |
| 68,011 | |
Capital expenditures for long-lived assets | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
| |
| | |
| | |
| | |
| |
| |
For the Nine Months Ended September 30, 2021 | |
| |
Therapeutic Operations | | |
ESG Operations | | |
Corporate | | |
Total | |
| |
| | |
| | |
| | |
| |
Net loss | |
$ | (236,287 | ) | |
$ | - | | |
$ | (1,240,937 | ) | |
$ | (1,477,224 | ) |
| |
| | | |
| | | |
| | | |
| | |
Total assets | |
| - | | |
| - | | |
| 68,011 | | |
| 68,011 | |
Capital expenditures for long-lived assets | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
16.
SUBSEQUENT EVENTS
On
October 11, 2022, Daedalus Ecosciences and Starks entered into the Starks Agreement pursuant to
which Daedalus Ecosciences acquired Starks’ 10% common stock ownership interest in the Range Entities. As a result of this transaction,
Daedalus Ecosciences is the sole shareholder of the Range Entities. No other changes were made to the consideration received by Starks
as part of the Share Purchase Agreement entered into on May 11, 2022, and he remains as President of each of the Range Entities.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
As
used in this discussion and analysis and elsewhere in this Quarterly Report, the “Company” refers to Malachite Innovations,
Inc., a Nevada corporation.
Cautionary
Statement
The
following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction
with the Company’s Unaudited Consolidated Financial Statements and the related notes thereto contained in Part I, Item 1 of this
Quarterly Report. The information contained in this Quarterly Report on Form 10-Q is not a complete description of the Company’s
business or the risks associated with an investment in the Company’s common stock. The Company urges you to carefully review and
consider the various disclosures made by the Company in this Quarterly Report and in the Company’s other reports filed with the
Securities and Exchange Commission (the “SEC”), including the Company’s Transition Report on Form 10-KT for the nine
months ended December 31, 2021 filed on March 31, 2022, and the related audited financial statements and notes included therein.
Certain
statements made in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Forward-looking
statements are projections in respect of future events or the Company’s future financial performance. In some cases, you can identify
forward-looking statements by terminology such as “may,” “will,” “should,” “intend,”
“expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,”
“potential,” or “continue” or the negative of these terms or other comparable terminology. These statements are
only predictions and involve known and unknown risks, uncertainties and other factors, which may cause the Company’s or its industry’s
actual results, levels of activity or performance to be materially different from any future results, levels of activity or performance
expressed or implied by these forward-looking statements. These risks and uncertainties include: general economic and financial market
conditions; the Company’s ability to obtain additional financing as necessary; the Company’s ability to continue operating
as a going concern; any adverse occurrence with respect to the Company’s business or; results of the Company’s research and
development activities that are less positive than it expects; the Company’s ability to bring its intended products to market;
market demand for the Company’s intended products; shifts in industry capacity; product development or other initiatives by the Company’s
competitors; fluctuations in the availability and costs of raw materials required in the Company’s drug development process; other
factors beyond the Company’s control; and the other risks described under the heading “Risk Factors” in the Company’s
Transition Report on Form 10-KT filed with the SEC on March 31, 2022.
Although
the Company believes that the expectations and assumptions reflected in the forward-looking statements it makes are reasonable, the Company
cannot guarantee future results, levels of activity or performance. In addition, the Company cannot assess the impact of each factor
on its business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those
expressed by any forward-looking statements. As a result, readers should not place undue reliance on any of the forward-looking statements
the Company makes in this report. Forward-looking statements speak only as of the date on which they are made. Except as required by
law, the Company undertakes no obligation to revise or update publicly any forward-looking statements for any reason.
Company
Overview
Unless
otherwise provided in this Quarterly Report, references to the “Company” refer to Malachite Innovations, Inc., a Nevada corporation
formed on June 29, 2007 as Legend Mining Inc., and its consolidated subsidiaries. On October 10, 2011, the Company completed a merger
with its wholly-owned subsidiary, Stevia First Corp., whereby the Company changed its name from “Legend Mining Inc.” to “Stevia
First Corp.” On July 15, 2016, the Company’s Board of Directors and shareholders approved a name change to “Vitality
Biopharma, Inc.” On October 1, 2021, the Company completed a merger with its wholly-owned subsidiary, Malachite Innovations, Inc.,
whereby the Company changed its name from “Vitality Biopharma, Inc.” to “Malachite Innovations, Inc.”
Malachite
Innovations is a company focused on improving the health and wellness of people and the planet. The Company seeks to accomplish this objective
through the operation of two wholly-owned subsidiaries: (i) Graphium Biosciences, Inc. which is focused on developing new innovations
targeting the health and wellness of people, with a particular focus on advancing its broad portfolio of over 100 glycosylated cannabinoid
prodrugs and (ii) Daedalus Ecosciences, Inc. which is focused on evaluating new innovations targeting the health and wellness of the
planet through an Environmental, Social and Governance (“ESG”) business strategy, with a particular focus on deploying technological
innovations and eco-friendly solutions to remedy difficult environmental situations in economically challenged communities.
The
Company’s corporate headquarters is located in Cleveland, Ohio. As of September 30, 2022, the Company employed twenty-three full-time
employees, including twenty employees of the Range Entities, one cannabinoid research scientist working in the Company’s office
and laboratory space in Rocklin, California, and two senior executives of the Company. The Company also has, in the past, engaged the
services of scientific and regulatory consultants to assist in its research and development activities, which is an approach that provides
the Company with flexible and experienced resources to advance its corporate objectives while maintaining a relatively lower overhead
cost structure.
Graphium
Biosciences, Inc.
Cannaboside
Prodrugs
The
Company’s cannabosides are cannabinoid-glycoside prodrugs, which were discovered through application of the Company’s proprietary
enzymatic bioprocessing technologies that are converted within the body after administration from an inactive molecule into a pharmacologically
active drug. Currently, the Company has produced more than 100 novel cannabosides, including glycosylated tetrahydrocannabinol (THC),
cannabidiol (CBD), cannabidivarin (CBDV) and cannabinol (CBN), that are covered by worldwide patents and patent applications for composition
of matter, method of production and method of use.
A
prodrug is a compound that, after administration, is metabolized into a pharmacologically active drug. Prodrugs are often designed to
improve drug properties and reduce known or expected toxicities and adverse side effects. By using the Company’s proprietary enzymatic
bioprocessing technologies, its clinical research team has developed a novel family of prodrugs by combining cannabinoid and glucose
molecules. The resulting compounds, known as cannabosides, have unique commercial applications and patentable compositions of matter,
which are separate and distinct from ordinary cannabinoids. The advantages of cannabosides may include: (i) administration in a convenient
oral formulation, (ii) targeted delivery with release in the colon or large intestine, (iii) improved stability with limited degradation
or drug metabolism, and (iv) delayed release enabling longer-lasting effects and fewer administrations by patients.
The
Company’s proprietary glycosylation process, which results in adding one or more glucose molecules to compounds, may enable
its new cannabosides to act as prodrugs that achieve targeted delivery of the bioactive compounds of cannabinoids to the
gastrointestinal tract. Glycosylated compounds are generally more stable and water soluble, so upon ingestion, the Company believes
they will remain intact and transit through the esophagus, stomach and upper intestine with limited absorption or degradation from
stomach acids. However, once the glycosylated compounds reach the large intestine, the Company expects them to encounter glycoside
hydrolase enzymes secreted by the human intestinal microbiota that will cleave the polar glucose residues and release the active
cannabinoid compound primarily in the large intestine or colon.
The
Company has focused its research and development activities on the glycosylation of cannabinoids given their well-known positive effects
on the human endocannabinoid system. The Company’s research and development activities originally focused on the glycosylation
of CBD and then later expanded into the glycosylation of THC. The use of the cannabinoid THC has been shown to provide substantial anti-inflammatory
benefits on the human body, among other benefits, but is limited as a pharmaceutical option given its psychoactive and intoxicating properties.
However, by glycosylating THC, the Company has learned through initial animal studies that the binding of glucose and THC molecules restricts
the release of THC into the body’s digestive system until the prodrug reaches the large intestine, at which point the glycoside
hydrolase enzymes cleave the glucose from the prodrug and the THC is released in a targeted and restricted manner. Further, the Company
has learned through its initial animal studies that this targeted release of THC, which could be provided in very low doses to achieve
physiologically beneficial results, serves as an anti-inflammatory agent in the lower gastrointestinal tract and minimizes the amount
of THC absorbed into the blood stream, therefore avoiding the psychoactive and intoxicating properties that hinder the broader pharmaceutical
use of THC.
The
Company is developing THC-glycoside prodrugs for the treatment of gastrointestinal diseases, including inflammatory bowel disease (IBD)
and irritable bowel syndrome (IBS) because of the targeted release described previously. IBD is a frequently chronic inflammatory condition
where parts of the digestive system become inflamed from an overactive immune response. The disease can lead to irreversible damage to
the gastrointestinal tract and may require surgery to remove affected areas of the intestine. Two major forms of the disease are Crohn’s
disease, which can affect any part of the digestive system, and ulcerative colitis, which often affects the colon or large intestine.
The disease is often unpredictable with periods of painful and debilitating symptoms followed by periods of remission with limited symptoms.
IBS has similar symptoms to IBD, including abdominal pain, but the underlying disease process is quite different. IBS is a functional
gastrointestinal disorder that commonly affects the large intestine and is characterized by abdominal cramping, diarrhea, constipation,
and pain. Currently, patients suffering from IBD are frequently prescribed anti-inflammatory drugs such as steroids, biologics and immunosuppressants,
and patients suffering from IBS are prescribed antibiotics, antidepressants and gastrointestinal motility compounds, all of which often
result in unwanted side effects.
The
Company’s most promising THC-glycoside (VBX-100) is being developed as an oral prodrug for the treatment of IBD and IBS. VBX-100
was selected from the Company’s THC-glycoside portfolio for compatibility with commercial production techniques and the optimal
prodrug delivery profile that maximizes intestinal anti-inflammatory properties while minimizing psychoactive or intoxicating effects.
Initial pre-clinical studies on the efficacy of VBX-100 in animal models have shown favorable outcomes, including reduced inflammation
of the gastrointestinal tract and no measurable systemic THC found in tissue examined using highly-sensitive testing equipment.
The
Company has determined that the value of its cannaboside prodrug assets would likely be maximized through a public capital raise into
the Company or a private capital raise into Graphium Biosciences to secure funding to advance VBX-100 through its
remaining pre-clinical animal studies and its Phase I and Phase II clinical trials.
Orphan
Drug Designation
In
January 2018, the Company filed a request with the FDA’s Office of Orphan Products Development (OOPD) for an Orphan Drug Designation
of its VBX-100 prodrug for the treatment of pediatric ulcerative colitis. In March 2018, the OOPD denied the Company’s request
based, in part, on the FDA’s decision to no longer grant Orphan Drug Designation status to drugs for pediatric subpopulations of
common diseases (i.e., diseases or conditions with an overall prevalence of over 200,000), unless the use of the drug in the pediatric
subpopulation meets the regulatory criteria for an orphan subset, or the disease in the pediatric subpopulation is considered a different
disease from the disease in the adult population.
In
December 2019, the Company’s received a letter from the OOPD informing it that the FDA determined that the Company may be eligible
for pediatric-subpopulation designation because the Company submitted its original request for an Orphan Drug Designation before the
guidance Clarification of Orphan Designation of Drugs and Biologics for Pediatric Subpopulations of Common Diseases was finalized
in July 2018.
Accordingly,
in May 2020, the Company filed a response letter with the OOPD addressing the other deficiencies noted in the Company’s original
submission in January 2018, which included, among other things (1) support for the prevalence of pediatric ulcerative colitis; (2) the
Company’s scientific rationale for the specific animal models used in its pre-clinical animal studies; and (3) more comprehensive
supporting documentation for the use of VBX-100 in pediatric patients with ulcerative colitis. In August 2020, the Company received a
letter from the OOPD stating that it was unable to grant the Company’s request for an Orphan Drug Designation status because its
VBX-100 prodrug was administered before and after colitis was induced in its in vivo mouse studies, which resulted in the need
for more scientific data to support the efficacy of our VBX-100 prodrug in a treatment-only setting. As a result, the Company was advised
to perform a second in vivo mouse study in which its VBX-100 prodrug would be administered only after colitis was induced in order
to provide a clear indication that the active drug was released only after ulcerative colitis was present. In May 2021, the Company completed
the treatment-only in vivo mouse study and filed a supplemental response letter with the OOPD providing the requested in vivo
treatment-only mouse study results in support of its position that VBX-100 may be effective as a treatment for pediatric ulcerative
colitis.
On
August 9, 2021, the Company received a letter from the OOPD stating that it has been granted Orphan Drug Designation for its glycosylated
cannabinoid VBX-100 for the treatment of pediatric ulcerative colitis. The Company is currently evaluating several regulatory pathways
for the advancement of its VBX-100 prodrug through pre-clinical and clinical studies, including leveraging the benefits of the Orphan
Drug Designation granted by the OOPD.
Daedalus
Ecosciences
Overview
Daedalus
Ecosciences is focused on creating shareholder value by addressing the health and wellness of the planet through an ESG-focused business
strategy, with a particular focus on deploying technological innovations and eco-friendly solutions to remedy difficult environmental
situations in economically challenged communities.
The
Company’s ESG business strategy is based on the foundational principle that sustainability and value creation are interconnected.
Rather than evaluating the merits of an opportunity based solely on the short-term direct profitability of a proposed business initiative,
sustainable business practice takes a holistic approach and considers the environmental, social and financial impacts of that initiative
on a wide range of stakeholders, including shareholders, the environment and local communities. The Company believes that a strong ESG
proposition, properly capitalized, will help the Company expand into and create value in new environmentally-focused markets. The Company
also believe that a robust ESG business model can enhance its investment returns by allocating capital to more promising and more sustainable
opportunities.
A
stronger external-value proposition may enable the Company to achieve greater strategic freedom. Given that certain of the ESG business
initiatives under consideration may require governmental approvals or support, we believe that a focus on ESG core principles can ease
regulatory pressures and help reduce the Company’s risk of adverse government action. The Company also believes that a strong ESG
proposition can help it attract and retain quality employees, enhance employee motivation by instilling a sense of purpose, and increase
productivity overall.
The
Company will require additional capital to successfully pursue its ESG business strategy. While the Company believes there are an increasing
number of sources of financing available for ESG initiatives, there can be no assurance that the Company will successfully raise the
needed capital. The Company believes that a commitment to ESG business principles will allow the Company to generate strong financial
returns for shareholders while also creating long-term environmental and social benefits.
Initially,
the Company intends to focus its ESG business strategy on acquiring and developing businesses the Company believes have potential to
conserve, protect and re-purpose the natural environment in those areas in the U.S. that have been negatively impacted by mining. The
Company’s business development strategy will initially focus on the following areas:
|
● |
Land
reclamation |
|
● |
Water
treatment and remediation |
|
● |
Carbon
footprint reduction |
|
● |
Water
usage and conservation |
|
● |
Renewable
energy usage |
|
● |
Recycling
and disposal practices |
|
● |
Green
products, technologies, and infrastructure |
|
● |
Relationship
with the U.S. Environmental Protection Agency (EPA) and other environmental regulatory bodies |
The
Company may also build, invest in or acquire companies that use blockchain, or distributed ledger technology, to account for and verify
voluntary-market carbon credits generated by increased usage of renewable resources or the decreased usage of non-renewable resources
to enable a more efficient and transparent global market for carbon credits. This may include companies (i) developing innovative products
or solutions to reduce or mitigate carbon emissions; (ii) developing technologies that drive blockchain registry of credits or tokens;
(iii) issuing tokens based on registry of carbon credits; and (iv) developing exchange facilities for carbon credits.
The
Company believes that it is well-positioned from a managerial and operational perspective to pursue these business initiatives given
the experience of management in connection with other successful ventures that are developing and executing various reclamation and remediation
programs at coal mines in Appalachia and creating profitable next-generation eco-friendly initiatives and stable jobs in local communities
previously reliant primarily on the highly cyclical coal mining industry.
Range
Environmental Resources and Range Natural Resources
In
May 2022, the Company, through its Daedalus Ecosciences
subsidiary, acquired the Range Entities. The Range Entities provide land reclamation, water restoration
and environmental consulting services to mining and non-mining customers throughout the Appalachian region. The Range Entities’
land reclamation services seek to return land to pre-mining conditions or repurpose the land for natural, commercial, agricultural or
recreational use. The Range Entities’ water restoration services seek to improve rivers, streams and discharges through novel and
innovative treatment applications to help customers meet their various regulatory standards and requirements. The Range Entities also
provide environmental consulting services to customers typically in connection with land reclamation and water restoration projects and
as an additional value-add service, sell water treatment chemicals manufactured by third parties to its customers.
Additional
ESG Opportunities
The
Company is actively pursuing a number of other ESG-focused investment opportunities to advance its mission with a particular focus on
some of the most challenging environmental situations in disadvantaged communities.
Results
of Operations
Three
Months Ended September 30, 2022 and September 30, 2021
The
Company’s net loss during the three months ended September 30, 2022 was $119,616 compared to a net loss of $504,358 for the three
months ended September 30, 2021. The Company’s revenue during the three months ended September 30, 2022 was $1,547,258 and its
gross profit was $357,783. The Company had no revenue during the three months ended September 30, 2021.
During
the three months ended September 30, 2022, the Company incurred general and administrative expenses in the aggregate amount of $449,041,
compared to $436,523 incurred during the three months ended September 30, 2021 (an increase of $12,518). General and administrative expenses
generally include corporate overhead, salaries and other compensation costs, financial and administrative contracted services, marketing,
consulting costs and travel expenses. The majority of the increase in general and administrative costs relates to health insurance costs
in the ESG Operations segment of $44,955 that were not incurred in the 2021 period. These costs were offset by a decrease in professional
fees in the 2022 period. The Company incurred professional fees of $3,550 during the three months ended September 30, 2022, as compared
to $52,500 during the three months ended September 30, 2021 (a decrease of $48,950).
In
addition, during the three months ended September 30, 2022, the Company incurred research and development costs of $106,744, compared
to $67,838 during the three months ended September 30, 2021 (an increase of $38,906). This increase resulted from an increase in wages
allocated to the Therapeutic Operations segment, which increased to $83,479 in the period ended September 30, 2022, as compared to $48,443
in the period ended September 30, 2021 (an increase of $35,036).
During
the three months ended September 30, 2022, the Company recorded total net other income in the amount of $78,386, compared to total net
other income recorded during the three months ended September 30, 2021, in the amount of $3. This difference was attributable to a gain
of $109,435 related to the forgiveness of the Company’s ESG Operations segment’s PPP loan offset by interest expense of $31,049
incurred during the three months ended September 30, 2022. No amounts were recorded related to these items during the three months ended
September 30, 2021.
During
the three months ended September 30, 2022, the Company had a net loss of $119,616 compared to a net loss of $504,358 during the three
months ended September 30, 2021. The decrease in net loss attributable to common stockholders of $384,742 is primarily due to the gross
profit of $357,783 earned during the three months ended September 30, 2022, compared to gross profit of $0 earned during the three months
ended September 30, 2021.
Nine
Months Ended September 30, 2022 and September 30, 2021
The
Company’s net loss during the nine months ended September 30, 2022 was $1,010,776 compared to a net loss of $1,477,224 for the
nine months ended September 30, 2021. The Company’s revenue during the nine months ended September 30, 2022 was $2,186,617 and
its gross profit was $422,735. The Company had no revenue or gross profit during the nine months ended September 30, 2021.
During
the nine months ended September 30, 2022, the Company incurred general and administrative expenses in the aggregate amount of $1,147,308,
compared to $1,538,158 incurred during the nine months ended September 30, 2021 (a decrease of $390,850). The majority of the decrease
in general and administrative costs relates to stock-based compensation which decreased to $0 during the nine months ended September
30, 2022, as compared to $130,516 during the nine months ended September 30, 2021, professional fees which decreased to $16,090 during
the nine months ended September 30, 2022, as compared to $197,500 during the nine months ended September 30, 2021 (a decrease of $181,410),
and legal fees, which decreased to $93,770 during the nine months ended September 30, 2022, as compared to $303,474 during the nine months
ended September 30, 2021 (a decrease of $209,704).
In
addition, during the nine months ended September 30, 2022, the Company incurred research and development costs of $340,297, compared
to $236,287 during the nine months ended September 30, 2021 (an increase of $104,010). This increase resulted from an increase in wages
related to research and development, which increased to $251,316 in the period ended September 30, 2022, as compared to $145,803 in the
period ended September 30, 2021 (an increase of $105,513), and legal fees, which increased to $51,871 during the nine months ended September
30, 2022, from $0 during the nine months ended September 30, 2021. These costs were offset by a decrease in stock-based compensation
which decreased to $0 during the nine months ended September 30, 2022, as compared to $28,333 during the nine months ended September
30, 2021.
During
the nine months ended September 30, 2022, the Company recorded total net other income in the amount of $54,094, compared to total net
other income of $297,221 recorded during the nine months ended September 30, 2021. This difference was primarily attributable to the
gain on extinguishment of liabilities of $296,653 recorded during the nine months ended September 30, 2021, compared to a gain of $109,435
related to the forgiveness of the Company’s ESG Operations segment’s PPP loan, offset by interest expense of $55,341 incurred
during the nine months ended September 30, 2022.
During
the nine months ended September 30, 2022, the Company had a net loss of $1,010,776 compared to a net loss of $1,477,224 during the nine
months ended September 30, 2021. The decrease in net loss attributable to common stockholders of $466,448 is primarily due to the gross
profit of $422,735 earned during the nine months ended September 30, 2022, compared to gross profit of $0 earned during the nine months
ended September 30, 2021.
Liquidity
and Capital Resources
The
Company has incurred losses since inception resulting in an accumulated deficit of $50,151,454 as of September 30, 2022.
As
of September 30, 2022, the Company had total current assets of $1,654,684, comprised primarily of cash in the amount of $1,156,799, and
accounts receivable and other receivables of $497,001. The Company’s total current liabilities as of September 30, 2022 were $721,085,
consisting of the current portion of long-term debt in the amount of $396,939, and accounts payable of $324,146, which includes a $33,440
lease payment attributable to the Company’s now-dissolved wholly-owned subsidiary, The Control Center, Inc., for which it is not
responsible. As a result, on September 30, 2022, the Company had working capital of $933,599.
As
of September 30, 2022, the Company had long-term assets of $2,552,967, which were comprised of net equipment assets of $1,683,406, goodwill
of $751,421, operating lease asset of $109,248, and deposits of $8,892. As of September 30, 2022, the Company had long-term liabilities
of $878,983, which were comprised of long-term debt, net of current portion of $769,735, and operating lease liability of $109,248.
Sources
of Capital
Based
on the Company’s current corporate strategy, its total expenditures for the 12 months following September 30, 2022 are expected
to be approximately $1,800,000, which is comprised of general operating and research and development expenses. Based on the Company’s
cash balance of $1,156,799, $1,000,000 available under its revolving credit line as of September 30, 2022, $4,830,050 available under
its equity financing line, revenues being generated by the Range Entities, and its estimated total expenditures of approximately $1,800,000
for the 12-month period ending September 30, 2023, the Company expects to have sufficient funds to operate its business over the next
12 months. The Company expects to generate funds from its ESG Operations, but may also seek additional financing and other sources of
capital to accelerate the funding and execution of its growth strategy and value creation plan.
The
Company’s estimated total expenditures for the 12-month period ending September 30, 2023 could increase if the Company encounters
unanticipated expenses in connection with operating its business as presently planned. In addition, the Company’s estimates of
the amount of cash necessary to fund its business may prove to be too low, and the Company could spend its available financial resources
much faster than it currently expects. If the Company cannot raise the capital necessary to continue to develop its business, the Company
will be forced to delay, scale back or eliminate some or all of its proposed operations. If any of these were to occur, there is a substantial
risk that the Company’s business would fail.
Since
inception, the Company has primarily funded its operations through equity and debt financings. The Company has revenue earned from its
investment in the Range Entities that it expects will fund its ongoing operations and provide excess cash to fund all or a portion
of additional ESG investments made by Daedalus in the future. The Company may also supplement its funding through equity and debt financings
in the future. However, sources of additional funds may not be available when needed, on acceptable terms, or at all. If the Company
issues equity or convertible debt securities to raise additional funds or to fund, in whole
or in part, acquisitions in furtherance of its business strategy, the Company’s existing stockholders may experience substantial
dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of its existing stockholders.
If the Company incurs additional debt, it may increase the Company’s leverage relative to its earnings or to its equity capitalization,
requiring the Company to pay additional interest expenses. Obtaining commercial loans, assuming those loans would be available, would
increase the Company’s liabilities and future cash commitments. If the Company pursues capital through alternative sources, such
as collaborations or other similar arrangements, the Company may be forced to relinquish rights to its proprietary glycosylated cannabinoid
technology or other intellectual property and could result in its receipt of only a portion of any revenue that may be generated from
a partnered product or business. Moreover, regardless of the manner in which the Company seeks to raise capital, it may incur substantial
costs in those pursuits, including investment banking fees, legal fees, accounting fees, printing and distribution expenses and other
related costs.
Net
Cash Used in Operating Activities
The
Company has not historically generated positive cash flows from operating activities. For the nine months ended September 30, 2022, net
cash used in operating activities was $568,536 compared to net cash used in operating activities of $1,503,046 for the nine months ended
September 30, 2021. This decrease was primarily attributable to a lower net loss of $1,010,776 for the nine months ended September 30,
2022, compared to a net loss of $1,477,224 for the nine months ended September 30, 2021, as well as a gain on extinguishment of liabilities
of $296,653 recognized during the nine months ended September 30, 2021, and a decrease in accounts receivable of $554,181 during the
nine months ended September 30, 2022, partially offset by a decrease in the expenses recorded for stock-based compensation related to
stock options of $158,849 during the nine months ended September 30, 2021. Net cash used in operating activities during the nine months
ended September 30, 2022, consisted primarily of a net loss of $1,010,776 and an increase of unbilled receivables of $161,263, offset
by a decrease in accounts receivable of $554,181. Net cash used in operating activities during the nine months ended September 30, 2021,
consisted primarily of a net loss of $1,477,224, and a gain on extinguishment of liabilities of $296,653, partially offset by $158,849
related to stock-based compensation.
Net
Cash Used in Investing Activities
During
the nine months ended September 30, 2022, net cash used in investing activities was $1,977,502. Net cash used in investing activities
during the nine months ended September 30, 2022, consisted primarily of equipment purchases totaling $1,243,329 and cash paid for the
acquisition of Range Environmental of $750,000. No net cash was used in or provided by investing activities during the nine months ended
September 30, 2021.
Net
Cash Provided By Financing Activities
During
the nine months ended September 30, 2022, net cash provided by financing activities was $3,664,494, compared to net cash provided from
financing activities of $119,000 during the nine months ended September 30, 2021. Net cash provided by financing activities for the nine
months ended September 30, 2022 consisted of $3,250,000 received from the issuance of common stock and warrants, proceeds of $923,309
from long-term debt, offset by the payoff of the SBA Disaster Loan of $158,815 and the payoff of the revolving line of credit of $350,000.
The cash provided during the nine months ended September 30, 2021 was a result of the issuance of common stock and warrants under an
equity line.
Off-Balance
Sheet Arrangements
The
Company has no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its
financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources that would be material to stockholders.
Critical
Accounting Policies
The
Company’s financial statements and accompanying notes included in this report have been prepared in accordance with United States
generally accepted accounting principles (“U.S. GAAP”) applied on a consistent basis. The preparation of financial statements
in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting periods.
The
Company regularly evaluates the accounting policies and estimates that it uses to prepare its financial statements. In general, management’s
estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are
believed to be reasonable under the facts and circumstances. Actual results could differ from the estimates made by management.
The
Company believes the following critical accounting policies require it to make significant judgments and estimates in the preparation
of its consolidated financial statements included in this report:
Use
of Estimates and Assumptions
The
preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. The more significant
estimates and assumption by management include, among others, assumptions used in valuing assets acquired in business acquisitions, reserves
for accounts receivable, assumptions used in valuing equity instruments issued for services, the valuation allowance for deferred tax
assets, accruals for potential liabilities, and assumptions used in the determination of the Company’s liquidity. Actual results
could differ from those estimates.
Stock-Based
Compensation
The
Company periodically issues stock options and restricted stock awards to employees and non-employees in non-capital raising transactions
for services and for financing costs. The Company accounts for such grants issued and vesting based on FASB ASC 718 “Compensation-Stock
Compensation” whereby the value of the award is measured on the date of grant and recognized for employees as compensation expense
on the straight-line basis over the vesting period. Recognition of compensation expense for non-employees is in the same period and manner
as if the Company had paid cash for the services.
Revenue
The
Company’s revenue recognition policies will follow the guidance of FASB ASC 606 “Revenue from Contracts with Customers.”
FASB ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms of contracts, which includes
(1) identifying the contracts or agreements with a customer, (2) identifying its performance obligations in the contract or agreement,
(3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations, and (5) recognizing
revenue as each performance obligation is satisfied.
The
Range Entities primarily invoice customers and recognize revenue on a periodic basis for equipment and labor hours provided to a customer
on a particular job based on an agreed-upon hourly rate sheet or a fixed amount for a project. The Range Entities also invoice customers
and recognize revenue for equipment mobilization fees and materials and supplies required to complete a project. The Range Entities invoice
for the sales of chemicals and recognize revenue when the products are delivered to the customer’s designated site. Costs for equipment,
labor and chemicals are generally expensed as incurred since the projects are generally short-term and not subject to a contract. The
Range Entities’ performance obligations are satisfied at the point in time when the services are performed or when products are
received by the customer, which is when the customer has title and the significant risks and rewards of ownership. The Range Entities
do not have any significant financing components as payment is received within a commercially reasonable time after the point of sale.
Costs incurred to obtain a contract will be expensed as incurred when the amortization period is less than a year. Shipping and handling
amounts paid by the customers are included in revenue.
Contract
modifications are routine in the performance of the Range Entities’ contracts. Contracts are often modified to account for changes
in contract specifications or requirements. In most instances, contract modifications are a result of changes in the scope of work, or
the products or services required to complete the contract and are customarily approved in advance by the customer.
Recent
Accounting Pronouncements
Please
refer to Footnote 1 of the accompanying financial statements for management’s discussion of recent accounting pronouncements.