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Cryomass Technologies, Inc. - Quarter Report: 2022 March (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2022

 

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number: 000-56155

 

CRYOMASS TECHNOLOGIES INC.

(Exact name of registrant as specified in its charter)

 

Nevada   82-5051728
(State of incorporation)   (IRS Employer Identification No.)
     
1001 Bannock Street, Suite 612, Denver, CO   80204
(Address of principal executive offices)   (Zip Code)

 

303-416-7208

(Registrant’s telephone number, including area code)

  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
  Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes No

 

As of May 12, 2022, the registrant had 200,664,498 shares of its common stock, par value $0.001 per share, outstanding.

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
         

 

 

 

 

 

 

FORWARD LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or the negative of these words or other comparable terminology.

 

The identification in this report of factors that may affect our future performance and the accuracy of forward-looking statements is meant to be illustrative and by no means exhaustive. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty.

 

Factors that could cause our actual results to differ materially from those expressed or implied by forward-looking statements include, but are not limited to:

 

  Trends affecting our financial condition, results of operations or future prospects, including the impact of COVID-19;

 

  Our business and growth strategies;

 

  Our financing plans and forecasts;

 

  The factors that we expect to contribute to our success and our ability to be successful in the future;

 

  Our business model and strategy for realizing positive results as sales increase;

 

  Competition, including our ability to respond to such competition and its expectations regarding continued competition in the market in which we compete;

 

  Our ability to meet our projected operating expenditures and the costs associated with development of new projects;

 

  The impact of new accounting pronouncements on our financial statements;

 

  Whether our cash flows from operating activities will be sufficient to meet our operating expenditures;

 

  Our market risk exposure and efforts to minimize risk;

 

  Regulations, including tax law and practice, federal and state laws governing the cannabis and cannabinoid industries, and tariff legislation;

 

  Our overall outlook including all statements under Management’s Discussion and Analysis of Financial Condition and Results of Operations;

 

  That estimates and assumptions made in the preparation of financial statements in conformity with accounting principles generally accepted in the United states (“GAAP”) may differ from actual results; and

 

  Our expectations as to future financial performance, cash and expense levels and liquidity sources.

 

Any forward-looking statements in this Quarterly Report on Form 10-Q reflect our current views with respect to future events or to our future financial performance. A more detailed description of risk factors that may affect our operating results can be found in Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q and Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC on March 28, 2022, and our other filings with the SEC. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

 

 

 

 

TABLE OF CONTENTS

 

      PAGE
       
PART I - FINANCIAL INFORMATION    
Item 1. Financial Statements    
  Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021 (Unaudited)   1
  Consolidated Statements of Operations for the Three Months Ended March 31, 2022 and 2021 (Unaudited)   2
  Consolidated Statements of Shareholders’ Equity for the Three Months Ended March 31, 2022 and 2021 (Unaudited)   3
  Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021 (Unaudited)   4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   19
Item 3. Quantitative and Qualitative Disclosures About Market Risk   28
Item 4. Controls and Procedures   28
       
PART II - OTHER INFORMATION    
Item 1. Legal Proceedings   30
Item 1A. Risk Factors   30
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds   30
Item 3. Defaults Upon Senior Securities   30
Item 4. Mine Safety Disclosures   30
Item 5. Other Information   30
Item 6. Exhibits   31
Signatures     32

 

i

 

 

CRYOMASS TECHNOLOGIES INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

   March 31,
2022
   December 31,
2021
 
ASSETS        
Current assets:        
Cash and cash equivalents  $3,594,275   $5,772,839 
Prepaid expenses   73,178    757,383 
Total current assets   3,667,453    6,530,222 
           
Loan receivable   4,218,831    3,600,000 
Property and equipment, net   233,641    225,000 
Goodwill   1,190,000    1,190,000 
Intangible assets, net   4,016,768    4,038,600 
Total assets  $13,326,693   $15,583,822 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
           
Current liabilities:          
Accounts payable and accrued expenses  $1,364,905   $1,882,419 
Total current liabilities   1,364,905    1,882,419 
Notes payable   208,333    177,083 
Total liabilities   1,573,238    2,059,052 
           
Commitments and contingencies (Note 15)   
 
    
 
 
           
Shareholders’ equity:          
Preferred stock, $0.001 par value, 100,000 shares authorized, no shares issued and outstanding respectively    
-
    
-
 
Common stock, $0.001 par value, 500,000,000 shares authorized, 199,143,664 and 196,949,801 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively   199,144    196,950 
Additional paid-in capital   42,215,245    41,916,207 
Common stock to be issued   80,208    
-
 
Accumulated deficit   (30,741,142)   (28,588,837)
Total shareholders’ equity   11,753,455    13,524,320 
Total liabilities and shareholders’ equity  $13,326,693   $15,583,822 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements. 

 

1

 

 

CRYOMASS TECHNOLOGIES INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

   Three Months Ended
March 31,
 
   2022   2021 
         
Net sales  $
-
   $
-
 
Cost of goods sold   
-
    
-
 
Gross profit   
-
    
-
 
           
Operating expenses:          
Personnel costs   335,230    373,714 
General and administrative   295,349    396,470 
Legal and professional fees   1,458,257    225,520 
Amortization expense   21,832    
-
 
Research and development   17,122    
-
 
Total operating expenses   2,127,790    995,704 
Loss from operations   (2,127,790)   (995,704)
           
Other income (expenses):          
Interest expense - net   (36,023)   (202,609)
Gain on foreign exchange   11,508    34,770 
Total other expenses   (24,515)   (167,839)
Net loss from continuing operations, before taxes   (2,152,305)   (1,163,543)
Income taxes   
-
    
-
 
Net loss from continuing operations   (2,152,305)   (1,163,543)
Net gain from discontinued operations, net of tax   
-
    116,616 
Net loss  $(2,152,305)  $(1,046,927)
           
Comprehensive loss from discontinued operations   
-
    
-
 
Comprehensive loss  $(2,152,305)  $(1,046,927)
           
Net loss per common share:          
Loss from continuing operations - basic and diluted  $(0.01)  $(0.01)
           
Gain / (loss) from discontinued operations - basic and diluted  $
-
   $
-
 
           
Loss per common share - basic and diluted  $(0.01)  $(0.01)
           
Weighted average common shares outstanding—basic and diluted   198,268,853    98,257,687 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

2

 

 

CRYOMASS TECHNOLOGIES INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(UNAUDITED)

 

   Common Stock   Additional
Paid-In
   Common
Stock to
   Accumulated   Total Shareholders’ 
   Shares   Amount   Capital   Be Issued   Deficit   Equity 
Balance at December 31, 2020   97,005,817   $97,006   $19,138,947   $98,535   $(15,729,194)  $3,605,294 
                               
Share issuance from sale of common stock   1,491,819    1,492    207,043    (98,535)   
-
    110,000 
                               
Stock-based compensation   -    
-
    250,817    
-
    
-
    250,817 
                               
Net loss   -    
-
    
-
    
-
    (1,046,927)   (1,046,927)
                               
Balance at March 31, 2021   98,497,636   $98,498   $19,596,807   $
-
   $(16,776,121)  $2,919,184 
                               

Balance at December 31, 2021

   196,949,801   $196,950   $41,916,207   $
-
   $(28,588,837)  $13,524,320 
                               
Share issuance in exchange for services   458,334    458    159,959    80,208    
-
    240,625 
                               
Stock-based compensation   1,735,529    1,736    139,079    
-
    
-
    140,815 
                               
Net loss   -    
-
    
-
    
-
    (2,152,305)   (2,152,305)
                               
Balance at March 31, 2022   199,143,664   $199,144   $42,215,245   $80,208   $(30,741,142)  $11,753,455 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

3

 

 

CRYOMASS TECHNOLOGIES INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   For the Three Months Ended
March 31,
 
   2022   2021 
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss  $(2,152,305)  $(1,163,543)
Adjustments to reconcile net loss to net cash used in operating activities from continuing operations:          
Amortization of debt discount   31,250    31,250 
Depreciation and amortization expense   21,832    
-
 
Stock-based compensation expense   140,815    250,817 
Fair value of common stock issued pursuant to service and advisory agreements   160,417    
-
 
Change in operating assets and liabilities:          
Prepaid expenses   684,205    30,238 
Accounts payable and accrued expenses   (517,514)   190,848 
Net cash used in operating activities from continuing operations   (1,631,300)   (660,390)
Net cash provided by / (used in) operating activities from disc ops   
-
    194,167 
Net cash used in operating activities   (1,631,300)   (466,223)
CASH FLOWS FROM INVESTING ACTIVITIES:          
Issuance of loans receivable   (618,831)   
-
 
Purchase of property and equipment   (8,641)   
-
 
Net cash used in investing activities from continuing operations   (627,472)   
-
 
Net cash used in investing activities from discontinued operations   
-
    (174,003)
Net cash used in investing activities   (627,472)   (174,003)
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from issuance of common stock   
-
    110,000 
Proceeds from common stock subscribed and to be issued   80,208    
-
 
Proceeds from loans payable, net of repayment   
-
    136,778 
Proceeds from notes payable   
-
    725,000 
Net cash provided by financing activities from continuing operations   80,208    971,778 
Net cash provided by financing activities from discontinued operations   
-
    
-
 
Net cash provided by financing activities   80,208    971,778 
Net increase / (decrease) in cash from continuing operations   (2,178,564)   311,388 
Net increase in cash from discontinued operations   
-
    20,164 
Cash at beginning of period   5,772,839    329,839 
Cash at end of period  $3,594,275   $661,391 
Supplemental disclosure of cash flow information:          
Cash paid for interest  $
-
   $125,065 
Supplemental disclosure of non-cash investing and financing activities:          
Common stock issued pursuant to vesting of restricted stock units  $848,500   $146,602 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

4

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

1. Nature of the Business

 

Cryomass Technologies Inc (“Cryomass Technologies” or the “Company”) owns and is developing the strategy to operate patented cryo-mechanical technology is for the separation of plant materials in the harvesting of hemp and cannabis, and potentially other high value crops such as hops. The system exploits CryoMass’s U.S.-patented process for the controlled application of liquid nitrogen to stabilize and separate the structural elements of gross plant material. The device currently under development is scaled for highway transportability and is being optimized for the low-cost collection of fully intact hemp and cannabis trichomes. The functional “beta” machine is expected to be fully field-tested during mid-2022, followed by commercial use of the equipment including revenue generation.

 

2. Variable Interest Entity

 

Pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Section 810, Consolidation (“ASC 810”), the Company is required to include in its consolidated financial statements, the financial statements of its variable interest entity (“VIE”). ASC 810 requires a VIE to be consolidated if that company is subject to a majority of the risk of loss for the VIE or is entitled to receive a majority of the VIE’s residual returns. VIEs are those entities in which a company, through contractual arrangements, bears the risk of, and enjoys the rewards normally associated with ownership of the entity, and therefore the company is the primary beneficiary of the entity.

 

Under ASC 810, a reporting entity has a controlling financial interest in a VIE, and must consolidate that VIE, if the total equity investment at risk is not sufficient to permit the legal entity to finance its activities without additional subordinated financial support provided by any parties, including equity holders. Beginning July 15, 2019, the Company consolidated Critical Mass Industries LLC DBA Good Meds (“CMI” and/or “Good Meds”) as a VIE pursuant to certain intellectual property, administrative and consulting agreements in which the Company is deemed the primary beneficiary of CMI. Accordingly, the results of CMI have been included in the accompanying consolidated financial statements.

 

Effective December 31, 2021, we entered into a restated and amended administrative services agreement, terminated our license and marketing agreements, and restated the asset purchase agreement with CMI and affiliates. As a result of these agreements, we disposed of all CMI-related assets and extinguished any and all related obligations. For clarity, we have no management or operations decision-making right or responsibility, nor any access to future economic benefits from operation of the assets. Therefore, upon commencing these agreements, we determined that CMI no longer qualifies as a variable interest entity as of December 31, 2021.

   

CMI Statement of Operations
   For the Three Months Ended
March 31,
 
Description  2022   2021 
Net sales  $
-
   $1,695,925 
Cost of goods sold, inclusive of depreciation   
-
    1,118,735 
Gross profit  $
-
   $577,190 
           
Operating expenses          
Personnel costs   
-
    154,460 
Sales and marketing   
-
    226,347 
General and administrative   
-
    28,988 
Legal and professional fees   
-
    21,515 
Total operating expenses   
-
    431,310 
Gain from operations  $
-
   $145,880 
           
Other income / (expense)          
Interest expense   
-
    (29,264)
Total other income / (expense)   
-
    (29,264)
Net loss   
-
    116,616 

 

As a result of new agreements entered with CMI on December 31, 2021, as further detailed in Note 1 above, we disposed of all CMI-related assets and extinguished any and all related obligations in exchange for a $3,600,000 promissory note due to us no later than December 31, 2023.

 

5

 

 

3. Going Concern Uncertainty, Financial Conditions and Management’s Plans

 

The Company believes it has sufficient cash available to fund its anticipated level of operations for at least the next twelve months. During the year ended 2021, the Company raised $10,548,535 in common stock and $4,900,000 in convertible notes which were all converted to common stock.

 

While management believes the Company has sufficient cash available to support an anticipated level of operations for at least the next twelve months, the continuation of our company as a going concern is dependent upon the continued financial support from its shareholders, the ability of our company to obtain necessary equity or debt financing to continue operations, the payment of our note receivable from CMI , and ultimately the attainment of profitable operations. For the three months ended March 31, 2022, our company used $1,631,300 of cash for operating activities, incurred a net loss of $2,152,305 and has an accumulated deficit of $30,741,142 since inception.

 

On March 11, 2020, the 2019 novel coronavirus (“COVID-19) was characterized as a “pandemic.”  The Company’s operations were impacted during the year in the United States. The impact of COVID-19 developments and uncertainty with respect to the economic effects of the pandemic has introduced significant volatility in the financial markets.

 

The Company assessed certain accounting matters that require consideration of forecasted financial information, including, but not limited to, the carrying value of the Company’s goodwill, intangible assets, and other long-lived assets, and valuation allowances in context with the information reasonably available to the Company and the unknown future impacts of COVID-19 as of March 31, 2022 and through the date of this report. The Company’s future assessment of the magnitude and duration of COVID-19, as well as other factors, could result in material impacts to the Consolidated Financial Statements in future reporting periods.

  

The COVID-19 pandemic and responses to this crisis, including actions taken by federal, state and local governments, have had an impact on the operations of the company, including, without limitation, the following: reduced staffing due to employee suspected conditions and social distancing measures; constraints on productivity; management and staff non-essential business-related travel was constrained due to stay-at-home orders; most employees have shifted to remote work resulting in loss of productivity; consumers visiting dispensaries operated under license impacted by stay-at-home orders. Management continues to monitor the COVID-19 pandemic situation and federal, state and local recommendations and will provide updates as appropriate.

 

4. Summary of Significant Accounting Policies

 

Principles of Consolidation

 

The accompanying consolidated financial statements have been prepared in accordance with GAAP. The consolidated financial statements include the accounts of the Cryomass Technologies Inc, Cryomass LLC, and CMI, a VIE for which the Company was deemed to be the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation. The Company operates as one segment from its corporate headquarters in Colorado.

 

Effective December 31, 2021, the Company entered into an asset purchase agreement involving its VIE with Critical Mass Industries, Inc. and John Knapp, the sole shareholder of Critical Mass Industries, Inc., to divest its discontinued operations in cannabis cultivation, where the buyer assumes all assets and liabilities from the Company. Therefore, with regards to both criteria discussed above, the Company no longer has the power to direct activities, absorb losses, or receive benefits from the VIE and as such will no longer consolidate with CMI.

 

6

 

 

Use of Estimates

 

The preparation of the Company’s financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of expenses during the reporting period. Significant estimates and assumptions reflected in these financial statements include, but are not limited to determining the fair value of the assets acquired and liabilities assumed in acquisition, determining the fair value and potential impairment of inventory, determining the useful lives and potential impairment of long-lived assets and potential impairment of goodwill. The Company bases its estimates on historical experience, known trends and other market-specific or other relevant factors that it believes to be reasonable under the circumstances. On an ongoing basis, management evaluates its estimates when there are changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates.

 

Reclassifications

 

Certain items in the consolidated financial statements were reclassified from prior periods for presentation purposes.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid instruments with maturities of three months or less at the time of issuance to be cash equivalents.

 

Concentrations of Credit Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash. Periodically, the Company maintains deposits in accredited financial institutions in excess of federally insured limits. The Company deposits its cash in financial institutions that it believes have high credit quality and has not experienced any losses on such accounts. Additionally, the company entered into a $3,600,000 loan receivable in conjunction with the disposal of discontinued operations at the end of 2021, which is backed by the assets of the discontinued operations, should the borrower default. Aside from these items, the Company does not believe it is exposed to any unusual credit risk.

 

Purchase Accounting for Acquisitions

 

We apply the acquisition method of accounting for a business combination. In general, this methodology requires us to record assets acquired and liabilities assumed at their respective fair values at the date of acquisition. Any amount of the purchase price paid that is in excess of the estimated fair value of the net assets acquired is recorded as goodwill. For certain acquisitions, we also record a liability for contingent consideration based on estimated future business performance. We monitor our assumptions surrounding these estimated future cash flows and, if there is a significant change, would record an adjustment to the contingent consideration liability and a corresponding adjustment to either income or expense. We determine fair value using widely accepted valuation techniques, primarily discounted cash flow and market multiple analyses. These types of analyses require us to make assumptions and estimates regarding industry and economic factors, the profitability of future business strategies, discount rates and cash flow.

 

If actual results are not consistent with our assumptions and estimates, or our assumptions and estimates change due to new information, we may be exposed to an impairment charge in the future. If the contingent consideration paid for any of our acquisitions differs from the amount initially recorded, we would record either income or expense associated with the change in liability.

 

7

 

 

Variable Interest Entities

 

The Company accounts for variable interest entities in accordance with FASB ASC Topic 810, Consolidation. Management evaluates the relationship between the Company and VIEs and the economic benefit flow of the contractual arrangement with the VIEs. Management determines if the Company is the primary beneficiary of a VIE through a qualitative analysis that identifies which variable interest holder has the controlling financial interest in the VIE. The variable interest holder who has both of the following has the controlling financial interest and is the primary beneficiary: (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (2) the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE. In performing our analysis, we consider all relevant facts and circumstances, including: the design and activities of the VIE, the terms of the contracts the VIE has entered into, the nature of the VIE’s variable interests issued and how they were negotiated with or marketed to potential investors, and which parties participated significantly in the design or redesign of the entity. As a result of such evaluation, management concluded that the Company was the primary beneficiary of CMI and consolidates the financial results of this entity. Effective December 31, 2021, the Company entered into an asset purchase agreement involving its VIE with Critical Mass Industries, Inc. and John Knapp, the sole shareholder of Critical Mass Industries, Inc., to divest its discontinued operations in cannabis cultivation, where the buyer assumes all assets and liabilities from the Company. Therefore, with regards to both criteria discussed above, the Company no longer has the power to direct activities, absorb losses, or receive benefits from the VIE and as such will no longer consolidate with CMI.

 

Accounts Receivable, net

 

Accounts receivable, net is comprised of balances due from customers and are recorded at the invoiced amount. Past due balances are determined based on the contractual terms of the arrangements. Accounts receivable are accrued against when management determines, after considering economic and business conditions and all means of collection efforts have been exhausted and the potential for recovery is considered remote, that the collection of receivables is doubtful.

  

Inventory, net

 

Inventory, net is comprised of work-in-process and finished goods consisting of cannabis and cannabidiol products. Cost includes expenditures directly related to the manufacturing process as well as suitable portions of related production overheads, based on normal operating capacity. Inventory, net is stated at the lower of cost or net realizable value. The Company compares the cost of inventory with market value and writes down inventories to net realizable value, if lower. In evaluating whether inventories are stated at lower of cost or net realizable value, management considers such factors as inventories on hand, physical deterioration, obsolescence, changes in price levels, estimated time to sell such inventories and current market conditions. Due to changing market conditions, management will periodically conduct a thorough review of its inventory and record a provision for inventory losses if necessary. This is based on the Company’s best estimates of product sales prices and customer demand patterns. It is at least reasonably possible that the estimates used by the Company to determine its provision for inventory losses will be materially different from the actual amounts or results. These differences could result in materially higher than expected inventory provisions, which could have a materially adverse effect on the Company’s results of operations and financial conditions in the near term.

 

Revenue Recognition

 

Under FASB Topic 606, Revenue from Contacts with Customers (“ASC 606”), the Company recognizes revenue when the customer obtains control of promised goods or services, in an amount that reflects the consideration which is expected to be received in exchange for those goods or services. The Company recognizes revenue following the five-step model prescribed under ASC 606: (i) identify contract(s) with a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation(s) in the contract; and (v) recognize revenues when (or as) the Company satisfies a performance obligation.

 

Discontinued Operations

 

For the three months ended March 31, 2021, Company’s revenue consisted of sales of cannabis and ancillary products to both retail consumers and wholesale customers. Revenue for retail customers was recognized upon completion of the transaction in the point of sale system and satisfaction of the sale by providing the corresponding inventory at the retail location. Revenue for wholesale customers was recognized upon acceptance of the physical goods and confirmation by acceptance of the inventory in the regulatory marijuana enforcement tracking reporting compliance (“METRC”) system. Revenue was recognized upon transfer of control of promised products to customers, generally as risk of loss passes, in an amount that reflected the consideration the Company expected to receive in exchange for those products. Taxes collected from customers, which was subsequently remitted to governmental authorities, were excluded from revenue.

 

8

 

 

Retail customer loyalty liabilities were recognized in the period in which they were incurred and were often be retired without being utilized. Shipping and handling costs were expensed as incurred and are included in cost of sales.

 

The Company operated in a highly regulated environment in which state regulatory approval was required prior to the customer being able to purchase the product, either through the Colorado Marijuana Enforcement Division for wholesale clients or the Colorado Department of Public Health and Environment for medical patients.

 

Expenses

  

Operating Expenses

 

Operating expenses encompass personnel costs, sales and marketing expenses, research and development expenses, general and administrative expenses, professional and legal fees and depreciation and amortization related to the property and equipment and intangibles acquired through the acquisition of CMI and Cryocann. Personnel costs consist primarily of consulting expense and administrative salaries and wages. Sales and marketing expenses consist primarily of advertising and marketing, and salaries related to sales and marketing employees. General and administrative expenses are comprised of travel expenses, accounting expenses, and board fees. Professional services are principally comprised of outside legal and professional fees.

 

Discontinued Operations

 

Cost of Goods Sold, Net of Depreciation and Amortization

 

Cost of goods sold primarily consisted of allocated salaries and wages of employees directly related with the production process, allocated depreciation and amortization directly related to the production process, cultivation supplies, rent and utilities.

 

Other Expense, net

 

Other expense, net consisted of interest expense, other income and (loss) gain on foreign exchange.

 

Stock-Based Compensation

 

The fair value of restricted stock units (“RSUs”) granted are measured on the grant date using the closing price of the Company’s common shares on the grant date. For stock options, the Company engages a valuation firm to calculate the grant date fair value of the options issued. The Company accounts for forfeitures as they occur, rather than estimating expected forfeitures over the course of a vesting period. All stock-based compensation costs are recorded in general and administrative expenses in the consolidated statements of operations.

 

Property and Equipment, net

 

Purchase of property and equipment are recorded at cost. Improvements and replacements of property and equipment are capitalized. Maintenance and repairs that do not improve or extend the lives of property and equipment are charged to expense as incurred. When assets are sold or retired, their cost and related accumulated depreciation are removed from the accounts and any gain or loss is reported in the consolidated statements of operations. Depreciation and amortization expense is recognized using the straight-line method over the estimated useful life of each asset, as follows:

 

    Estimated Useful Life
Computer equipment   3 – 5 years
Furniture and fixtures   5 – 7 years
Machinery and equipment   5 – 8 years
Leasehold improvements   Shorter of lease term or 15 years

 

9

 

 

Goodwill and Intangible Assets

 

Goodwill represents the excess of the purchase price of an acquired entity over the fair value of identifiable tangible and intangible assets acquired and liabilities assumed in a business combination.

 

Indefinite-lived intangible assets established in connection with business combinations consists of in process research and development. Intangible assets with indefinite lives are recorded at their estimated fair value at the date of acquisition. Once in process research and development is placed in service, it will be amortized over the estimated useful life.

 

Intangible assets with finite lives are recorded at their estimated fair value at the date of acquisition and are amortized over their estimated useful lives using the straight-line method. Amortization of assets ceases upon designation as held for sale. The estimated useful lives of intangible assets are detailed in the table below:

 

    Estimated
Useful Life
Patent   10 years
In process research and development   Indefinite

  

Impairment of Goodwill and Intangible Assets

 

Goodwill

 

Goodwill is not amortized, but instead is tested annually at December 31 for impairment and upon the occurrence of certain events or substantive changes in circumstances.

 

We account for the impairment of goodwill under the provisions of Financial Accounting Standards Board (FASB) Accounting Standard Update 2017-04 (“ASU 2017-04”), “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” and FASB Accounting Standards Codification (ASC) 350-20-35, Intangibles – Goodwill and Other – Goodwill.

 

The Company performs impairment testing for goodwill by performing the following steps: 1) evaluate the relevant events or circumstances to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, 2) if yes to step 1, calculate the fair value of the reporting unit and compare it with its carrying amount, including goodwill, 3) recognize impairment, limited to the total amount of goodwill allocated to that reporting unit, equal to the excess of the carrying value of a reporting unit over its fair value.

  

Management concluded that there were no events indicative of goodwill impairment during the three months ended March 31, 2022.

 

Indefinite-Lived Intangible Assets and Intangible Assets Subject to Amortization

 

Indefinite-lived intangible assets and intangible assets subject to amortization are not amortized, but instead are tested annually at December 31 for impairment and upon the occurrence of certain events or substantive changes in circumstances.

 

We account for the impairment of indefinite-lived intangible assets under the provisions of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 350-30-35, Intangibles – Goodwill and Other – General Intangibles Other Than Goodwill. Following this guidance, the Company compares the estimated fair value of the indefinite-lived intangible assets to its carrying value. If the carrying value exceeds the fair value, the Company recognizes impairment equal to that excess.

 

10

 

 

We account for the impairment of intangible assets subject to amortization under the provisions of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 360-10-35, Property, Plant, and Equipment. Following this guidance, the Company compares the estimated fair value of the intangible assets subject to amortization to its carrying value. If the carrying value exceeds the fair value, the Company recognizes impairment equal to that excess.

 

Management concluded that there were no events indicative of identifiable intangible asset impairment during the three months ended March 31, 2022.

    

Income Taxes

 

The Company uses the liability method of accounting for income taxes as set forth in ASC 740, Income Taxes. Under the liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse. A valuation allowance is recorded when it is likely that the deferred tax assets will not be realized. We assess our income tax positions and record tax benefits for all years subject to examination based upon our evaluation of the facts, circumstances and information available at the reporting date. In accordance with ASC 740-10, for those tax positions where there is a greater than 50% likelihood that a tax benefit will be sustained, our policy will be to record the largest amount of tax benefit that is more likely than not to be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where there is less than 50% likelihood that a tax benefit will be sustained, no tax benefit will be recognized in the financial statements.

 

Fair Value Measurements

 

Certain assets and liabilities of the Company are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:

 

  Level 1 — Quoted prices in active markets for identical assets or liabilities.
     
  Level 2 — Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.
     
  Level 3 — Unobservable inputs that are supported by little or no market activity that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.

 

The carrying values reported in the consolidated balance sheets for cash, prepaid expenses, inventories, accounts payable, and notes payable approximate fair values because of the immediate or short-term maturities of these financial instruments. There were no other assets or liabilities that require fair value to be recalculated on a recurring basis.  

 

The fair value of beneficial conversion features associated with convertible notes and the fair value of warrants are calculated utilizing level 2 inputs.

  

When multiple instruments are issued in a single transaction, the total proceeds from the transaction should be allocated among the individual freestanding instruments identified. The allocation occurs after identifying (1) all the freestanding instruments and (2) the subsequent measurement basis for those instruments. The subsequent measurement basis helps inform how the proceeds should be allocated. After the proceeds are allocated to the freestanding instruments, those instruments should be further evaluated for embedded features that may need to be bifurcated or separated.

 

11

 

 

If debt or stock is issued with detachable warrants, the guidance in ASC 470-20-25-2 (applied by analogy to stock) requires that the proceeds be allocated to the two instruments based on their relative fair values. This method is generally appropriate if debt or stock is issued with any other freestanding instrument that is classified in equity (such as a detachable forward contract) or as a liability but not subject to subsequent fair value accounting.

 

Given that our convertible notes and common stock that were issued with warrants are both not subject to subsequent fair value accounting treatment, Management determined the relative fair value method shall be used for allocating the proceeds of the transaction. Under the relative fair value method, the instrument being analyzed is allocated a portion of the proceeds based on its fair value to the sum of the fair value of all the instruments covered int the allocation. Management additionally evaluates the facts and circumstances to determine whether the principal balance of convertible notes approximate their fair value, which we have concluded for all convertible notes issued.

   

Net Loss per Share

 

The Company follows ASC 260, Earnings Per Share, which requires presentation of basic and diluted earnings per share (“EPS”) on the face of the income statement for all entities with complex capital structures. Net earnings or loss per share is computed by dividing net income or loss by the weighted-average number of common shares outstanding during the period, excluding shares subject to redemption or forfeiture. The Company presents basic and diluted net earnings or loss per share. Diluted net earnings or loss per share reflect the actual weighted average of common shares issued and outstanding during the period, adjusted for potentially dilutive securities outstanding. Potentially dilutive securities are excluded from the computation of the diluted net loss per share if their inclusion would be anti-dilutive. There were 1,933,982 unvested RSU’s considered potentially dilutive securities outstanding as of March 31, 2022 and 2,050,000 unvested RSU’s considered potentially dilutive securities outstanding as of March 31, 2021. Diluted net loss per share is the same as basic net loss per share for each period.

  

Recent Accounting Pronouncements

 

In August 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40). ASU 2020-06 reduces the number of accounting models for convertible debt instruments and convertible preferred stock. The accounting model for beneficial conversion features is removed. The ASU is effective for smaller reporting companies for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company determined that this update will impact its financial statements.

 

5. Revenue Recognition

 

Disaggregated Revenue

 

The following amounts relate to discontinued operations from our CMI VIE disposed of on December 31, 2021.

 

   For the Three Months Ended
March 31,
 
   2022   2021 
Types of Revenues:        
Medical retail  $
         -
   $1,130,504 
Medical wholesale   
-
    556,310 
Recreational wholesale   
-
    9,010 
Total revenues  $
-
   $1,130,504 

 

12

 

 

6. Business Combination

 

On June 22, 2021, the Company entered into an Asset Purchase Agreement with Cryocann USA Corp, a California corporation (“Cryocann”), pursuant to which Company acquired substantially all the assets of Cryocann (the “Cryocann Acquisition”). The aggregate purchase price was $3,500,000 million in cash and 10,000,000 shares of Company common stock and a promissory note was issued for $1,252,316 payable by Company to Cryocann on October 15, 2021, which represents the remaining Purchase Price of $2,500,000 minus the amount owed by Cryocann under a Loan Agreement dated April 23, 2021 by and between Cryocann and the Company.

 

The Company concluded that the Cryocann Acquisition qualified as a business combination under ASC 805. The Company’s allocation of the purchase price was calculated as follows:

 

Cash  $2,247,684 
Common stock   1,804,500 
Promissory Note   1,220,079 
Total purchase price  $5,272,263 

 

Description

  Fair Value   Weighted
average
useful life
(in years)
 
Assets acquired:        
Intangible assets:        
In process research and development   3,209,000    Indefinite 
Patent   873,263    10 
Goodwill   1,190,000      
Total assets acquired  $5,272,263      

 

As if the acquisition occurred on January 1, 2021, as reported in our pro forma basis, our net loss would have been $2,025,847 and our net loss per common share would have been $0.02 for the three months ended March 31, 2021. Our net sales would have remained unchanged during the period. These pro forma results are not necessarily indicative of the results that actually would have occurred if the acquisition had occurred on the first day of the periods presented, nor does the pro forma financial information purport to represent the results of operations for future periods. 

 

7. Discontinued Operations

 

In June 2020, the Company’s board of directors adopted a plan to exit the cultivation, manufacturing of infused products and retail distribution businesses through the sale of CMI. The Company determined that the intended sale represented a strategic shift that will have a major effect on the Company’s operations and financial results.

  

The consolidated statements of operations include the following operating results related to these CMI discontinued operations:

 

   Three Months Ended
March 31,
 
   2022   2021 
         
Net sales  $
-
   $1,695,925 
Cost of goods sold, inclusive of depreciation   
-
    1,118,735 
Gross profit   
-
    577,190 
           
Operating expenses:          
Personnel costs   
-
    154,460 
Sales and marketing   
-
    226,347 
General and administrative   
-
    28,988 
Legal and professional fees   
-
    21,515 
Total operating expenses   
-
    431,310 
Gain / (loss) from operations   
-
    145,880 
           
Other income (expenses):          
Interest expense   
-
    (29,264)
Total other expenses   
-
    (29,264)
Net gain / (loss) from discontinued operations, before taxes   
-
    116,616 
Income taxes   
-
    
-
 
Net gain / (loss) from discontinued operations  $
-
   $116,616 

 

13

 

 

8. Property and Equipment, Net

 

Property and equipment, net consisted of the following.

 

   March 31,
2022
   December 31,
2021
 
Leasehold improvements  $
-
   $
-
 
Machinery and equipment   233,641    225,000 
Furniture and fixtures   
-
    
-
 
Construction in progress   
-
    
-
 
    233,641    225,000 
Less: Accumulated depreciation   
-
    
-
 
   $233,641   $225,000 

 

As of March 31, 2022, our machinery and equipment was not capable of producing a unit of product that is saleable. Depreciation expense will be recognized once our machinery and equipment is ready for its intended use.

 

9. Goodwill and Intangible Assets

  

The carrying value of goodwill was $1,190,000 as of March 31, 2022 and December 31, 2021.

 

The following tables summarize information relating to the Company’s identifiable intangible assets as of March 31, 2022 and December 31, 2021:

 

   March 31, 2022
   Estimated
Useful Life
(Years)
  Gross
Amount
   Accumulated
Amortization
   Carrying
Value
 
Amortized               
Patent  10 years  $873,263   $(65,495)  $807,768 
Indefinite-lived                  
In-process research and development  Indefinite   3,209,000    
-
    3,209,000 
Total identifiable intangible assets     $4,082,263   $(65,495)  $4,016,768 

 

   December 31, 2021
   Estimated
Useful Life
(Years)
  Gross
Amount
   Accumulated
Amortization
   Carrying
Value
 
Amortized               
Patent  10 years  $873,263   $(43,663)  $829,600 
Indefinite-lived                  
In-process research and development  Indefinite   3,209,000    
-
    3,209,000 
Total identifiable intangible assets     $4,082,263   $(43,663)  $4,038,600 

 

Amortization expense was $21,832 and $0 for the three months ended March 31, 2022 and 2021, respectively.

 

14

 

 

10. Loans Receivable  

 

As a result of new agreements entered with CMI on December 31, 2021, as further detailed in Note 1 above, we received a $3,600,000 promissory note due to us no later than December 31, 2023. In consideration of the loan receivable, we conveyed to CMI, any and all manufacturing, grow equipment, retail-related assets and other assets Seller owns in the state of Colorado and are currently used by CMI subsidiaries in the course of business, including client lists and appertaining intellectual property, and no other Buyer or Parent assets, as well as all liabilities related to these assets. During the quarter, the Company issued an additional $620,000 in loans to CMI.

 

11. Debt

 

On July 27, 2020, the Company entered into a subscription agreement consisting of 1) a convertible note and 2) warrants. The 1) convertible note has a face value of $250,000, matures August 1, 2022, and accrues interest at 8% per annum. The note is convertible into 2,500,000 shares of the Company’s common stock at a conversion price of $0.10 per share. The beneficial conversion feature is accounted for in accordance with ASC 470-20 Debt with Conversion and Other Options and the resulting debt discount is amortized over the life of the note. As of March 31, 2022, the net carrying amount is $208,333, which consists of the $250,000 convertible note and $41,667 unamortized debt discount. As of December 31, 2021, the net carrying amount is $177,083, which consists of the $250,000 convertible note and $72,917 unamortized debt discount. The 2) warrants are exercisable to purchase an additional 2,500,000 shares of common stock at $0.25 per share.

 

On August 26, 2020, the Company entered into a $600,000 loan agreement, which accrues interest at 84% per annum. On January 25, 2021, the Company refinanced this loan at 93.6%, to obtain additional funding. The loan was fully repaid on April 27, 2021. 

 

On March 18, 2021, the Company entered into a $225,000 note payable, which accrued interest at 15% per annum. The note was fully repaid on May 7, 2021.

  

Between March 29, 2021 and July 6, 2021, the Company entered into a series of similar subscription agreements with either domestic or non-US accredited investors, respectively (each, a “Initial Tranche Subscription Agreement (US)” and, respectively, “Initial Tranche Subscription Agreement (non-US)”) pursuant to which the Company issued and sold to certain accredited investors, in the initial tranche of a non-brokered private placement (the “Private Placement”), an aggregate 3,000 units (“Units”), each Unit representing (i) one $1,000 principal amount term note providing for an optional conversion into shares of Company common stock at a price of $0.20 per share (each the “Initial Convertible Term Note”) and (ii) a common share warrant for the purchase of 5,000 shares of Company common stock at an exercise price of $0.40 per share (each an “Initial Warrant”), for aggregate net proceeds of $3,000,000. The Initial Convertible Term Notes and the Initial Warrants mature on March 31, 2022 and March 31, 2023, respectively, and accrued interest at a rate of 12% per annum payable on a quarterly basis.

 

Between May and July 6, 2021, the Company entered into a series of substantially similar subscription agreements with either domestic or non-US investors (each, a “Subscription Agreement (US)”, and, respectively, “Subscription Agreement (non-US)”) pursuant to which the Company issued and sold to certain accredited investors, in the second tranche of the Private Placement, an aggregate 1,900 units (“Units”), each Unit representing (i) one $1,000 principal amount term note (each a “Convertible Term Note”) providing for an optional conversion into shares of Company common stock at a price of $0.20 per share and (ii) a common share warrant for the purchase of 5,000 shares of Company common stock at an exercise price of $0.40 per share (each a “Warrant”), for additional aggregate net proceeds of $1,900,000. The Convertible Term Notes and Warrants mature on September 30, 2022 and April 30, 2023, respectively, and accrued interest at a rate of 12% per annum payable on a quarterly basis.

 

All notes were converted during the fourth quarter of 2021.

 

On August 20, 2021, the Company entered into a $300,000 loan agreement, which accrued interest at 91.23% per annum. Payment is due on a weekly basis up to the maturity date of May 27, 2021. The loan was fully repaid on October 19, 2021.

 

15

 

 

12. Related Party Transactions

 

In conjunction with the Cryocann Acquisition, the Company received a promissory note from Matt Armstrong, an employee of the Company, for $281,771. This note receivable was issued as part of an employment agreement with Matt Armstrong, effective June 22, 2021, and was offset against his signing bonus on October 15, 2021. There was no interest associated with the note.

 

On August 19, 2021, the Company entered into a loan agreement of $237,590 with its Chief Executive Officer, Christian Noel. The note accrues interest at 14% per annum and was repaid on October 22, 2021.

 

On November 15, 2021, the Company issued 250,000 common shares and warrants, respectively, to Christian Noel in exchange for $50,000. In addition, the Company issued 760,000 common shares and warrants, respectively, to Trichome Capital Inc. in exchange for $152,000. Christian Noel has voting and investment control of Trichome Capital Inc. 

  

13. Shareholders’ Equity

 

From January to March 2021, the Company issued 1,491,819 shares of common stock in order to raise capital.

 

From April to June 2021, the Company issued 10,000,000 shares of common stock related to the CryoCann transaction, 6,903,172 shares of common stock pursuant to employment agreements, 2,500,000 shares of common stock in exchange for the extinguishment of debt, and 633,125 shares of common stock in exchange for services.

 

From July to September 2021, the Company issued 798,414 shares of common stock in order to raise capital, 633,707 shares of common stock in exchange for services, and 92,127 shares of common stock for interest payment on a note payable.

 

From October to December 2021, the Company issued 50,700,000 shares of common stock in order to raise capital, 1,570,501 shares of common stock in exchange for services, and 24,621,119 shares of common stock in exchange for extinguishment of debt.

 

From January to March 2022, the Company issued 458,334 shares of common stock in exchange for services, 550,000 shares of common stock for 2021 management performance bonuses, 185,529 shares of common stock for director compensation, and 1,000,000 shares of common stock for 2020 RSU grants vesting in January 2022.

 

Restricted Stock Unit Awards

 

The Company adopted its 2019 Omnibus Stock Incentive Plan (the “2019 Plan”), which provides for the issuance of stock options, stock grants and RSUs to employees, directors and consultants. The primary purpose of the 2019 Plan is to enhance the ability to attract, motivate, and retain the services of qualified employees, officers and directors. Any RSUs granted under the 2019 Plan will be at the discretion of the Compensation Committee of the Board of Directors. On January 10, 2022, the shareholders approved the 2022 Stock Incentive Plan which then replaced the 2019 Plan.

 

16

 

 

A summary of the Company’s RSU award activity for the three months ended March 31, 2022 is as follows:

 

   Restricted
Stock
Units
   Weighted
Average
Grant
Date
Fair Value
 
Outstanding at December 31, 2021   2,200,003   $0.45 
Granted   1,469,511    0.27 
Vested   (1,735,529)   0.49 
Forfeited   
-
    
-
 
Outstanding at March 31, 2022   1,933,982   $0.27 

 

The total fair value of RSUs vested during the three months ending March 31, 2022 and 2021 was $848,600 and $146,602, respectively. As of March 31, 2022 and 2021, there was $187,761 and $472,087, respectively, of unrecognized stock-based compensation cost related to non-vested RSU’s, which is expected to be recognized over the remaining vesting period.

 

Stock-based compensation expense relating to RSU’s was $140,815 and $250,817 for the three months ending March 31, 2022 and 2021, respectively. Stock-based compensation for the three months ending March 31, 2022 consisted of equity awards forfeited, granted and vested to employees, directors and consultants of the Company in the amount of $27,179, $108,771, and $4,866, respectively. Expenses for stock-based compensation are included on the accompanying consolidated statements of operations in general and administrative expense.

 

Stock Option Awards

 

A summary of the Company’s stock option activity for the three months ended March 31, 2022 is as follows:

 

   Stock
Option
Shares
   Weighted
Average
Exercise
Price
   Weighted
Average
Remaining
Contractual
Term
   Aggregate
Intrinsic
Value
 
Outstanding at December 31, 2021   8,500,000   $0.18    9.2   $1,579,108 
Granted and vested   
-
    
-
    
-
    
-
 
Forfeited   
-
    
-
    
-
    
-
 
Outstanding at March 31, 2022   8,500,000   $0.18    9.0   $1,579,108 

 

During the three months ended March 31, 2022 and 2021, the Company did not issue any stock options.

 

During the year ended December 31, 2021, the Company issued warrants with the option to purchase 73,950,000 common shares at an exercise price of $0.40 per share. Of these warrants, 15,000,000 shares expire on March 31, 2023, 9,500,000 expire on April 30, 2023, 1,000,000 expire on September 17, 2023, 7,750,000 expire on October 15, 2023, 9,510,000 expire on October 26, 2023, 190,000 expire on November 2, 2023, 27,060,000 expire on November 10, 2023, 1,940,000 expire on November 15, 2023, and 750,000 expire on November 17, 2023.

 

The fair value of these warrants is $1,867,960, which is reflected in additional paid in capital.

 

17

 

 

14. Income Taxes

 

In accordance with ASC 740-270, the Company calculates the interim tax expense based on an annual effective tax rate (“AETR”). The AETR represents the Company’s estimated effective tax rate for the year based on full year projection of tax expense, divided by the projection of full year pretax book loss, adjusted for discrete transactions occurring during the period. The annual effective tax rate for the three months ended March 31, 2022 was 0.0%,

 

As of March 31, 2022, the Company has recorded no income tax liability.

 

15. Commitments & Contingencies

 

Occasionally, the Company may be involved in claims and legal proceedings arising from the ordinary course of its business. The Company records a provision for a liability when it believes that it is both probable that a liability has been incurred, and the amount can be reasonably estimated. If these estimates and assumptions change or prove to be incorrect, it could have a material impact on the Company’s consolidated financial statements. Contingencies are inherently unpredictable, and the assessments of the value can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions.

 

Lease Commitments

 

The Company accounts for lease transactions in accordance with Topic 842, Leases (“ASC 842”), which requires an entity to recognize a right-of-use (“ROU”) asset and a lease liability for virtually all leases. Operating lease ROU assets and liabilities are 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 the Company’s obligation to make lease payments arising from the lease.

 

There are no other leases that meet the reporting standards of ASU Topic 842 as the Company does not have any other leases with a term exceeding twelve months. Other lease payments not accounted for under ASU Topic 842 total $0 and $14,392 for the three months ended March 31, 2022 and 2021, respectively.

 

An ROU asset of $1,411,461 was recognized upon the CMI Transaction. The right of use assets and lease liabilities assumed from the CMI transaction were disposed of as part of the disposal of our discontinued operations, which is described in further detail above.

 

The present value of the liabilities decreased by $0 and $132,230 for the three months ended March 31, 2022 and 2021, respectively. This balance is included in the operating section of the statement of cash flows for three months ended March 31, 2022 and 2021. Operating lease cost was approximately $0 and $159,5254 for the three months ended March 31, 2022 and 2021, respectively.

 

The Company does not have any leases that have not yet commenced which are significant.

 

Legal Proceedings

 

We know of no material, existing or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our company.

 

16. Subsequent Events

 

Subsequent to March 31, 2022, the Company issued 1,091,667 shares of common stock. 291,667 shares were issued at $0.35 per share in exchange for services, 800,000 shares were issued to three directors and one executive officer at $0.28 per share, and 200,000 shares were issued to an executive officer at $0.25 per share.

 

Subsequent to March 31, 2022, the Company purchased property and equipment associated with testing of our processing equipment for a total value of $115,945.

 

On April 5, 2022, the Company granted 500,000 shares for director services. The shares will vest on January 1, 2023.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

 

This quarterly report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may”, “should”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “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 that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.

 

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

 

In this quarterly report, unless otherwise specified, our financial statements are expressed in United States Dollars (US$) and are prepared in accordance with United States generally accepted accounting principles. All references to “common shares” refer to the common shares in our capital stock.

 

Unless expressly indicated or the context requires otherwise, the terms “Cryomass Technologies,” the “Company,” “we,” “us,” and “our” refer to Cryomass Technologies Inc.., a Nevada corporation, and, where appropriate, its wholly owned subsidiaries.

 

General Overview

 

Cryomass Technologies Inc (“Cryomass Technologies” or the “Company”) began as Auto Tool Technologies Inc., which was incorporated under the laws of the State of Nevada on May 10, 2011. The Company’s name was changed to AFC Building Technologies Inc. effective January 10, 2014. Effective April 26, 2018, the Company changed its name to First Colombia Development Corp. Effective October 14, 2019, the Company changed its name to Redwood Green Corp. Effective September 1, 2020, the Company changed its name to Andina Gold Corp. On July 15, 2021, the Company entered into a plan of merger with its wholly-owned subsidiary, Cryomass Technologies Inc a Nevada corporation, for the purpose of changing the name of the Company to Cryomass Technologies Inc. effective August 27, 2021. Our ticker symbol changed from AGOL to CRYM.

 

The Company’s principal office is located at 1001 Bannock St., Suite 612, Denver, CO 80204, and its telephone number is 303-416-7208. The Company’s website is www.cryomass.com. Information appearing on the website is not incorporated by reference into this prospectus.

 

The Company over its history has explored a number of different business opportunities.

 

On May 10, 2018, the Company acquired all the issued and outstanding share capital of First Colombia Devco S.A.S. (“Devco”) a Colombian company, and began to establish various business ventures in Colombia in the agriculture and real estate development, tourism, and infrastructure sectors before commencing to phase them out in April 2019.

 

On July 1, 2019, the Company acquired 100% of the membership interests in General Extract, LLC (“General Extract”), a Colorado limited liability company. General Extract was founded in 2015 as an importer, distributor, broker and postprocessor of hemp and hemp derivatives. The Company acquired all of the issued and outstanding membership interests, including business plans and access to contacts.

 

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On July 15, 2019, the Company, through its wholly owned subsidiary Good Acquisition Co., entered into a Membership Interest Purchase Agreement to acquire cannabis-related intellectual property and other assets of Critical Mass Industries LLC DBA Good Meds (“CMI” and/or “Good Meds”), a Colorado limited liability company (“CMI Transaction”). CMI is licensed by the Marijuana Enforcement Division of Colorado Department of Revenue to produce cannabis and cannabis products under its six licenses. These licenses allow for cultivation, manufacturing of infused products and retail distribution. At the time the Company entered into the Membership Interest Purchase Agreement, Colorado law prohibited public companies, including the Company, from owning cannabis licenses. Therefore, CMI spun off certain assets acquired by the Company. Under the terms of the Membership Interest Purchase Agreement, CMI retained the cannabis license, inventory and accounts receivable (the “Cannabis License Assets”) and continued to operate the cannabis business related to those assets. In consideration for the transfer of the acquired assets, the Company delivered 13,553,233 shares of the Company common stock, in addition to $1,999,770 in cash to CMI.

 

Effective December 31, 2021, we entered into a restated and amended administrative services agreement, terminated our license and marketing agreements, and restated the asset purchase agreement with CMI and affiliates. As a result of these agreements, we disposed of all CMI-related assets and extinguished any and all related obligations. For clarity, we have no management or operations decision-making right or responsibility, nor any access to future economic benefits from operation of the assets. Therefore, upon commencing these agreements, we determined that CMI no longer qualifies as a variable interest entity (“VIE”) as of December 31, 2021.

 

Good Meds, the operating unit of CMI, is based in Denver, CO, and operates in a 60,000-square-foot cultivation and processing facility. This facility produces cannabis for sale as dry flower and biomass input for processing into Marijuana-Infused Products (“MIP”), such as live resin, wax and budder. Good Meds also owns and operates two medical cannabis dispensaries located in Lakewood, CO and Englewood, CO. The business has been in operation since 2009.

 

Beginning in March 2020, an evaluation of various strategic alternatives was followed by the decision to sell the Colorado-based assets and refocus its attention on unique opportunities for gold exploration in Colombia. In August 2020, the Company established a wholly owned Colombian subsidiary, Andina Gold Colombia SAS for this purpose. In December 2020, due to the death of the top geologist exploring opportunities on behalf of the Company, and the effects of the ongoing Coronavirus pandemic, the Company determined that pursuit of gold exploration in Colombia was no longer a practical alternative. 

 

On June 22, 2021, the Company entered into an Asset Purchase Agreement with Cryocann USA Corp, a California corporation (“Cryocann”), pursuant to which Company acquired substantially all the assets of Cryocann. The aggregate purchase price was $3,500,000 million in cash and 10,000,000 shares of Company common stock As part of the Cryocann Acquisition, we retained both Cryocann employees, who have expert knowledge of the industry, related participants, customers and the acquired patented technology. Under their employment agreements, each employee may receive compensation if specific performance targets are met in association with our future operating performance when the Cryocann technology enters the market. The technology and assets acquired from Cryocann are operated from the Company’s subsidiary, Cryomass LLC. The patented cryo-mechanical technology is for the separation of plant materials in the harvesting of hemp and cannabis, and potentially other high value crops such as hops. We believe this technology will reduce processing costs and increases the quality of extracted compounds. We are exploring the application of the underlying technology to a broad range of industries that handle high-value materials and that could benefit from our precision capture methods. We anticipate that cannabis and hemp will be the first in a series of such industries.

 

To develop and commercialize the technology, we contracted with an independent engineering and manufacturing firm to refine the design of our cryo-mechanical system for the handling of harvested hemp, cannabis and other high-value plants. The system exploits CryoMass’s U.S.-patented process for the controlled application of liquid nitrogen to stabilize and separate the structural elements of gross plant material. The device currently under development is scaled for highway transportability and is being optimized for the low-cost collection of fully intact hemp and cannabis trichomes. It can be used within minutes after plants have been cut and can also efficiently capture trichomes from fresh frozen or even dried plant parts, including trim. The device’s through-put capacity is expected to be approximately 600 kilograms of gross plant material per hour. The advanced design for the equipment has been completed, and testing of a prototype machine is currently underway. The engineering and manufacturing firm has indicated that it has the capacity to build 10 to 15 such devices per month.

 

20

 

 

In November 2021, we retained a second engineering and manufacturing firm to independently develop a separate machine design that applies our patented process. This work is now complete. 

  

The first functional “beta” machine is expected to be fully field-tested during mid-2022. In the same time-frame, we expect to commission the build of the first production-run system and to deploy both machines in commercial scale operations by the end of the third quarter, 2022, including revenue generation.

 

Management believes the CryoMass system will deliver a compelling combination of cost and time savings while enhancing product quality and quantity for largescale cultivators and processors of hemp and cannabis. The use of a CryoMass system – which can be trucked to and operated on the fields of most large hemp and cannabis growers or be permanently installed at a user’s processing facility – should eliminate many of the costs that come with traditional practices, especially the labor, fuel and capital costs of drying and curing hemp or cannabis that is grown for the extraction of end products. With traditional practices, harvested plants are transported to a specially constructed drying house and then treated for a week or longer under controlled conditions of temperature and humidity. It’s a costly method. With our system, harvested plants are simply fed into the front end of a CryoMass machine, and minutes later fully intact trichomes are collected at the back end of the machine. With traditional practices and their seven-to-ten days of handling and drying, a large share of a plant’s valuable trichomes break off and are lost. Then the remaining trichomes are damaged by long exposure to oxygen and by the evaporation of their volatile terpenes. The CryoMass system, on the other hand, stabilizes and collects fully intact trichomes at harvest, leaving no opportunity for such wasteful loss. Field-captured trichomes are the cleanest element of a hemp or cannabis plant because, unlike the rest of the plant, trichomes do not readily take up heavy metals, pesticides or other common soil contaminants. As a product for end-users, field-captured trichomes are closest to being contaminant free. As feedstock for manufacturers of extracts and oils, they are the key to the purest products possible.

 

Because the trichomes collected with CryoMass technology represent only 10% or so of a plant’s weight and volume, they are cheaper to ship and store than gross plant material. For the same reason and because trichomes are free of the waxes and other unwanted materials found in the rest of the plant, processing trichomes into oils and extracts can be far quicker, cheaper and easier than processing gross plant material. Even trichomes captured from dried or frozen plant parts deliver this cost-saving advantage to processors of oils and extracts. The three-dimensional advantage achievable with the CryoMass system – first-stage cost savings, product enhancement and downstream cost savings – can as much as double a crop’s wholesale value. And in some jurisdictions, users may enjoy a reduction in excise taxes levied on cannabis and hemp harvests, which typically are tied to the gross weight of hemp or cannabis that is removed from the field.

 

Production and processing of hemp and cannabis is a huge, worldwide industry. In the U.S., for example, the wholesale value of the cannabis crop from just the 11 states permitting adult-use and medical cannabis exceeds $6 billion annually.1 Growth in the U.S. and in the worldwide market is likely fed in part by the growing acceptance of medicinal cannabis products and anticipated legislative changes in various jurisdictions worldwide.

 

And that may only be chapter one of the Company’s story. Several other high-value plants, including species that are important for health and wellness products, wrap their valuable elements in trichomes. The technology we are developing for hemp and cannabis may have profitable application to those other species as well. We intend to find out.

 

In September, we were granted an additional patent for our process from the Chinese Intellectual Property Office. We currently are taking steps to gain further protection for our intellectual property through the European Union Intellectual Property Office and several other international jurisdictions.

 

21

 

 

On November 17th we announced the completion of a $10.3 million equity financing. The financing and the earlier conversion of substantially all the company’s debt into common stock left the Company with a strong balance sheet and adequate resources for our planned business development during the coming twelve months. In connection with the financing, 1,010,000 shares and 760,000 shares of CryoMass Technologies common stock were purchased by CEO Christian Noël and Chairman of the Board Delon Human, respectively, either individually or through entities controlled by them.

 

Update on COVID-19

 

In December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China, which has spread throughout the world, including the United States. On January 30, 2020, the World Health Organization declared the outbreak of COVID-19 a “Public Health Emergency of International Concern,” and on March 11, 2020, it characterized the outbreak as a “pandemic”. The impact of COVID-19 developments and uncertainty with respect to the economic effects of the pandemic has introduced significant volatility in the financial markets.

 

To date, COVID-19 has surfaced in nearly all regions around the world and resulted in travel restrictions, both domestic and international, closing of borders and business slowdowns or shutdowns in affected areas. As a result, COVID-19 has impacted the Company’s business. Although deemed an essential business during the pandemic, many dispensaries and cannabis manufacturers have suspended or reduced operations on a temporary basis due to matters associated with COVID-19.

 

The COVID-19 pandemic and responses to this crisis, including actions taken by federal, state and local governments, have had an impact on the operations of the Company, including, without limitation, the following: reduced staffing due to employee suspected conditions and social distancing measures; constraints on productivity; management and staff non-essential business-related travel was constrained due to stay-at-home orders; some employees have shifted to remote work resulting in loss of productivity; consumers visiting dispensaries operated under license impacted by stay-at-home orders. Management continues to monitor the COVID-19 pandemic situation and federal, state and local recommendations and will provide updates as appropriate.

  

Our Current Business

 

Our business portfolio includes the accounts of Cryomass LLC (formerly known as General Extract), which is controlled by the Company through its 100% ownership interest. The Company dissolved its previously reported VIE relationship with Critical Mass Industries Inc., such that we no longer report the VIE as discontinued operations held for sale.

 

On June 23, 2021, the Company consummated purchase of assets of Cryocann USA Corp through its wholly-owned subsidiary Cryomass LLC. We are currently finalizing research and development work of our patented technology. We intend to begin commercial-scale testing of the system prototype in the first half of 2022 and plan to target specific markets and industries to employ this ground-breaking technology.

 

To develop and commercialize the technology, we contracted with an independent engineering and manufacturing firm to refine the design of our cryo-mechanical system for the handling of harvested hemp, cannabis and other high-value plants. The system exploits CryoMass’s U.S.-patented process for the controlled application of liquid nitrogen to stabilize and separate the structural elements of gross plant material. The device currently under development is scaled for highway transportability and is being optimized for the low-cost collection of fully intact hemp and cannabis trichomes. It can be used within minutes after plants have been cut and can also efficiently capture trichomes from fresh frozen or even dried plant parts, including trim. The device’s through-put capacity is expected to be approximately hundreds of kilograms of gross plant material per hour. The advanced design for the equipment has been completed, and testing of a prototype machine is currently underway. The engineering and manufacturing firm has indicated that it has the capacity to build 10 to 15 such devices per month.

 

22

 

 

 

The first functional “beta” machine is expected to be fully field-tested during mid-2022. In the same time-frame, we expect to commission the build of the first production-run system and to deploy both machines in commercial scale operations by the end of the third quarter, 2022, including revenue generation.

 

Management believes the CryoMass system will deliver a compelling combination of cost and time savings while enhancing product quality and quantity for largescale cultivators and processors of hemp and cannabis. The use of a CryoMass system – which can be trucked to and operated on the fields of most large hemp and cannabis growers or be permanently installed at a user’s processing facility – should eliminate many of the costs that come with traditional practices, especially the labor, fuel and capital costs of drying and curing hemp or cannabis that is grown for the extraction of end products. With traditional practices, harvested plants are transported to a specially constructed drying house and then treated for a week or longer under controlled conditions of temperature and humidity. It’s a costly method. With our system, harvested plants are simply fed into the front end of a CryoMass machine, and minutes later fully intact trichomes are collected at the back end of the machine. With traditional practices and their seven-to-ten days of handling and drying, a large share of a plant’s valuable trichomes break off and are lost. Then the remaining trichomes are damaged by long exposure to oxygen and by the evaporation of their volatile terpenes. The CryoMass system, on the other hand, stabilizes and collects fully intact trichomes at harvest, leaving no opportunity for such wasteful loss. Field-captured trichomes are the cleanest element of a hemp or cannabis plant because, unlike the rest of the plant, trichomes do not readily take up heavy metals, pesticides or other common soil contaminants. As a product for end-users, field-captured trichomes are closest to being contaminant free. As feedstock for manufacturers of extracts and oils, they are the key to the purest products possible.

 

Because the trichomes collected with CryoMass technology represent only 10% or so of a plant’s weight and volume, they are cheaper to ship and store than gross plant material. For the same reason and because trichomes are free of the waxes and other unwanted materials found in the rest of the plant, processing trichomes into oils and extracts can be far quicker, cheaper and easier than processing gross plant material. Even trichomes captured from dried or frozen plant parts deliver this cost-saving advantage to processors of oils and extracts. The three-dimensional advantage achievable with the CryoMass system – first-stage cost savings, product enhancement and downstream cost savings – can as much as double a crop’s wholesale value. And in some jurisdictions, users may enjoy a reduction in excise taxes levied on cannabis and hemp harvests, which typically are tied to the gross weight of hemp or cannabis that is removed from the field.

 

Results of Operations for the Three Months Ended March 31, 2022 and 2021

 

Our operating results for the three months ended March 31, 2022 and 2021 are summarized as follows:

 

   For the Three Months Ended
March 31,
   Change 
   2022   2021   Dollars   Percentage 
Net sales  $-   $-   $     -         0%
Cost of goods sold, inclusive of depreciation   -    -    -    0%
Gross profit   -    -    -    0%
Total operating expenses   2,127,790    995,704    1,131,820    114%
Loss from operations   (2,127,790)   (995,704)   (1,131,820)   114%
Total other expenses   (24,515)   (167,839)   141,862    -85%
Net loss from continuing operations, before taxes   (2,152,305)   (1,163,543)   (989,958)   85%
Income taxes   -    -    -    0%
Net loss from continuing operations  $(2,152,305)  $(1,163,543)  $(989,958)   85%
Net income / (loss) from disc. operations, net of tax  $-   $116,616   $(116,616)   -100%
Net loss  $(2,152,305)  $(1,046,927)  $1,106,574    106%

 

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Our operating results for the three months ended March 31, 2022 and 2021, relating to our variable interest entity, CMI, are classified as discontinued operations above and summarized as follows:

 

   For the Three Months Ended
March 31,
   Change 
   2022   2021   Dollars   Percentage 
Net sales  $-   $1,695,925   $(1,695,925)   -100%
Cost of goods sold, inclusive of depreciation   -    1,118,735    (1,118,735)   -100%
Gross profit   -    577,190    (577,190)   -100%
Total operating expenses   -    431,310    (431,310)   -100%
Gain from operations   -    145,880    (145,880)   -100%
Total other expenses   -    (29,264)   (29,264)   -100%
Net income, before taxes   -    116,616    (116,616)   -100%
Income taxes   -    -    -    -100%
Net income  $-   $116,616   $(116,616)   -100%

 

Net Sales and Cost of Goods Sold

 

There were no net sales related to continuing operations for the three months ended March 31, 2022 and 2021. There were no net sales related to CMI for the three months ended March 31, 2022. CMI net sales were $1,695,925 for the three months ended March 31, 2021, of which $1,130,504 was related to medical retail, $556,310 was related to medical wholesale, $9,010 was related to recreational wholesale, and $101 was related to other revenues. In the fourth quarter of 2020, CMI decided to stop growing recreational product in order to create additional space to grow more medical product. This change resulted in decreased revenue from recreational wholesale and increased revenue in both medical retail and medical wholesale. The overall decrease in CMI net sales for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 was $1,695,925, or 100%, which is attributable to the Company’s disposal of its discontinued operations as of December 31, 2021.

  

There were no cost of goods sold related to continuing operations for the three months ended March 31, 2022 and 2021. CMI’s cost of goods sold were $0 and $1,118,735 for the three months ended March 31, 2022 and 2021, respectively, representing a decrease of $1,118,735 or 100%. This decrease is attributable to the Company’s disposal of its discontinued operations as of December 31, 2021.

 

Operating Expenses

 

Operating expenses encompass personnel costs, research and development, general and administrative expenses, and legal and professional fees. Total operating expenses were $2,127,790 for the three months ended March 31, 2022 as compared to $995,704 for the three months ended March 31, 2021. The decrease of $1,132,086, or 114%, was primarily attributable to the following changes in operating expenses of:

 

  Legal and professional fees - $1,232,737 increase

 

  General and administrative - $101,121 decrease

 

The increase of $1,232,471, or 547%, in legal and professional fees is primarily due to the fact that the Company incurred significant costs related to investor relations market awareness activities during the three months ending March 31, 2022. The decrease of $101,121, or 26%, in general and administrative expenses is primarily due to the fact that the Company incurred additional stock-based compensation expense during the three months ending March 31, 2021 related to Chris Hansen’s separation agreement and accelerated vesting of RSU’s

 

24

 

 

CMI operating expenses encompass personnel costs, sales and marketing, general and administrative, legal and professional fees, and amortization expense. Total operating expenses for CMI were $0 and $431,310 for the three months ending March 31, 2022 and 2021, respectively, representing a decrease of $431,310 or 100%.

 

Other Expense

 

Other expense for the three months ending March 31, 2022 consisted of $36,023 interest expense - net and $11,508 gain on foreign exchange. Other expense for the three months ending March 31, 2021 consisted of $202,609 interest expense and $34,770 gain on foreign exchange. The decrease in interest expense was a result of the Company paying off a significant amount of its debt throughout 2021. The gain on foreign exchange relates to a payable agreement with Cryomass LLC’s supplier.

 

CMI had no other expense for the three months ending March 31, 2022. CMI’s other expense during the three months ending March 31, 2021 consisted of $29,264 interest expense, which primarily relates to the related party note. This decrease is attributable to the Company’s disposal of its discontinued operations as of December 31, 2021.

 

Net Loss 

 

For the foregoing reasons, we had a net loss of $2,152,305 for the three months ending March 31, 2022, or $0.01 net loss per common share – basic and diluted, compared to a net loss of $1,046,927 for the three months ending March 31, 2021, or $0.01 net loss per common share – basic and diluted.

 

Liquidity, Capital Resources and Cash Flows

 

During 2021 Q2 and Q3, the Company obtained a total of $4,900,000 cash through a convertible debt unit offering consisting of a convertible note and a warrant to purchase shares. These funds are available to cover operating expenses while exploring new business opportunities. On June 23, 2021, the Company consummated purchase of assets of Cryocann USA Corp.

 

As of March 31, 2022, the Company had working capital of $2,302,548 and cash balance of $3,594,275. The Company estimates that it needs approximately $3,000,000 to cover overhead costs plus an additional $500,000-$2,000,000 to support the capital expenditures and operations and growth of the assets acquired from CryoCann USA Corp, over the next twelve months. Management believes it has sufficient cash available, based on proceeds from two private placements completed during the previous year to support the anticipated level of operations for the foreseeable future.

 

COVID-19 has resulted in, and may continue to result in, significant disruption of financial markets, which may reduce the Company’s ability to access capital or its customers’ ability to pay the Company for past or future purchases, which could negatively affect the Company’s liquidity. The Company believes that the cash balances and cash from operations will be sufficient to satisfy its cash needs for the next few months until it can obtain new long-term financing or other sources of capital. If we are unable to attain additional financing, we will have to seek additional strategic alternatives and relief from our additional liabilities accumulated during COVID-19.

 

The impact of COVID-19 developments and uncertainty with respect to the economic effects of the pandemic have introduced significant volatility in the financial markets. The uncertainties associated with COVID-19 related to our industry present risk and doubt about the Company’s ability to continue as a going concern. 

 

Going Concern

 

Management believes it has sufficient cash available to support an anticipated level of operations for at least 12 months following the date of this report.

 

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Capital Resources 

 

The following table summarizes total current assets, liabilities and working capital for the periods indicated: 

 

   March 31,
2022
   December 31,
2021
 
Current assets  $3,667,453   $6,530,222 
Current liabilities   1,364,905    1,882,419 
Working capital  $2,302,548   $4,647,803 

 

As of March 31, 2022 and December 31, 2021, we had a cash balance of $3,594,275 and $5,772,839, respectively.

 

Summary of Cash Flows

 

   For the Three Months Ended
March 31,
 
   2022   2021 
Net cash used in operating activities  $(1,631,300)  $(466,223)
Net cash used in investing activities  $(627,472)  $(174,003)
Net cash provided by financing activities  $80,208   $971,778 

 

Net used in operating activities

 

Net cash used in operating activities was $1,631,300 during the three months ended March 31, 2022. This included a net loss of $2,152,305, a non-cash charge related to amortization of debt discount of $31,250, a non-cash charge related to depreciation and amortization expense of 21,832, a non-cash charge related to fair value of common stock issued pursuant to service and advisory agreements, and a non-cash charge related to stock-based compensation of $140,815. This was partially offset by net changes in accounts receivable, prepaid expenses, inventory, and accounts payable and accrued expenses of $166,425.

 

Net cash used in operating activities was $466,223 during the three months ended March 31, 2021. This included a net loss of $1,163,543, a non-cash charge related to stock-based compensation of $250,817, a non-cash charge related to the amortization of debt discount of $31,250, and cash provided by operating activities from discontinued operations of $194,167. This was partially offset by net changes in prepaid expenses and accounts payable and accrued expenses of $221,086.

 

Net cash used in investing activities

 

Net cash used in investing activities was $627,472 during the three months ended March 31, 2022, due to the issuance of loans receivable and purchase of property and equipment.

 

Net cash used in investing activities was $174,003 during the three months ended March 31, 2021, due to the purchase of property and equipment for discontinued operations.

 

Net cash provided by financing activities

 

Net cash provided by financing activities for the three months ended March 31, 2022 was $80,208, due to common stock subscribed and to be issued.

 

Net cash provided by financing activities for the three months ended March 31, 2021 was $971,778, which consisted of $110,000 proceeds from the issuance of common stock, $136,778 proceeds from loans payable net of repayment, and $725,000 proceeds from notes payable.

 

Off-Balance Sheet Arrangements

 

None.

 

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Critical Accounting Policies

 

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to intangibles, accounting for acquisitions, revenue recognition, income taxes, useful life and recoverability of long-lived assets and deferred income tax asset valuations. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

Revenue Recognition

 

Under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contacts with Customers (“ASC 606”), the Company recognizes revenue when the customer obtains control of promised goods or services, in an amount that reflects the consideration which is expected to be received in exchange for those goods or services. The Company recognizes revenue following the five-step model prescribed under ASC 606: (i) identify contract(s) with a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation(s) in the contract; and (v) recognize revenues when (or as) the Company satisfies a performance obligation.

  

The Company’s revenue consists of sales of cannabis and ancillary products to both retail consumers and wholesale customers. Revenue for retail customers is recognized upon completion of the transaction in the point of sale system and satisfaction of the sale by providing the corresponding inventory at the retail location. Revenue for wholesale customers is recognized upon acceptance of the physical goods and confirmation by acceptance of the inventory in the regulatory marijuana enforcement tracking reporting compliance (“METRC”) system. Revenue is recognized upon transfer of control of promised products to customers, generally as risk of loss pass, in an amount that reflects the consideration the Company expects to receive in exchange for those products. Taxes collected from customers, which are subsequently remitted to governmental authorities, are excluded from revenue.

 

Retail customer loyalty liabilities are recognized in the period in which they are incurred and will often be retired without being utilized. Shipping and handling costs are expensed as incurred and are included in cost of sales, which were not material for the three months ended March 31, 2022 and 2021.

 

The Company operates in a highly regulated environment in which state regulatory approval is required prior to the customer being able to purchase the product, either through the Colorado Marijuana Enforcement Division for wholesale clients or the Colorado Department of Public Health and Environment for medical patients.

 

Inventory, net

 

Inventory, net is comprised of work-in-process and finished goods consisting of cannabis and cannabidiol products. Cost includes expenditures directly related to the manufacturing process as well as suitable portions of related production overheads, based on normal operating capacity. Inventory, net is stated at the lower of cost or net realizable value. The Company compares the cost of inventory with market value and writes down inventories to net realizable value, if lower. In evaluating whether inventories are stated at lower of cost or net realizable value, management considers such factors as inventories on hand, physical deterioration, obsolescence, changes in price levels, estimated time to sell such inventories and current market conditions. Due to changing market conditions, management will periodically conduct a thorough review of its inventory and record a provision for inventory losses if necessary. This is based on the Company’s best estimates of product sales prices and customer demand patterns. It is at least reasonably possible that the estimates used by the Company to determine its provision for inventory losses will be materially different from the actual amounts or results. These differences could result in materially higher than expected inventory provisions, which could have a materially adverse effect on the Company’s results of operations and financial conditions in the near term.

 

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Variable Interest Entities

 

The Company accounts for variable interest entities in accordance with FASB ASC Topic 810, Consolidation. Management evaluates the relationship between the Company and VIEs and the economic benefit flow of the contractual arrangement with the VIEs. Management determines if the Company is the primary beneficiary of a VIE through a qualitative analysis that identifies which variable interest holder has the controlling financial interest in the VIE. The variable interest holder who has both of the following has the controlling financial interest and is the primary beneficiary: (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (2) the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE. In performing our analysis, we consider all relevant facts and circumstances, including: the design and activities of the VIE, the terms of the contracts the VIE has entered into, the nature of the VIE’s variable interests issued and how they were negotiated with or marketed to potential investors, and which parties participated significantly in the design or redesign of the entity. Previously, management concluded that the Company was the primary beneficiary of CMI and consolidated the financial results of this entity.

 

Effective December 31, 2021, the Company entered into an asset purchase agreement involving its VIE with Critical Mass Industries, Inc. and John Knapp, the sole shareholder of Critical Mass Industries, Inc., to divest its discontinued operations in cannabis cultivation, where the buyer assumes all assets and liabilities from the Company. Therefore, with regards to both criteria discussed above, the Company no longer has the power to direct activities, absorb losses, or receive benefits from the VIE and as such will no longer consolidate with CMI.

 

Income Taxes

 

Potential benefits of income tax losses are not recognized in the accounts until realization is more likely than not. The Company has adopted ASC 740, Income Taxes as of its inception. ASC 740 prescribes the procedures for recognition and measurement of tax positions taken or expected to be taken in income tax returns. Pursuant to ASC 740 the Company is required to compute tax asset benefits for net operating losses carried forward. The potential benefits of net operating losses have not been recognized in these financial statements because the Company cannot be assured it is more likely than not it will utilize the net operating losses carried forward in future years. As of March 31, 2022 and 2021, the Company does not have an accrual relating to uncertain tax positions. It is not anticipated that unrecognized tax benefits would significantly increase or decrease within 12 months of the reporting date.

   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable for a smaller reporting company.

 

Item 4. Controls and Procedures

 

Management’s Evaluation of Disclosure Controls and Procedures

 

We have carried out an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), to allow timely decisions regarding required disclosures. Based upon that evaluation, our Company’s CEO and CFO concluded that our Company’s disclosure controls and procedures were not effective as of March 31, 2022.

 

Management has not formally documented its procedures and controls and as such does not have a sufficient basis to assess its internal controls over financial reporting. Management identified that it did not maintain adequately designed internal control over the preparation and oversight of:

 

  month-end and period-end financial close processes.

 

  non-routine or complex transactions.

 

  the adoption of new accounting standards.

 

Management’s Report on Internal Control Over Financial Reporting

 

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2022, the end of the annual period covered by this report and according to the criteria established in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

 

Based on that evaluation, management has concluded that the Company did not maintain effective internal control over financial reporting as of the quarter ended March 31, 2022 due to the existence of significant deficiency in the internal control over financial reporting described below.

 

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A significant deficiency is a deficiency, or a combination of deficiencies, in internal controls over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

 

Management has determined that we did not maintain effective internal controls over financial reporting as of the quarter ended March 31, 2022 due to the existence of the following material weaknesses identified by management:

 

  Due to the Company’s size, the is insufficient segregation of duties to prevent or detect on a timely basis a misstatement of our annual or interim financial statements.

 

We intend to continue to evaluate and strengthen our internal control over financial reporting. These efforts require significant time and resources. If we are unable to establish adequate internal control over financial reporting, we may encounter difficulties in the audit or review of our financial statements by our independent registered public accounting firm, which in turn may have a material adverse effect on our ability to prepare financial statements in accordance with GAAP and to comply with our SEC reporting obligations.

 

Management is in the process of determining how best to change our current system and implement a more effective system to insure that information required to be disclosed in the reports that we file or submit under the Exchange Act have been recorded, processed, summarized and reported accurately. Our management intends to develop procedures to address the current deficiencies to the extent possible given limitations in financial and personnel resources.

 

Management utilizes external experts to assist the Company with technical accounting expertise needs as deemed necessary and plans to perform a formal assessment of its internal control’s framework. However, no assurance can be made at this point that the implementation of such controls and procedures will be completed in a timely manner or that they will be adequate once implemented.  

 

Attestation report of Registered Public Accounting Firm

 

This Quarterly Report on Form 10-Q does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting because we are not an “accelerated filer” or a “large accelerated filer”. Our management’s report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this Quarterly Report on Form 10-Q.

 

Management’s Evaluation of Disclosure Controls and Procedures

 

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer (who is also the Company’s principal executive officer), and our chief financial officer (who is also the Company’s principal financial and accounting officer) to allow for timely decisions regarding required disclosure. Thus, in accordance with Rules 13a-15(b) under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures as of March 31, 2022, which is the end of the period covered by this Form 10-Q. Based on the evaluation of these disclosure controls and procedures, and in light of the significant deficiency found in our internal controls over financial reporting, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective. The ineffectiveness of our disclosure controls and procedures was due to a significant deficiency identified in our internal control over financial reporting.

 

Changes in Internal Control over Financial Reporting

 

There has been no change in our internal control over financial reporting that occurred during the quarter ended March 31, 2022. We have not been able to remediate the significant deficiency described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 and 2020. Our remediation efforts will continue to be implemented throughout our 2022 fiscal year. We believe that the controls that we will be implementing will improve the effectiveness of our internal control over financial reporting. As we continue to evaluate and work to improve our internal control over financial reporting, we may determine to take additional measures to address the significant deficiency or determine to supplement or modify certain of the remediation measures described above.

 

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PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

Legal proceedings covering a dispute arising from a past employment agreements is pending against the Company’s former business partner, CMI. In Gaudio v. Critical Mass Industries, LLC et al, CMI’s motion to set aside a default judgment was granted April 26, 2021. It is possible that there could be adverse developments in the Gaudio case. An unfavorable outcome or settlement of pending litigation would have a significant impact on our ability to collect receivables from CMI, to complete any of the pending transactions involving our Colorado assets and agreements, and could encourage the commencement of additional litigation against CMI or the Company. We and our subsidiaries will record provisions in the consolidated financial statements for pending litigation when we determine that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. At the present time, while it is reasonably possible that an unfavorable outcome in the Gaudio case may occur, (i) management is unable to estimate the possible loss or range of loss that our Company would undergo that could result from an unfavorable outcome or settlement in Gaudio; and (iii) accordingly, management has not provided any amounts in the consolidated financial statements for an unfavorable outcome in this case, if applicable. Any applicable legal advice costs are expensed as incurred.

 

Item 1A. Risk Factors

 

In addition to the other information set forth in this Report, you should carefully consider the factors discussed in Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 and subsequent quarterly reports on Form 10-Q, which could materially affect our business, financial condition or future results.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

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Item 6. Exhibits

 

Exhibit
Number
  Description
31.1*   Section 302 Certification under the Sarbanes-Oxley Act of 2002 of the Principal Executive Officer.
31.2*   Section 302 Certification under the Sarbanes-Oxley Act of 2002 of the Principal Financial Officer and Principal Accounting Officer.
32.1*   Section 906 Certification under the Sarbanes-Oxley Act of 2002 of the Principal Executive Officer.
32.2*   Section 906 Certification under the Sarbanes-Oxley Act of 2002 of the Principal Financial Officer and Principal Accounting Officer.
101.INS   Inline XBRL Instance Document
101.SCH   Inline XBRL Taxonomy Extension Schema Document
101.CAL   Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF   Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB   Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE   Inline XBRL Taxonomy Extension Presentation Linkbase Document
104   Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

 

*Filed herewith.

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

CRYOMASS TECHNOLOGIES INC.  
(Registrant)  
   
Dated: May 12, 2022  
   
/s/ Christian Noel  
Christian Noel  
Chief Executive Officer and Director  
(Principal Executive Officer)  
   
Dated: May 12, 2022  
   
/s/ Philip Mullin  
Philip Mullin  
Chief Financial Officer and Treasurer  
(Principal Financial Officer and
Principal Accounting Officer)
 

 

 

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