MALACHITE INNOVATIONS, INC. - Quarter Report: 2022 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended June 30, 2022

For the transition period from _____ to _____

Commission File Number: 000-53832

MALACHITE INNOVATIONS, INC.

(Exact name of registrant as specified in its charter)

(216) 304-6556

Registrant’s telephone number, including area code

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the 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 smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” and “smaller reporting company” in Rule 12b-2 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 October 11, 2022, there were 78,116,814 shares of the registrant’s common stock outstanding.

MALACHITE INNOVATIONS, INC.

Quarterly Report on Form 10-Q

For the Quarterly Period Ended

June 30, 2022

INDEX

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

MALACHITE INNOVATIONS, INC.

CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(Unaudited)

MALACHITE INNOVATIONS, INC.

CONSOLIDATED BALANCE SHEETS

See accompanying notes to the consolidated financial statements.

MALACHITE INNOVATIONS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

See accompanying notes to the consolidated financial statements.

MALACHITE INNOVATIONS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

(Unaudited)

See accompanying notes to the consolidated financial statements.

MALACHITE INNOVATIONS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See accompanying notes to the consolidated financial statements.

MALACHITE INNOVATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(Unaudited)

1. BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Malachite Innovations, Inc. (the “Company”, “we”, “us” or “our”), was incorporated in the State of Nevada on June 29, 2007.

Originally founded in 2007 as Legend Mining Inc., the Company began operations as a mineral extraction exploration business. In 2011, the Company changed its name to Stevia First Corp. and pursued a new strategy focused on developing stevia-based additives for the food and beverage industry. In 2015, the Company changed its name to Vitality Biopharma, Inc. and pursued a new strategy focused on developing cannabinoid-based prodrugs anticipated to treat inflammatory conditions of the gastrointestinal tract by unlocking the therapeutic properties of cannabinoids but without their unwanted psychoactive side effects.

In October 2021, the Company changed its name to Malachite Innovation, Inc. and reorganized its corporate structure and created the following two wholly-owned operating subsidiaries: (i) Graphium Biosciences, Inc., a Nevada corporation (“Graphium”), into which the Company contributed all of its drug development assets; and (ii) Daedalus Ecosciences, Inc., a Nevada corporation (“Daedalus”). Graphium plans to focus its business activities on the health and wellness of people, with a particular focus on advancing our broad portfolio of over 100 glycosylated cannabinoid prodrugs. Daedalus plans to focus its business activities on the health and wellness of the planet through ESG investments, with a particular focus on deploying technological innovations and eco-friendly solutions to remedy difficult environmental situations in economically challenged communities.

In May 2022, Daedalus acquired Range Environmental Resources, Inc., a West Virginia corporation (“Range Environmental”) and Range Natural Resources, Inc., a West Virginia corporation (“Range Natural” and together with Range Environmental, the “Range Entities”). The Range Entities provide land reclamation, water restoration and environmental consulting services to mining and non-mining customers throughout the Appalachian region with the goal of returning land to pre-mining conditions or repurpose the land for natural, commercial, agricultural or recreational use. The Range Entities’ water restoration services seek to improve rivers, streams and discharges through novel and innovative treatment applications to help customers meet their various regulatory standards and requirements. The Range Entities also provide environmental consulting services to customers typically in connection with land reclamation and water restoration projects and as an additional value-add service, sells water treatment chemicals manufactured by third parties to their customers.

Going Concern

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying financial statements, during the six months ended June 30, 2022, the Company incurred a net loss of $891,160 and used $845,068 of cash in our operating activities. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year of the date that the financial statements are issued. The financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.

The ability to continue as a going concern is dependent on the Company attaining and maintaining profitable operations in the future and/or raising additional capital to meet its obligations and repay its liabilities arising from normal business operations when they come due. We estimate as of June 30, 2022, we had sufficient funds to operate the business for 18 months given our cash balance of $1,866,289, line of credit availability of $150,000, the availability of $4,830,050 under our $5,000,000 equity financing line via an executed securities purchase agreement, and revenues being generated by the Range Entities. Although our existing cash balances are estimated to be sufficient to fund our currently planned level of operations, we are actively seeking additional financing and other sources of capital to accelerate the funding and execution of our growth strategy and value creation plan. However, these estimates could differ if we encounter unanticipated difficulties, or if our estimates of the amount of cash necessary to operate our business prove to be wrong, and we use our available financial resources faster than we currently expect. No assurance can be given that any future financing or capital, if needed, will be available or, if available, that it will be on terms that are satisfactory to the Company.

Basis of Presentation

The consolidated financial statements include the accounts of the Company and its wholly owned direct subsidiaries, Graphium Biosciences, Inc., Daedalus Ecosciences, Inc., and Vitality Healthtech, Inc. (dissolved in May 2021), and its wholly-owned indirect subsidiaries, Range Environmental Resources, Inc. and Range Natural Resources, Inc., and have been prepared in accordance with accounting principles generally accepted in the United States of America. Intercompany balances and transactions have been eliminated in consolidation. The Company’s fiscal year end is December 31.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. The more significant estimates and assumptions by management include, among others, assumptions used in valuing assets acquired in business acquisitions, reserves for accounts receivable, assumptions used in valuing equity instruments issued for services, the valuation allowance for deferred tax assets, and accruals for potential liabilities. Actual results could differ from those estimates.

Revenue Recognition

The Company applies the following standards and recognizes revenue when (1) services have been provided pursuant to an agreed-upon equipment and labor hourly rate sheet or a fixed amount for a project, (2) products have been shipped to and accepted by the customer, and (3) amounts are reasonably assured of collection, including the consideration of the customer’s ability and intention to pay when the amount is due. The Company primarily invoices customers and recognizes revenue on a periodic basis for equipment and labor hours provided to a customer on a particular job based on an agreed-upon hourly rate sheet or a fixed amount for a project. The Company also invoices customers and recognizes revenue for equipment mobilization fees and materials and supplies required to complete a project. The Company invoices for the sales of chemicals and recognizes revenue when the products are delivered to the customer’s designated site. Costs for equipment, labor and chemicals are generally expensed as incurred since the projects are generally short-term and not subject to a contract.

The Company’s performance obligations are satisfied at the point in time when the services are performed or when products are received by the customer, which is when the customer has title and the significant risks and rewards of ownership.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less at the date of acquisition to be cash equivalents. From time to time, the Company’s cash account balances exceed the balances covered by the Federal Deposit Insurance System. The Company has never suffered a loss due to such excess balances.

Accounts Receivable

Trade accounts receivable are stated at the amount management expects to collect from the balances outstanding at the end of each fiscal period reflected in the consolidated balance sheets. Based on management’s assessment, it has concluded that losses on balances outstanding as of those dates will be immaterial and, therefore, no allowances were recorded for the three or six months ended June 30, 2022 or June 30, 2021.

Equipment

Equipment is carried at cost. Expenditures for maintenance and repairs are charged to cost of services. Additions and betterments are capitalized. The cost and related accumulated depreciation of equipment sold or otherwise disposed of are removed from the accounts and any gain or loss is reflected in the current year’s earnings.

 SCHEDULE OF EQUIPMENT

The Company provides for depreciation of equipment using the straight-line method for both financial reporting and federal income tax purposes over the estimated six-year useful lives of the equipment.

The Company assesses the recoverability of its property, plant, and equipment by determining whether the depreciation of the assets over their remaining lives can be recovered through projected future cash flows generated by the assets. There were no assets identified for impairment.

Fair Value of Financial Instruments

FASB ASC 825 “Financial Instruments” requires that the Company disclose estimated fair values of financial instruments. Financial instruments held by the Company include, among others, accounts receivable, accounts payable and long-term debt. The carrying amounts reported in the balance sheets for assets and liabilities qualifying as financial instruments are a reasonable estimate of fair value.

Leases

FASB ASC 842 “Leases” requires the Company to determine whether a contract is, or contains, a lease at inception. Right-of-use assets represent the Company’s right to use an underlying asset during the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at lease commencement based upon the estimated present value of unpaid lease payments over the lease term. The Company uses its incremental borrowing rate based on the information available at lease commencement in determining the present value of unpaid lease payments.

Income Taxes

The Company follows the asset and liability method of accounting for income taxes. Under this method, deferred income tax assets and liabilities are recognized for the estimated tax consequences attributable to differences between the financial statement carrying values and their respective income tax basis (temporary differences). The effect on deferred income tax assets and liabilities of a change in tax rates is recognized as income (loss) in the period that includes the enactment date.

Stock-Based Compensation

The Company periodically issues stock options and restricted stock awards to employees and non-employees in non-capital raising transactions for services. The Company accounts for such grants issued and vesting based on FASB ASC 718 “Compensation-Stock Compensation” whereby the value of the award is measured on the date of grant and recognized for employees as compensation expense on the straight-line basis over the vesting period. Recognition of compensation expense for non-employees is in the same period and manner as if the Company had paid cash for the services. The Company recognizes the fair value of stock-based compensation within its Consolidated Statements of Operations with classification depending on the nature of the services rendered.

The fair value of the Company’s stock options is estimated using the Black-Scholes-Merton Option Pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or restricted stock, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes-Merton Option Pricing model and based on actual experience. The assumptions used in the Black-Scholes-Merton Option Pricing model could materially affect compensation expense recorded in future periods.

Basic and Diluted Loss Per Share

Basic loss per share is computed by dividing the net loss applicable to common stockholders by the weighted average number of outstanding common shares during the period. Shares of restricted stock are included in the basic weighted average number of common shares outstanding from the time they vest. Diluted loss per share is computed by dividing net loss applicable to common stockholders by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued. Shares of restricted stock are included in the diluted weighted average number of common shares outstanding from the date they are granted unless they are antidilutive. Diluted loss per share excludes all potential common shares if their effect is anti-dilutive. The following potentially dilutive shares were excluded from the shares used to calculate diluted earnings per share as their inclusion would be anti-dilutive:

 SCHEDULE OF ANTI-DILUTIVE SECURITIES EXCLUDED FROM COMPUTATION OF EARNINGS PER SHARE

Patents and Patent Application Costs

Although the Company believes that its patents and underlying technology have continuing value, the amount of future benefits to be derived from the patents is uncertain. Accordingly, patent costs are expensed as incurred.

Research and Development

Research and development costs consist primarily of fees paid to consultants and outside service providers, patent fees and costs, and other expenses relating to the acquisition, design, development and testing of the Company’s treatments and product candidates. Research and development costs are expensed as incurred.

Segments

As of October 1, 2021, we began operating under two segments: (i) Graphium Biosciences, Inc., a wholly-owned subsidiary of the Company, will report the operating results of our health and wellness innovations serving people, with a particular focus on advancing our broad portfolio of over 100 glycosylated cannabinoid prodrugs, and (ii) Daedalus Ecosciences, Inc., a wholly-owned subsidiary of the Company, will report the operating results of our health and wellness innovations serving the planet, with a particular focus on deploying technological innovations and eco-friendly solutions to remedy difficult environmental situations in economically challenged communities.

In accordance with FASB ASC 280 “Segment Reporting”, the Company’s chief operating decision maker has been identified as the Chief Executive Officer of the Company, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Existing guidance, which is based on a management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about products and services, major customers, and the countries in which the entity holds material assets and reports revenue. All material operating units qualify for aggregation under “Segment Reporting” due to their similar customer base and similarities in: economic characteristics; nature of products and services; and procurement, manufacturing, and distribution processes.

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires entities to use a forward-looking approach based on current expected credit losses to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. ASU 2016-13 is effective for the Company beginning April 1, 2023, and early adoption is permitted. The Company does not believe the potential impact of the new guidance and related codification improvements will be material to its financial position, results of operations and cash flows.

Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future financial statements.

2. ACQUISITION OF RANGE ENVIRONMENTAL RESOURCES AND RANGE NATURAL RESOURCES

In May 2022, the Company and its wholly-owned subsidiary, Daedalus Ecosciences, Inc., entered into a Share Purchase Agreement with Range Environmental Resources, Inc. (“Range Environmental”), and Range Natural Resources, Inc. (“Range Natural”, and collectively with Range Environmental, the “Range Entities”), and the two (2) shareholders of the Range Entities (the “Range Shareholders”) (the “Share Purchase Agreement”), under which the Company issued a total of 10,000,000 shares of the Company’s common stock to the Range Shareholders and Daedalus Ecosciences paid cash consideration of $1,000,000 to the Range Shareholders for 80% of the outstanding common stock of each of the Range Entities.

Subsequent to entering into the Share Purchase Agreement, the Company discovered that Joshua Justice, one of the Range Shareholders (“Justice”), made certain misrepresentations in the Share Purchase Agreement. On July 12, 2022, the Company entered into a Separation Agreement, by and among the Company, Daedalus Ecosciences, the Range Entities, and Justice and his spouse (the “Separation Agreement”) pursuant to which Justice: a) acknowledged that his employment with the Range Entities was terminated for cause effective June 30, 2022; b) returned the 5,000,000 shares of the Company’s common stock that had been issued to him under the terms of the Share Purchase Agreement; c) transferred his 10% interest in each of the Range Entities to Daedalus Ecosciences; and d) paid Daedalus Ecosciences cash in an amount of $250,000. As a result, only 5,000,000 of the Company’s common stock issued to the Range Shareholders is considered to have been issued in exchange for 90% of the outstanding common stock of each of the Range Entities.

Subsequently, on October 11, 2022, Daedalus Ecosciences and Jeremy Starks, the other Range Shareholder (“Starks”), entered into a share purchase agreement, effective as of May 11, 2022 (the “Starks Agreement”) pursuant to which Starks agreed to exchange his 10% common stock ownership of the Range Entities for 10% of the Cash Dividends and Sale Proceeds (as both terms are defined in the Starks Agreement) of the Range Entities, as a result of which, the Range Entities are now wholly-owned subsidiaries of Daedalus Ecosciences and the Range Entities are reported as wholly-owned indirect subsidiaries of the Company in the financial statements made part of this Form 10-Q. No other changes were made to the consideration received by Mr. Starks as part of the Share Purchase Agreement and he remains as President of each of the Range Entities.

The Company accounted for the transaction as a business combination in accordance ASC 805 “Business Combinations”. The Company has performed an allocation of the purchase price paid for the assets acquired and the liabilities assumed. The fair values of the assets acquired are set forth below. The allocation of the purchase price is based on management’s estimates.

 SCHEDULE OF BUSINESS ACQUISITION ALLOCATION OF PURCHASE PRICE

3. GOODWILL

Goodwill increased to $751,421 at June 30, 2022. There had been no goodwill at December 31, 2021. The increase in goodwill was driven by the addition of the Range Entities in the quarter and represents the value of the Range Entities’ brand reputation, customer base and employee relations. Goodwill by reportable segment is as follows:

SCHEDULE OF GOODWILL

4. EQUITY

Issuance of Common Stock and Warrants

In May 2022, the Company entered into two securities purchase agreements providing for the issuance and sale by the Company of (i) 20,000,000 shares of the Company’s common stock (the “Shares”) at a price of $0.15 per share and (ii) warrants to purchase up to an additional 20,000,000 shares of the Company’s common stock (the “Warrants”, and the shares issuable upon exercise of the Warrants, the “Warrant Shares”) at a price of $0.60 per share. The Warrants expire on May 10, 2027. The aggregate proceeds to the Company from the sale of the Shares and Warrants was $3,000,000.

In May 2022, the Company purchased 90% of the outstanding common stock of each of the Range Entities for a combination of Company shares and cash, as described in Note 2. Only 5,000,000 of the Company’s common stock issued to the Range Shareholders is considered outstanding as of June 30, 2022, in order to reflect the effects of the Separation Agreement.

5. STOCK OPTIONS

A summary of the Company’s stock option activity during the six months ended June 30, 2022 is as follows:

 SCHEDULE OF STOCK OPTION ACTIVITY

A summary of the Company’s stock options outstanding and exercisable as of June 30, 2022 is as follows:

 SCHEDULE OF STOCK OPTIONS OUTSTANDING AND EXERCISABLE

There is no remaining unamortized cost of the outstanding stock-based awards at June 30, 2022. At June 30, 2022, the 6,752,544 outstanding stock options had no intrinsic value.

6. WARRANTS

A summary of warrants to purchase common stock during the six months ended June 30, 2022 is as follows:

 SCHEDULE OF WARRANTS ACTIVITY

At June 30, 2022, the 20,646,668 outstanding stock warrants had no intrinsic value.

7. NOTES PAYABLE

Range Environmental was granted a loan (the “PPP loan”) from United Bank for $109,435 on March 9, 2021, pursuant to the Paycheck Protection Program (the “PPP”) under the CARES Act.

The PPP loan matures on March 9, 2023 and bears interest at a rate of 1% per annum, with the first six months of interest deferred.

On August 19, 2022, Range Environmental received notice that the U.S. Small Business Administration (“SBA”) had reviewed the forgiveness application of Range Environmental’s PPP loan and provided forgiveness of the entire principal of the PPP loan plus accrued interest.

On June 17, 2020, Range Environmental was granted an SBA Disaster Loan in the amount of $150,000 with an interest rate of 3.75% per annum. On September 14, 2022, the Company paid the entire balance due on this loan of $162,575, including $12,575 in accrued interest.

The following notes payable are outstanding as of June 30, 2022:

SCHEDULE OF NOTES PAYABLE

8. LINE OF CREDIT

In November 2021, the Company obtained an unsecured revolving line of credit with a bank with a limit of $1,000,000. The line of credit has a maturity date of November 30, 2022, and bears interest at one percent (1%) above the prime rate. As of June 30, 2022, the balance due under the line of credit was $850,000.

9. EQUITY LINE

In August 2021, the Company entered into a $5,000,000 equity line transaction with Triton Funds, LP (“Triton”) providing for the issuance and sale by the Company to Triton of a number of shares of the Company’s common stock having an aggregate value of up to $5,000,000 and warrants to purchase up to an equal number of shares of the Company’s common stock. In its sole discretion and subject to certain agreed upon funding conditions, the Company may submit, from time to time, notices obligating Triton to purchase shares with a value of up to $250,000 until the financing arrangement expires on December 31, 2022 or Triton has purchased the $5,000,000 of shares pursuant to the equity line transaction. As of June 30, 2022, $4,830,050 is available under this equity line.

10. GAIN ON EXTINGUISHMENT OF ADVANCE

In July 2018, the Company received a payment from a third party in the amount of $296,653. Since the Company has not been able to confirm the nature of this payment, it had previously recorded this payment as an advance that was included in current liabilities. At March 31, 2021, the Company, after consultation with outside legal counsel, determined that any claim to recover that payment was time barred by the statute of limitations and the Company recorded relief of this liability and a gain from debt extinguishment of $296,653 during the six months ended June 30, 2021.

11. LONG-TERM DEBT OBLIGATIONS

Long-term debt consists of debt on vehicles and equipment, which serves as the collateral. Interest rates range from 3.69% to 8.99% for 2022. The debt matures from 2022 through 2028. The aggregate amount of the debt was $1,258,382 at June 30, 2022, $392,708 of which is due within one year of June 30, 2022, and $865,674 is due after June 30, 2023.

A summary of payments due under the long-term debt by year is as follows:

SCHEDULE OF MATURITIES OF LONG TERM DEBT

12. OPERATING LEASE

The Company has an operating lease agreement for one piece of equipment leased by Range Environmental Resources with a remaining lease term of 31 months. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company accounts for the lease and non-lease components of its lease as a single lease component. Lease expense is recognized on a straight-line basis over the lease term.

Under FASB ASC 842, an operating lease right-of-use (“ROU”) asset and liability is recognized at commencement date based on the present value of lease payments over the lease term. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Generally, the implicit rate of interest in arrangements is not readily determinable and the Company utilizes its incremental borrowing rate in determining the present value of lease payments. The Company’s incremental borrowing rate is a hypothetical rate based on its understanding of what its credit rating would be. The operating lease ROU asset includes any lease payments made and excludes lease incentives.

The components of lease expense and supplemental cash flow information related to leases for the period are as follows:

 SCHEDULE OF COMPONENTS OF LEASE EXPENSE

The supplemental balance sheet information related to leases for the period is as follows:

SCHEDULE OF LEASES SUPPLEMENTAL BALANCE SHEET INFORMATION

Maturities of the Company’s lease liabilities are as follows:

SCHEDULE OF MATURITIES OF LEASE LIABILITIES

Lease expenses related to leases with a duration of one year or less were $8,620 and $8,213 during the three months ended June 30, 2022 and June 30, 2021, respectively. Lease expenses related to leases with a duration of one year or less were $16,870 and $15,720 during the six months ended June 30, 2022 and June 30, 2021, respectively.

13. MAJOR CUSTOMER AND CONCENTRATION OF CREDIT RISK

Sales to the Company’s two largest customers were 91% of total sales for the three and six months ended June 30, 2022.

Accounts receivable from the same two customers were 93% of total accounts receivable and unbilled receivables as of June 30, 2022.

14. COMMITMENTS AND CONTINGENCIES

The Company received a letter in February 2021 from counsel for the Company’s director’s and officer’s insurance carrier (the “insurer”) demanding that the Company reimburse the insurer for sums advanced by the insurer to a former director of the Company as defense costs in connection with a claim purportedly arising under a previous director’s and officer’s insurance policy. The Company believes it has no liability for this claim on the basis of, among other things, Nevada law, the Company’s governing documents and the language of the policy. Accordingly, as of June 30, 2022, no contingent liability has been recorded in the Company’s consolidated statements of financial condition for this matter.

15. SEGMENT INFORMATION

FASB ASC 280 “Segment Reporting” establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organizational structure as well as information about services, categories, business segments and major customers in financial statements. The Company has two reportable segments that are based on the following business units:

In accordance with FASB ASC 820, the Company’s chief operating decision-maker has been identified as the Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Existing guidance, which is based on a management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about products and services, major customers and the countries in which the entity holds material assets and reports revenue. All material operating units qualify for aggregation under FASB ASC 820 due to their similar customer base and similarities in: economic characteristics; nature of products and services; and procurement, manufacturing and distribution processes.

The Company had no inter-segment sales for the periods presented.

Summarized financial information concerning the Company’s reportable segments is shown as below:

 SCHEDULE OF FINANCIAL INFORMATION OF REPORTABLE SEGMENT

By Categories

16. SUBSEQUENT EVENTS

On August 19, 2022, Range Environmental received notice that the SBA had reviewed the forgiveness application of Range Environmental’s PPP loan and provided forgiveness of the entire principal of the PPP loan plus accrued interest, which totaled an amount of debt forgiveness equal to $109,435.

On August 31, 2022, the Company paid the entire balance due on the unsecured bank credit line of $863,305, including $13,305 in accrued interest.

On September 14, 2022, the Company paid the entire balance due on the SBA Disaster Loan of $162,575, including $12,575 in accrued interest.

On July 12, 2022, the Company and Daedalus Ecosciences entered into the Separation Agreement pursuant to which, among other things, Justice: a) acknowledged that his employment with the Range Entities was terminated for cause effective June 30, 2022; b) returned the 5,000,000 shares of the Company’s common stock that had been issued to him under the terms of the Share Purchase Agreement; c) transferred his 10% interest in each of the Range Entities to Daedalus Ecosciences; and d) paid Daedalus Ecosciences cash in the amount of $250,000.

On August 26, 2022, the Company entered into a securities purchase agreement with HTGT Enterprises LLC (“HTGT”) providing for the issuance and sale by the Company to HTGT of (i) 1,666,667 shares of the Company’s common stock (the “HTGT Shares”) at a price of $0.15 per share and (ii) a warrant to purchase up to an additional 1,666,667 shares of the Company’s common stock (the “HTGT Warrant”, and the shares issuable upon exercise of the Warrant, the “HTGT Warrant Shares”) at a price of $0.60 per share. After deducting for fees and expenses, the aggregate net proceeds from the sale of the HTGT Shares and the HTGT Warrant are approximately $248,000.

On October 11, 2022, Daedalus Ecosciences and Starks entered into the Starks Agreement pursuant to which Daedalus Ecosciences acquired Starks’ 10% common stock ownership interest in the Range Entities. As a result of this transaction, Daedalus Ecosciences is the sole shareholder of the Range Entities. No other changes were made to the consideration received by Starks as part of the Share Purchase Agreement entered into on May 11, 2022, and he remains as President of each of the Range Entities.

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

As used in this discussion and analysis and elsewhere in this Quarterly Report, the “Company”, “we”, “us” or “our” refer to Malachite Innovations, Inc., a Nevada corporation.

Cautionary Statement

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Unaudited Consolidated Financial Statements and the related notes thereto contained in Part I, Item 1 of this Quarterly Report. The information contained in this Quarterly Report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this Quarterly Report and in our other reports filed with the Securities and Exchange Commission (the “SEC”), including our Transition Report on Form 10-KT for the nine months ended December 31, 2021 filed on March 31, 2022, and the related audited financial statements and notes included therein.

Certain statements made in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Forward-looking statements are projections in respect of future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “intend,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, which may cause our or our industry’s actual results, levels of activity or performance to be materially different from any future results, levels of activity or performance expressed or implied by these forward-looking statements. These risks and uncertainties include: general economic and financial market conditions; our ability to obtain additional financing as necessary; our ability to continue operating as a going concern; any adverse occurrence with respect to our business or; results of our research and development activities that are less positive than we expect; our ability to bring our intended products to market; market demand for our intended products; shifts in industry capacity; product development or other initiatives by our competitors; fluctuations in the availability and costs of raw materials required in our drug development process; other factors beyond our control; and the other risks described under the heading “Risk Factors” in our Transition Report on Form 10-KT filed with the SEC on March 31, 2022.

Although we believe that the expectations and assumptions reflected in the forward-looking statements we make are reasonable, we cannot guarantee future results, levels of activity or performance. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those expressed by any forward-looking statements. As a result, readers should not place undue reliance on any of the forward-looking statements we make in this report. Forward-looking statements speak only as of the date on which they are made. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason.

Company Overview

Unless otherwise provided in this Quarterly Report, references to the “Company,” “we,” “us”, and “our” refer to Malachite Innovations, Inc., a Nevada corporation formed on June 29, 2007 as Legend Mining Inc., and its consolidated subsidiaries. On October 10, 2011, we completed a merger with our wholly-owned subsidiary, Stevia First Corp., whereby we changed our name from “Legend Mining Inc.” to “Stevia First Corp.” On July 15, 2016, our Board of Directors and shareholders approved a name change to “Vitality Biopharma, Inc.” On October 1, 2021, we completed a merger with our wholly-owned subsidiary, Malachite Innovations, Inc., whereby we changed our name from “Vitality Biopharma, Inc.” to “Malachite Innovations, Inc.”

Malachite Innovations is a company focused on improving the health and wellness of people and the planet. We seek to accomplish this objective through the operation of two wholly-owned subsidiaries: (i) Graphium Biosciences, Inc. which is focused on developing new innovations targeting the health and wellness of people, with a particular focus on advancing our broad portfolio of over 100 glycosylated cannabinoid prodrugs and (ii) Daedalus Ecosciences, Inc. which is focused on evaluating new innovations targeting the health and wellness of the planet through an Environmental, Social and Governance (“ESG”) business strategy, with a particular focus on deploying technological innovations and eco-friendly solutions to remedy difficult environmental situations in economically challenged communities.

Our corporate headquarters is located in Cleveland, Ohio. As of June 30, 2022, we employed twenty-one full-time employees, including eighteen employees of the Range Entities, one cannabinoid research scientist working in our office and laboratory space in Rocklin, California, and two senior executives of the Company. We also have, in the past, engaged the services of scientific and regulatory consultants to assist in our research and development activities, which is an approach that provides us with flexible and experienced resources to advance our corporate objectives while maintaining a relatively lower overhead cost structure.

Graphium Biosciences, Inc.

Cannaboside Prodrugs

Our cannabosides are cannabinoid-glycoside prodrugs, which were discovered through application of the Company’s proprietary enzymatic bioprocessing technologies that are converted within the body after administration from an inactive molecule into a pharmacologically active drug. Currently, the Company has produced more than 100 novel cannabosides, including glycosylated tetrahydrocannabinol (THC), cannabidiol (CBD), cannabidivarin (CBDV) and cannabinol (CBN), that are covered by worldwide patents and patent applications for composition of matter, method of production and method of use.

A prodrug is a compound that, after administration, is metabolized into a pharmacologically active drug. Prodrugs are often designed to improve drug properties and reduce known or expected toxicities and adverse side effects. By using our proprietary enzymatic bioprocessing technologies, our clinical research team has developed a novel family of prodrugs by combining cannabinoid and glucose molecules. The resulting compounds, known as cannabosides, have unique commercial applications and patentable compositions of matter, which are separate and distinct from ordinary cannabinoids. The advantages of cannabosides may include: (i) administration in a convenient oral formulation, (ii) targeted delivery with release in the colon or large intestine, (iii) improved stability with limited degradation or drug metabolism, and (iv) delayed release enabling longer-lasting effects and fewer administrations by patients.

Our proprietary glycosylation process, which results in adding one or more glucose molecules to compounds, may enable our new cannabosides to act as prodrugs that achieve targeted delivery of the bioactive compounds of cannabinoids to the gastrointestinal tract. Glycosylated compounds are generally more stable and water soluble, so upon ingestion, we believe they will remain intact and transit through the esophagus, stomach and upper intestine with limited absorption or degradation from stomach acids. However, once the glycosylated compounds reach the large intestine, we expect them to encounter glycoside hydrolase enzymes secreted by the human intestinal microbiota that will cleave the polar glucose residues and release the active cannabinoid compound primarily in the large intestine or colon.

We have focused our research and development activities on the glycosylation of cannabinoids given their well-known positive effects on the human endocannabinoid system. Our research and development activities originally focused on the glycosylation of CBD and then later expanded into the glycosylation of THC. The use of the cannabinoid THC has been shown to provide substantial anti-inflammatory benefits on the human body, among other benefits, but is limited as a pharmaceutical option given its psychoactive and intoxicating properties. However, by glycosylating THC, we have learned through initial animal studies that the binding of glucose and THC molecules restricts the release of THC into the body’s digestive system until the prodrug reaches the large intestine, at which point the glycoside hydrolase enzymes cleave the glucose from the prodrug and the THC is released in a targeted and restricted manner. Further, we have learned through our initial animal studies that this targeted release of THC, which could be provided in very low doses to achieve physiologically beneficial results, serves as an anti-inflammatory agent in the lower gastrointestinal tract and minimizes the amount of THC absorbed into the blood stream, therefore avoiding the psychoactive and intoxicating properties that hinder the broader pharmaceutical use of THC.

We are developing our THC-glycoside prodrugs for the treatment of gastrointestinal diseases, including inflammatory bowel disease (IBD) and irritable bowel syndrome (IBS) because of the targeted release described previously. IBD is a frequently chronic inflammatory condition where parts of the digestive system become inflamed from an overactive immune response. The disease can lead to irreversible damage to the gastrointestinal tract and may require surgery to remove affected areas of the intestine. Two major forms of the disease are Crohn’s disease, which can affect any part of the digestive system, and ulcerative colitis, which often affects the colon or large intestine. The disease is often unpredictable with periods of painful and debilitating symptoms followed by periods of remission with limited symptoms. IBS has similar symptoms to IBD, including abdominal pain, but the underlying disease process is quite different. IBS is a functional gastrointestinal disorder that commonly affects the large intestine and is characterized by abdominal cramping, diarrhea, constipation, and pain. Currently, patients suffering from IBD are frequently prescribed anti-inflammatory drugs such as steroids, biologics and immunosuppressants, and patients suffering from IBS are prescribed antibiotics, antidepressants and gastrointestinal motility compounds, all of which often result in unwanted side effects.

Our most promising THC-glycoside (VBX-100) is being developed as an oral prodrug for the treatment of IBD and IBS. VBX-100 was selected from our THC-glycoside portfolio for compatibility with commercial production techniques and the optimal prodrug delivery profile that maximizes intestinal anti-inflammatory properties while minimizing psychoactive or intoxicating effects. Initial pre-clinical studies on the efficacy of VBX-100 in animal models have shown favorable outcomes, including reduced inflammation of the gastrointestinal tract and no measurable systemic THC found in tissue examined using highly-sensitive testing equipment.

In light of our limited financial resources and the significant capital and human resources needed to advance our drug development program to a revenue-generating stage, we have determined that the value of our cannaboside prodrug assets would likely be maximized through a strategic transaction such as (i) a sale of Graphium Biosciences or its assets to a biotech partner with the resources necessary to advance our drug development program, (ii) a private capital raise directly into Graphium Biosciences to secure sufficient funding to meaningfully advance our drug development program, or (iii) a spin-off of our Graphium Biosciences subsidiary into a new publicly-traded company infused with sufficient funding to meaningfully advance our drug development program as a new stand-alone company. The Company is actively exploring all potential strategic alternatives for its drug development assets to maximize shareholder value.

Orphan Drug Designation

In January 2018, we filed a request with the FDA’s Office of Orphan Products Development (OOPD) for an Orphan Drug Designation of our VBX-100 prodrug for the treatment of pediatric ulcerative colitis. In March 2018, the OOPD denied our request based, in part, on the FDA’s decision to no longer grant Orphan Drug Designation status to drugs for pediatric subpopulations of common diseases (i.e., diseases or conditions with an overall prevalence of over 200,000), unless the use of the drug in the pediatric subpopulation meets the regulatory criteria for an orphan subset, or the disease in the pediatric subpopulation is considered a different disease from the disease in the adult population.

In December 2019, we received a letter from the OOPD informing us that the FDA determined that the Company may be eligible for pediatric-subpopulation designation because we submitted our original request for an Orphan Drug Designation before the guidance Clarification of Orphan Designation of Drugs and Biologics for Pediatric Subpopulations of Common Diseases was finalized in July 2018.

Accordingly, in May 2020, we filed a response letter with the OOPD addressing the other deficiencies noted in the Company’s original submission in January 2018, which included, among other things (1) support for the prevalence of pediatric ulcerative colitis; (2) our scientific rationale for the specific animal models used in our pre-clinical animal studies; and (3) more comprehensive supporting documentation for the use of VBX-100 in pediatric patients with ulcerative colitis. In August 2020, we received a letter from the OOPD informing us that it was unable to grant our request for an Orphan Drug Designation status because our VBX-100 prodrug was administered before and after colitis was induced in our in vivo mouse studies, which resulted in the need for more scientific data to support the efficacy of our VBX-100 prodrug in a treatment-only setting. As a result, we were advised to perform a second in vivo mouse study in which our VBX-100 prodrug would be administered only after colitis was induced in order to provide a clear indication that the active drug was released only after ulcerative colitis was present. In May 2021, we completed the treatment-only in vivo mouse study and filed a supplemental response letter with the OOPD providing the requested in vivo treatment-only mouse study results in support of our position that VBX-100 may be effective as a treatment for pediatric ulcerative colitis.

On August 9, 2021, we received a letter from the OOPD stating that we have been granted Orphan Drug Designation for our glycosylated cannabinoid VBX-100 for the treatment of pediatric ulcerative colitis. The Company is currently evaluating several regulatory pathways for the advancement of its VBX-100 prodrug through pre-clinical and clinical studies, including leveraging the benefits of the Orphan Drug Designation granted by the OOPD.

Daedalus Ecosciences

Overview

Daedalus Ecosciences is focused on creating shareholder value by addressing the health and wellness of the planet through an ESG-focused business strategy, with a particular focus on deploying technological innovations and eco-friendly solutions to remedy difficult environmental situations in economically challenged communities.

Our ESG business strategy is based on the foundational principle that sustainability and value creation are interconnected. Rather than evaluating the merits of an opportunity based solely on the short-term direct profitability of a proposed business initiative, sustainable business practice takes a holistic approach and considers the environmental, social and financial impacts of that initiative on a wide range of stakeholders, including shareholders, the environment and local communities. We believe that a strong ESG proposition, properly capitalized, will help us expand into and create value in new environmentally-focused markets. We also believe that a robust ESG business model can enhance our investment returns by allocating capital to more promising and more sustainable opportunities.

A stronger external-value proposition may enable the Company to achieve greater strategic freedom. Given that certain of the ESG business initiatives under consideration may require governmental approvals or support, we believe that a focus on ESG core principles can ease regulatory pressures and help reduce the Company’s risk of adverse government action. We also believe that a strong ESG proposition can help us attract and retain quality employees, enhance employee motivation by instilling a sense of purpose, and increase productivity overall.

The Company will require additional capital to successfully pursue its ESG business strategy. While we believe there are an increasing number of sources of financing available for ESG initiatives, there can be no assurance that the Company will successfully raise the needed capital. We believe that a commitment to ESG business principles will allow us to generate strong financial returns for shareholders while also creating long-term environmental and social benefits.

Initially, we intend to focus our ESG business strategy on acquiring and developing businesses we believe have potential to conserve, protect and re-purpose the natural environment in those areas in the U.S. that have been negatively impacted by mining. Our business development strategy will initially focus on the following areas:

We may also build, invest in or acquire companies that use blockchain, or distributed ledger technology, to account for and verify voluntary-market carbon credits generated by increased usage of renewable resources or the decreased usage of non-renewable resources to enable a more efficient and transparent global market for carbon credits. This may include companies (i) developing innovative products or solutions to reduce or mitigate carbon emissions; (ii) developing technologies that drive blockchain registry of credits or tokens; (iii) issuing tokens based on registry of carbon credits; and (iv) developing exchange facilities for carbon credits.

We believe that the Company is well-positioned from a managerial and operational perspective to pursue these business initiatives given the experience of management in connection with other successful ventures that are developing and executing various reclamation and remediation programs at coal mines in Appalachia and creating profitable next-generation eco-friendly initiatives and stable jobs in local communities previously reliant primarily on the highly cyclical coal mining industry.

Range Environmental Resources and Range Natural Resources

In May 2022, we acquired the Range Entities. The Range Entities provide land reclamation, water restoration and environmental consulting services to mining and non-mining customers throughout the Appalachian region. Our land reclamation services seek to return land to pre-mining conditions or repurpose the land for natural, commercial, agricultural or recreational use. Our water restoration services seek to improve rivers, streams and discharges through novel and innovative treatment applications to help customers meet their various regulatory standards and requirements. The Range Entities also provide environmental consulting services to customers typically in connection with land reclamation and water restoration projects and as an additional value-add service, sell water treatment chemicals manufactured by third parties to our customers.

Additional ESG Opportunities

The Company is actively pursuing a number of other ESG-focused investment opportunities to advance its mission with a particular focus on some of the most challenging environmental situations in disadvantaged communities.

Results of Operations

Three Months Ended June 30, 2022 and June 30, 2021

Our net loss during the three months ended June 30, 2022 was $443,186 compared to a net loss of $612,235 for the three months ended June 30, 2021. Our revenue during the three months ended June 30, 2022 was $639,359 and our gross profit was $64,952. We had no revenue during the three months ended June 30, 2021.

During the three months ended June 30, 2022, we incurred general and administrative expenses in the aggregate amount of $380,326, compared to $514,437 incurred during the three months ended June 30, 2021 (a decrease of $134,111). General and administrative expenses generally include corporate overhead, salaries and other compensation costs, financial and administrative contracted services, marketing, consulting costs and travel expenses. The majority of the decrease in general and administrative costs relates to professional fees which decreased to $11,790 during the three months ended June 30, 2022, as compared to $145,000 during the three months ended June 30, 2021 (a decrease of $133,210), and stock-based compensation which decreased to $0 during the three months ended June 30, 2022, as compared to $39,456 during the three months ended June 30, 2021.

In addition, during the three months ended June 30, 2022, we incurred research and development costs of $107,823, compared to $97,812 during the three months ended June 30, 2021 (an increase of $10,011). This increase resulted from an increase in legal fees allocated to research and development, which increased to $13,961 in the period ended June 30, 2022, as compared to $0 in the period ended June 30, 2021.

During the three months ended June 30, 2022, we recorded total net other expense in the amount of $19,989, compared to total net other income recorded during the three months ended June 30, 2021, in the amount of $14. This difference was attributable to the interest expense of $19,989 incurred during the three months ended June 30, 2022, as compared to $0 in the three months ended June 30, 2021.

During the three months ended June 30, 2022, we had a net loss of $443,186 compared to a net loss of $612,235 during the three months ended June 30, 2021. The decrease in net loss attributable to common stockholders of $169,049 is primarily due to the gross profit of $64,952 earned during the three months ended June 30, 2022, compared to gross profit of $0 earned during the three months ended June 30, 2021. Additionally, professional fees decreased by $133,210 in the three months ended June 30, 2022, as compared to the three months ended June 30, 2021.

Six Months Ended June 30, 2022 and June 30, 2021

Our net loss during the six months ended June 30, 2022 was $891,160 compared to a net loss of $972,866 for the six months ended June 30, 2021. Our revenue during the six months ended June 30, 2022 was $639,359 and our gross profit was $64,952. We had no revenue or gross profit during the six months ended June 30, 2021.

During the six months ended June 30, 2022, we incurred general and administrative expenses in the aggregate amount of $698,267, compared to $1,101,635 incurred during the six months ended June 30, 2021 (a decrease of $403,368). The majority of the decrease in general and administrative costs relates to stock-based compensation which decreased to $0 during the six months ended June 30, 2022, as compared to $130,516 during the six months ended June 30, 2021, professional fees which decreased to $12,540 during the six months ended June 30, 2022, as compared to $145,000 during the six months ended June 30, 2021 (a decrease of $132,460), and legal fees, which decreased to $75,000 during the six months ended June 30, 2022, as compared to $181,395 during the six months ended June 30, 2021 (a decrease of $106,395).

In addition, during the six months ended June 30, 2022, we incurred research and development costs of $233,553, compared to $168,449 during the six months ended June 30, 2021 (an increase of $65,104). This increase resulted from an increase in wages related to research and development, which increased to $167,836 in the period ended June 30, 2022, as compared to $97,361 in the period ended June 30, 2021 (an increase of $70,475), and legal fees, which increased to $45,578 during the six months ended June 30, 2022, from $0 during the six months ended June 30, 2021. These costs were offset by a decrease in stock-based compensation which decreased to $0 during the six months ended June 30, 2022, as compared to $28,333 during the six months ended June 30, 2021.

During the six months ended June 30, 2022, we recorded total net other expense in the amount of $24,292, compared to total net other income of $297,218 recorded during the six months ended June 30, 2021. This difference was primarily attributable to the gain on extinguishment of liabilities of $296,653 recorded during the six months ended June 30, 2021.

During the six months ended June 30, 2022, we had a net loss of $891,160 compared to a net loss of $972,866 during the six months ended June 30, 2021. The decrease in net loss attributable to common stockholders of $81,706 is primarily due to the recognition of gains on the extinguishment of liabilities in the amount of $296,653 during the six months ended June 30, 2021, compared to no gains recognized during the six months ended June 30, 2022, offset by a $403,368 decrease in general and administrative expenses during the six months ended June 30, 2022 compared to the six months ended June 30, 2021, and a $65,104 increase in research and development expenses during the six months ended June 30, 2022, compared to the six months ended June 30, 2021.

Liquidity and Capital Resources

We have incurred losses since inception resulting in an accumulated deficit of $50,031,838 as of June 30, 2022.

As of June 30, 2022, we had total current assets of $2,964,609, comprised primarily of cash in the amount of $1,866,289, and accounts receivable and other receivables of $1,097,436. Our total current liabilities as of June 30, 2022 were $1,791,448, consisting of $850,000 due under a revolving credit line, the current portion of our long-term debt in the amount of $392,708, and accounts payable of $548,740, which includes a $33,440 lease payment attributable to our now-dissolved wholly-owned subsidiary, The Control Center, Inc., for which we are not responsible. As a result, on June 30, 2022, we had working capital of $1,173,161.

As of June 30, 2022, we had long-term assets of $2,560,690, which were comprised of net property and equipment of $1,680,438, goodwill of $751,421, operating lease asset of $119,939, and deposits of $8,892. As of June 30, 2022, we had long-term liabilities of $1,256,652, which were comprised of long-term debt, net of current portion of $865,674, notes payable of $271,039, and operating lease liability of $119,939.

Sources of Capital

Based on our current corporate strategy, our total expenditures for the 12 months following June 30, 2022 are expected to be approximately $1,800,000, which is comprised of general operating and research and development expenses. Based on our cash balance of $1,866,289, $150,000 available under our revolving credit line as of June 30, 2022, $4,830,050 available under our equity financing line, revenues being generated by the Range Entities, and our estimated total expenditures of approximately $1,800,000 for the 12-month period ending June 30, 2023, we expect to have sufficient funds to operate our business over the next 12 months. We expect to generate funds from our ESG operations, but may also seek additional financing and other sources of capital to accelerate the funding and execution of our growth strategy and value creation plan.

Our estimated total expenditures for the 12-month period ending June 30, 2023 could increase if we encounter unanticipated expenses in connection with operating our business as presently planned. In addition, our estimates of the amount of cash necessary to fund our business may prove to be too low, and we could spend our available financial resources much faster than we currently expect. If we cannot raise the capital necessary to continue to develop our business, we will be forced to delay, scale back or eliminate some or all of our proposed operations. If any of these were to occur, there is a substantial risk that our business would fail.

Since inception, we have primarily funded our operations through equity and debt financings. The Company has revenue earned from its investment in the Range Entities that we expect will fund their ongoing operations and provide excess cash to fund all or a portion of additional ESG investments made by Daedalus in the future. We may also supplement our funding through equity and debt financings in the future. However, sources of additional funds may not be available when needed, on acceptable terms, or at all. If we issue equity or convertible debt securities to raise additional funds or to fund, in whole or in part, acquisitions in furtherance of our business strategy, our existing stockholders may experience substantial dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing stockholders. If we incur additional debt, it may increase our leverage relative to our earnings or to our equity capitalization, requiring us to pay additional interest expenses. Obtaining commercial loans, assuming those loans would be available, would increase our liabilities and future cash commitments. If we pursue capital through alternative sources, such as collaborations or other similar arrangements, we may be forced to relinquish rights to our proprietary glycosylated cannabinoid technology or other intellectual property and could result in our receipt of only a portion of any revenue that may be generated from a partnered product or business. Moreover, regardless of the manner in which we seek to raise capital, we may incur substantial costs in those pursuits, including investment banking fees, legal fees, accounting fees, printing and distribution expenses and other related costs.

Net Cash Used in Operating Activities

We have not historically generated positive cash flows from operating activities. For the six months ended June 30, 2022, net cash used in operating activities was $845,068 compared to net cash used in operating activities of $1,120,035 for the six months ended June 30, 2021. This decrease was primarily attributable to a gain on extinguishment of liabilities of $296,653 recognized during the six months ended June 30, 2021, and an increase in accounts payable of $192,628 during the six months ended June 30, 2022, partially offset by a decrease in the expenses recorded for stock-based compensation related to stock options of $158,849 during the six months ended June 30, 2021. Net cash used in operating activities during the six months ended June 30, 2022, consisted primarily of a net loss of $891,160 and an increase of unbilled receivables of $230,929, offset by an increase in accounts payable of $192,628 and a decrease in accounts receivable of $273,412. Net cash used in operating activities during the six months ended June 30, 2021, consisted primarily of a net loss of $972,866, and a gain on extinguishment of liabilities of $296,653, partially offset by $158,849 related to stock-based compensation.

Net Cash Used in Investing Activities

During the six months ended June 30, 2022, net cash used in investing activities was $1,842,006. Net cash used in investing activities during the six months ended June 30, 2022, consisted primarily of equipment purchases totaling $1,107,833 and cash paid for the acquisition of Range Environmental of $750,000. No net cash was used in or provided by investing activities during the six months ended June 30, 2021.

Net Cash Provided By Financing Activities

During the six months ended June 30, 2022, net cash provided from financing activities was $4,515,020, consisting of $3,000,000 received from the issuance of common stock and warrants, proceeds of $1,015,020 from long-term debt and $500,000 from a revolving line of credit. During the six months ended June 30, 2021, no net cash was used in or provided by financing activities.

Off-Balance Sheet Arrangements

We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that would be material to stockholders.

Critical Accounting Policies

Our financial statements and accompanying notes included in this report have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) applied on a consistent basis. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

We regularly evaluate the accounting policies and estimates that we use to prepare our financial statements. In general, management’s estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from the estimates made by management.

We believe the following critical accounting policies require us to make significant judgments and estimates in the preparation of our consolidated financial statements included in this report:

Use of Estimates and Assumptions

The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. The more significant estimates and assumption by management include, among others, assumptions used in valuing assets acquired in business acquisitions, reserves for accounts receivable, assumptions used in valuing equity instruments issued for services, the valuation allowance for deferred tax assets, accruals for potential liabilities, and assumptions used in the determination of the Company’s liquidity. Actual results could differ from those estimates.

Stock-Based Compensation

The Company periodically issues stock options and restricted stock awards to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for such grants issued and vesting based on FASB ASC 718 “Compensation-Stock Compensation” whereby the value of the award is measured on the date of grant and recognized for employees as compensation expense on the straight-line basis over the vesting period. Recognition of compensation expense for non-employees is in the same period and manner as if the Company had paid cash for the services.

Revenue

The Company’s revenue recognition policies will follow the guidance of FASB ASC 606 “Revenue from Contracts with Customers.” FASB ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms of contracts, which includes (1) identifying the contracts or agreements with a customer, (2) identifying our performance obligations in the contract or agreement, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations, and (5) recognizing revenue as each performance obligation is satisfied.

The Range Entities primarily invoice customers and recognize revenue on a periodic basis for equipment and labor hours provided to a customer on a particular job based on an agreed-upon hourly rate sheet or a fixed amount for a project. The Range Entities also invoice customers and recognize revenue for equipment mobilization fees and materials and supplies required to complete a project. The Range Entities invoice for the sales of chemicals and recognize revenue when the products are delivered to the customer’s designated site. Costs for equipment, labor and chemicals are generally expensed as incurred since the projects are generally short-term and not subject to a contract. The Range Entities’ performance obligations are satisfied at the point in time when the services are performed or when products are received by the customer, which is when the customer has title and the significant risks and rewards of ownership. The Range Entities do not have any significant financing components as payment is received within a commercially reasonable time after the point of sale. Costs incurred to obtain a contract will be expensed as incurred when the amortization period is less than a year. Shipping and handling amounts paid by the customers are included in revenue.

Contract modifications are routine in the performance of the Range Entities’ contracts. Contracts are often modified to account for changes in contract specifications or requirements. In most instances, contract modifications are a result of changes in the scope of work, or the products or services required to complete the contract and are customarily approved in advance by the customer.

Recent Accounting Pronouncements

Please refer to Footnote 1 of the accompanying financial statements for management’s discussion of recent accounting pronouncements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not Applicable.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We have established disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that information relating to the Company is accumulated and communicated to management, including our principal officers, as appropriate to allow timely decisions regarding required disclosure. Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2022, and have concluded that our disclosure controls and procedures were effective as of June 30, 2022.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2022, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. The impact and outcome of litigation, if any, is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are not currently a party to and our properties are not currently the subject of any material pending legal proceedings the adverse outcome of which, individually or in the aggregate, would be expected to have a material adverse effect on our financial position or results of operations.

Item 1A. Risk Factors

Please refer to the risks described under the heading “Risk Factors” in our Transition Report on Form 10-KT filed with the SEC on March 31, 2022.

In addition, please note the following additional risk factors relevant to the business operations of the Range Entities:

We may have difficulty accomplishing our growth strategy within and outside of our current service areas.

Our ability to expand our business, both within our current service areas and into new areas, involves significant risks, including, but not limited to:

Operating costs, construction costs and costs of providing services may rise faster than revenue.

Our ability to increase the rates at which we provide our land reclamation and water treatment and reclamation services may be limited by a variety of factors. However, our costs are subject to market conditions and other factors, and may increase significantly. The second largest component of our equipment operating costs is made up of salaries and wages. These costs are affected by the local supply and demand for qualified labor. Other large components of our costs are general insurance, workers compensation insurance, employee benefits and health insurance costs. These costs may increase disproportionately to our service rate increases and may have a material adverse effect on our financial condition and results of operations.

Our suppliers may fail to deliver materials and parts according to schedules, prices, quality and volumes that are acceptable to us, or we may be unable to manage these materials and parts effectively.

The equipment we use in our land reclamation and water treatment and reclamation business contains materials and parts purchased globally from many suppliers which exposes us to potential component shortages or delays. Unexpected changes in business conditions, materials pricing, labor issues, wars such as the current conflict in Ukraine, trade policies, natural disasters, health epidemics such as the global COVID-19 pandemic, trade and shipping disruptions, port congestions and other factors beyond our or our suppliers’ control could also affect these suppliers’ ability to deliver components to us or to remain solvent and operational. Additionally, if our suppliers do not accurately forecast and effectively allocate production or if they are not willing to allocate sufficient production to us, it may reduce our access to components and require us to search for new suppliers. The unavailability of any component or supplier could result in delays in providing our services and products. Our suppliers may not be willing or able to sustainably meet our timelines or our cost, quality and volume needs, or to do so may cost us more, which may require us to replace them with other sources. While we believe that we will be able to secure additional or alternate sources for most of our necessary components or products, there is no assurance that we will be able to do so quickly or at all.

Our financial results depend on successful project execution and may be adversely affected by cost overruns, failure to meet customer schedules or other execution issues.

A portion of our revenue is derived from projects that are technically complex and that may last over many months. These projects are subject to a number of significant risks, including project delays, cost overruns, changes in scope, unanticipated site conditions, design and engineering issues, incorrect cost assumptions, increases in the cost of materials and labor, safety hazards, third party performance issues, weather issues and changes in laws or permitting requirements. If we are unable to manage these risks, we may incur higher costs, liquidated damages and other liabilities to our customers, which may decrease our profitability and harm our reputation. Our continued growth will depend in part on executing a higher volume of large projects, which will require us to expand and retain our project management and execution personnel and resources.

We face competition in our industry, and we may be unable to attract customers and maintain a viable business.

There can be no assurance that we will be able to successfully compete with our competitors. Our competitors may prove more successful in offering similar services which prove to be more popular with potential customers than our services. Our ability to grow and achieve profitability will depend on our ability to satisfy our customers and withstand increasing competition by providing superior environmental services at reasonable cost. There can be no assurance that we will be able to achieve or maintain a successful competitive position.

If we become subject to environmental-related claims, we could incur significant cost and time to comply.

Our land reclamation and water treatment and reclamation business activities create a risk of significant environmental liabilities and reputational damage. Under applicable environmental laws and regulations, we could be strictly, jointly and severally liable for releases of regulated substances by us at the properties of others, including if such releases result in contamination of air or water or cause harm to individuals. Our business activities also create a risk of contamination or injury to our employees, customers or third parties, from the use, treatment, storage, transfer, handling and/or disposal of these materials.

In the event that our business activities result in environmental liabilities, such as those described above, we could incur significant costs or reputational damage in connection with the investigation and remediation of environmental contamination, and we could be liable for any resulting damages including natural resource damages. Such liabilities could exceed our available cash or any applicable insurance coverage we may have. Additionally, we are subject to, on an ongoing basis, federal, state and local laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. The cost of compliance with these laws and regulations may become significant and could have a material adverse effect on our business, financial condition, results of operations or prospects.

Further, we may incur costs to defend our position even if we are not liable for consequences arising out of environmental damage. Our insurance policies may not be sufficient to cover the costs of such claims.

Failure to effectively treat emerging contaminants could result in material liabilities.

A number of emerging contaminants might be found in water that we treat that may cause a number of illnesses. In applications where treated water enters the human body, illness and death may result if contaminants or pathogens are not eliminated during the treatment process. The potential impact of a contamination of water treated using our products, services or solutions is difficult to predict and could lead to an increased risk of exposure to product liability claims, increased scrutiny by federal and state regulatory agencies and negative publicity. Further, an outbreak of disease in any one of the markets we serve could result in a widespread loss of customers across such markets.

We may incur liabilities to customers as a result of failure to meet performance guarantees, which could reduce our profitability.

Our customers may seek performance guarantees as to our equipment and services. Failure to meet specifications of our customers or our failure to meet our performance guarantees may increase costs by requiring additional resources and services, monetary reimbursement to a customer or could otherwise result in liability to our customers. To the extent that we incur substantial performance guarantee claims in any period, our reputation, earnings and ability to obtain future business could be materially adversely affected.

Developments in, and compliance with, current and future environmental and climate change laws and regulations could impact our land reclamation and water treatment and reclamation business, financial condition or results of operations.

Our business, operations, and product and service offerings are subject to and affected by many federal, state, local and foreign environmental laws and regulations, including those enacted in response to climate change concerns. Compliance with existing laws and regulations currently requires, and compliance with future laws is expected to continue to require, increasing operating and capital expenditures in order to conform to changing environmental standards and regulations, which could impact our business, financial condition and results of operations. Furthermore, environmental laws and regulations may authorize substantial fines and criminal sanctions to address violations, and may require the installation of costly pollution control equipment or operational changes to limit emissions or discharges. We also incur, and expect to continue to incur, costs to comply with current environmental laws and regulations. At the same time, the demand for our land reclamation and water treatment and reclamation services also is driven by federal and state laws, regulations and programs which create incentives for our services. Developments such as the adoption of new environmental laws and regulations, stricter enforcement of existing laws and regulations, violations by us of such laws and regulations, discovery of previously unknown or more extensive contamination, litigation involving environmental impacts, our inability to recover costs associated with any such developments, or financial insolvency of other responsible parties could in the future have a material adverse effect on our financial condition and results of operations.

Our insurance may not provide adequate coverage.

Although we maintain general and product liability, property and commercial insurance coverage, which we consider prudent, there can be no assurance that such insurance will prove adequate in the event of actual casualty losses or broader calamities such as earthquakes, financial crises, economic depressions or other catastrophic events, which are either uninsurable or not economically insurable. Any such losses could have a material adverse effect on the performance of our systems.

Our land reclamation and water treatment and reclamation businesses are subject to various statutory and regulatory requirements, which may increase in the future.

Our land reclamation and water treatment and reclamation business is subject to various statutory and regulatory requirements. Our ability to continue to hold licenses and permits required for our land reclamation and water treatment and reclamation business is subject to maintaining satisfactory compliance with such requirements. We may incur significant costs to maintain compliance. Our ability to obtain modifications to our permits may be met with resistance, substantial statutory or regulatory requirements or may be too costly to achieve. These requirements may cause us to postpone or cancel our plans. Future statutory and regulatory requirements, including any legislation focused on combating climate change, may require significant cost to comply or may require changes to our products or services.

The environmental regulations to which we are subject may increase our costs and potential liabilities and limit our ability to operate.

Our land reclamation and water treatment and reclamation operations are subject to various federal, state, and local environmental requirements, including those relating to emissions to air, discharged wastewater, storage, treatment, transport and disposal of regulated materials and cleanup of coal mining and groundwater contamination. Efforts to conduct our operations in compliance with all applicable laws and regulations, including environmental rules and regulations, require programs to promote compliance, such as training employees and customers, purchasing health and safety equipment and in some cases hiring outside consultants and lawyers. Even with these programs, we face the risk of being subject to government enforcement proceedings, which can result in fines or other sanctions and require expenditures for remedial work on contaminated sites. The landscape of environmental regulation to which we are subject can change. Changes to environmental regulation often present new business opportunities for us; however, such changes may also result in increased operating and compliance costs. While we seek to monitor the landscape of environmental regulation, our ability to navigate is limited by our small size and resources, and any changes to such regulations may result in a material effect on our operations, cash flows or financial condition.

Regulators also have the power to suspend or revoke permits or licenses needed for operation of our equipment and vehicles based on, among other factors, our compliance record, and customers may decide not to do business with us because of concerns about our compliance record. Suspension or revocation of permits or licenses would impact our land reclamation and water treatment and reclamation operations and could have a material impact on our financial results. Although we have never had any of our operating permits revoked, suspended or non-renewed involuntarily, it is possible that such an event could occur in the future.

Some environmental laws and regulations impose liability and responsibility on present and former owners, operators or users of facilities and sites for contamination at such facilities and sites without regard to causation or knowledge of contamination. Investigations undertaken in connection with these activities may lead to discoveries of contamination that must be remediated, and closures of facilities might trigger compliance requirements that are not applicable to operating facilities.

Within the coal mining remediation market, demand for our services will be limited to a specific customer base and highly correlated to the coal mining industry. The coal mining industry’s demand for our services and products is affected by a number of factors including the volatile nature of the coal mining industry’s business, increased use of alternative types of energy and technological developments in the coal mining extraction process. A significant reduction in the target market’s demand for coal mining would reduce the demand for our services and products, which would have a material adverse effect upon our business, financial condition, results of operations and cash flows.

We require a variety of permits to operate our business. If we are not successful in obtaining and/or maintaining those permits it will adversely impact our operations.

Our land reclamation and water treatment and reclamation business requires permits to operate. Our inability to obtain permits in a timely manner could result in substantial delays to our business. The issuance of permits is dependent on the applicable government agencies and is beyond our control and that of our customers. There can be no assurance that we and/or our customers will receive the permits necessary to operate, which could substantially and adversely affect our operations and financial condition.

Based on the nature of our business we currently depend and are likely to continue to depend on a limited number of customers for a significant portion of our revenues.

We currently have two customers in West Virginia that account for substantially all of our land reclamation and water treatment and reclamation business. The failure to obtain additional customers or the loss of all or a portion of the revenues attributable to any current or future customer as a result of competition, creditworthiness, inability to negotiate extensions or replacement of contracts or otherwise could have a material adverse effect on our business, financial condition, results of operations and cash flows.

If our customers do not enter into, extend or honor their contracts with us, our profitability could be adversely affected. Our ability to receive payment for production depends on the continued solvency and creditworthiness of our customers and prospective customers. If any of our customers’ creditworthiness suffers, we may bear an increased risk with respect to payment defaults. If customers refuse to make payments for which they have a contractual obligation, our revenues could be adversely affected.

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

On May 10, 2022, the Company entered into a securities purchase agreement with Indemnity National Insurance Company (“Indemnity National”) providing for the issuance and sale by the Company to Indemnity National of (i) 13,333,333 shares of the Company’s common stock (the “Indemnity National Shares”) and (ii) warrants to purchase up to an additional 13,333,333 shares of the Company’s common stock (the “Indemnity National Warrant”). The aggregate proceeds to the Company from the sale of the Indemnity National Shares and Indemnity National Warrant was $2,000,000.

Also on May 10, 2022, the Company entered into a securities purchase agreement with Tower IV LLC (“Tower IV”) providing for the issuance and sale by the Company to Tower IV of (i) 6,666,667 shares of the Company’s common stock (the “Tower IV Shares”) and (ii) warrants to purchase up to an additional 6,666,667 shares of the Company’s common stock (the “Tower IV Warrant”). The aggregate proceeds to the Company from the sale of the Tower IV Shares and Tower IV Warrant was $1,000,000.

On August 26, 2022, the Company entered into a securities purchase agreement with HTGT Enterprises LLC (“HTGT”) providing for the issuance and sale by the Company to HTGT of (i) 1,666,667 shares of the Company’s common stock (the “HTGT Shares”) and (ii) a warrant to purchase up to an additional 1,666,667 shares of the Company’s common stock (the “HTGT Warrant”). The aggregate proceeds to the Company from the sale of the HTGT Shares and HTGT Warrant was $250,000.

The issuance of the Indemnity National Shares, the Tower IV Shares, and the HTGT Shares were made in private placement transactions, pursuant to the exemption provided by Section 4(a)(2) of the Securities Act and certain rules and regulations promulgated under that section and pursuant to exemptions under state securities laws, as a sale to an “accredited investor” as defined in Rule 501(a) of the Securities Act.

Item 6. Exhibits

† Furnished herewith.

SIGNATURES

Pursuant to the requirements 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.

EXHIBIT INDEX

† Furnished herewith.