UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2022
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number: 001-38190
Panacea Life Sciences Holdings, Inc.
(Exact name of registrant as specified in its charter)
| Nevada |
|
27-1085858 |
| (State or other jurisdiction of |
|
(I.R.S. Employer |
| incorporation or organization) |
|
Identification No.) |
5910 S University Blvd, C18-193, Greenwood Village, CO 80121
(Address of principal executive offices, Zip Code)
800–985-0515
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class |
|
Trading Symbol(s) |
|
Name of each exchange on which registered |
| N/A |
|
N/A |
|
N/A |
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 past 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, every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
Large Accelerated Filer ☐ |
Accelerated Filer ☐ |
|
Non-Accelerated Filer ☒ |
Smaller reporting company ☒ |
|
|
Emerging growth company ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 14,965,317 shares of common stock, par value $0.0001 per share, outstanding as May 2, 2022.
All share and per share numbers have been retroactively adjusted to give effect to a 1-for-28 reverse stock split effective October 25, 2021
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.
Panacea Life Sciences Holdings, Inc. and Subsidiary
Consolidated Balance Sheets
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
| ASSETS |
|
|
|
|
|
|
|
|
| CURRENT ASSETS: |
|
|
|
|
|
|
|
|
| Cash and cash equivalents |
|
$ |
55,997 |
|
|
$ |
19,774 |
|
| Accounts receivable, net |
|
|
162,618 |
|
|
|
244,496 |
|
| Other receivables, related party |
|
|
500,000 |
|
|
|
500,000 |
|
| Inventory |
|
|
4,324,787 |
|
|
|
4,264,277 |
|
| Marketable securities related party |
|
|
2,846,679 |
|
|
|
3,791,483 |
|
| Prepaid expenses and other current assets |
|
|
233,613 |
|
|
|
278,328 |
|
| TOTAL CURRENT ASSETS |
|
|
8,123,694 |
|
|
|
9,098,358 |
|
|
|
|
|
|
|
|
|
|
| Operating lease right-of-use asset, net, related party |
|
|
3,507,887 |
|
|
|
3,595,100 |
|
| Property and equipment, net |
|
|
8,543,360 |
|
|
|
8,839,982 |
|
| Intangible assets, net |
|
|
46,051 |
|
|
|
61,401 |
|
| Goodwill |
|
|
2,188,810 |
|
|
|
2,188,810 |
|
| TOTAL ASSETS |
|
$ |
22,409,802 |
|
|
$ |
23,783,651 |
|
|
|
|
|
|
|
|
|
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
| CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
| Accounts payable and accrued expenses |
|
$ |
2,151,199 |
|
|
$ |
1,685,825 |
|
| Operating lease liability, current portion, related party |
|
|
1,740,594 |
|
|
|
1,624,090 |
|
| Note payable-current, related party |
|
|
6,923,857 |
|
|
|
6,441,866 |
|
| Convertible note payable, net |
|
|
642,638 |
|
|
|
220,005 |
|
| Paycheck protection loan, SBA Loan |
|
|
99,100 |
|
|
|
99,100 |
|
| TOTAL CURRENT LIABILITIES: |
|
|
11,557,388 |
|
|
|
10,070,886 |
|
|
|
|
|
|
|
|
|
|
| Operating lease liability, long-term portion, related party |
|
|
3,258,312 |
|
|
|
3,347,335 |
|
| Other long-term liabilities, related party |
|
|
3,413,309 |
|
|
|
3,263,028 |
|
| TOTAL LIABILITIES |
|
|
18,229,009 |
|
|
|
16,681,249 |
|
|
|
|
|
|
|
|
|
|
| Commitments and contingencies |
|
|
– |
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
| STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
| Series A Preferred Stock: $0.0001 Par Value, 1,000 shares designated; 0 and 350 shares issued and outstanding on March 31, 2022 and December 31, 2021 respectively. |
|
|
– |
|
|
|
– |
|
| Series B-1 Preferred: $0.0001 Par Value, 32,000,000 shares designated; 1,500,000 and 1,500,000 shares issued and outstanding on March 31, 2022 and December 31, 2021 respectively. |
|
|
150 |
|
|
|
150 |
|
| Series B-2 Preferred: $0.0001 Par Value, 6,000,000 shares designated; 6,000,000 and 6,000,000 shares issued and outstanding on March 31, 2022 and December 31, 2021 respectively. |
|
|
600 |
|
|
|
600 |
|
| Series C Preferred: $0.0001 Par Value, 1,000,000 shares designated; 1,000,000 and 1,000,000 shares issued and outstanding on March 31, 2022 and December 31, 2021 respectively. |
|
|
100 |
|
|
|
100 |
|
| Series C-1 Preferred: $0.0001 Par Value, 10,000 shares designated; 10,000 and 10,000 shares issued and outstanding on March 31, 2022 and December 31, 2021 respectively. |
|
|
1 |
|
|
|
1 |
|
| Series C-2 Preferred: $0.0001 Par Value, 10,000 shares designated; 10,000 and 10,000 shares issued and outstanding on March 31, 2022 and December 31, 2021 respectively. |
|
|
1 |
|
|
|
1 |
|
| Series D Preferred: $0.0001 Par Value, 10,000 shares designated; 10,000 and 10,000 shares issued and outstanding on March 31, 2022 and December 31, 2021 respectively. |
|
|
1 |
|
|
|
1 |
|
| Common Stock: $0.0001 Par Value, 650,000,000 shares authorized; 14,762,342 and 14,073,708 shares issued and outstanding on March 31, 2022 and December 31, 2021 respectively. |
|
|
1,476 |
|
|
|
1,407 |
|
| Additional paid in capital |
|
|
23,725,724 |
|
|
|
23,865,155 |
|
| Accumulated deficit |
|
|
(19,547,259 |
) |
|
|
(16,765,013 |
) |
| TOTAL STOCKHOLDERS’ EQUITY |
|
|
4,180,794 |
|
|
|
7,102,402 |
|
|
|
|
|
|
|
|
|
|
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
$ |
22,409,802 |
|
|
$ |
23,783,651 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Panacea Life Sciences Holdings, Inc. and Subsidiary
Consolidated Statements of Operations
|
|
Three Months Ended March 31, |
|
|
|
2022 |
|
|
2021 |
|
| REVENUE |
|
$ |
466,474 |
|
|
$ |
512,138 |
|
| COST OF SALES |
|
|
366,091 |
|
|
|
329,837 |
|
| GROSS PROFIT |
|
|
100,383 |
|
|
|
182,301 |
|
|
|
|
|
|
|
|
|
|
| OPERATING EXPENSES |
|
|
|
|
|
|
|
|
| Operating expenses |
|
|
1,287,817 |
|
|
|
987,935 |
|
| General and administrative expenses |
|
|
460,550 |
|
|
|
286,042 |
|
| TOTAL OPERATING EXPENSES |
|
|
1,748,367 |
|
|
|
1,273,977 |
|
|
|
|
|
|
|
|
|
|
| LOSS FROM OPERATIONS |
|
|
(1,647,984 |
) |
|
|
(1,091,674 |
) |
|
|
|
|
|
|
|
|
|
| OTHER INCOME (EXPENSES) |
|
|
|
|
|
|
|
|
| Interest expense |
|
|
(501,295 |
) |
|
|
(322,563 |
) |
| Unrealized gain (loss) on marketable securities, net |
|
|
(944,804 |
) |
|
|
1,413,749 |
|
| Employer retention credit |
|
|
253,791 |
|
|
|
– |
|
| Rental Income |
|
|
58,046 |
|
|
|
95,601 |
|
| Gain on extinguishment of debt |
|
|
– |
|
|
|
275,539 |
|
| TOTAL OTHER INCOME (EXPENSE) |
|
|
(1,134,262 |
) |
|
|
1,462,326 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| TAXES |
|
|
– |
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
| NET INCOME (LOSS) |
|
$ |
(2,782,246 |
) |
|
$ |
370,650 |
|
|
|
|
|
|
|
|
|
|
| Per-share data |
|
|
|
|
|
|
|
|
| Basic net income (loss) per share |
|
$ |
(0.19 |
) |
|
$ |
0.02 |
|
| Diluted net income (loss) per share |
|
$ |
(0.19 |
) |
|
$ |
0.02 |
|
| Weighted average number of common shares outstanding (Basic) |
|
|
14,762,342 |
|
|
|
16,915,706 |
|
| Weighted average number of common shares outstanding (Diluted) |
|
|
14,762,342 |
|
|
|
21,897,959 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Panacea Life Sciences Holdings, Inc. and Subsidiary
Consolidated Statements of Stockholders’ Equity
|
|
Preferred Stock |
|
|
Common Stock |
|
|
Additional Paid-in |
|
|
Accumulated |
|
|
Total Stockholder’s |
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Equity |
|
| Balance as of December 31, 2021 |
|
|
8,530,350 |
|
|
$ |
853 |
|
|
|
14,073,708 |
|
|
$ |
1,407 |
|
|
$ |
23,865,155 |
|
|
$ |
(16,765,013 |
) |
|
$ |
7,102,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Issuance of shares in respect of the merger |
|
|
– |
|
|
|
– |
|
|
|
679,694 |
|
|
|
68 |
|
|
|
(68 |
) |
|
|
– |
|
|
|
– |
|
| Issuance of common stock for services |
|
|
– |
|
|
|
– |
|
|
|
8,940 |
|
|
|
1 |
|
|
|
19,999 |
|
|
|
– |
|
|
|
20,000 |
|
| Conversion of Series A Preferred Stock to convertible debt and warrants |
|
|
(350 |
) |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(159,362 |
) |
|
|
– |
|
|
|
(159,362 |
) |
| Net Income (Loss) |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(2,782,246 |
) |
|
|
(2,782,246 |
) |
| Balance as of March 31, 2022 |
|
|
8,530,000 |
|
|
$ |
853 |
|
|
|
14,762,342 |
|
|
$ |
1,476 |
|
|
$ |
23,725,724 |
|
|
$ |
(19,547,259 |
) |
|
$ |
4,180,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance as of December 31, 2020 |
|
|
1,020,000 |
|
|
$ |
102 |
|
|
|
16,915,706 |
|
|
$ |
1,692 |
|
|
$ |
18,689,119 |
|
|
$ |
(11,982,614 |
) |
|
$ |
6,708,299 |
|
| Net Income |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
370,650 |
|
|
|
370,650 |
|
| Balance as of March 31, 2021 |
|
|
1,020,000 |
|
|
$ |
102 |
|
|
|
16,915,706 |
|
|
$ |
1,692 |
|
|
$ |
18,689,119 |
|
|
$ |
(11,611,964 |
) |
|
$ |
7,078,949 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
Panacea Life Sciences Holdings, Inc. and Subsidiary
Consolidated Statements of Cash Flows
|
|
For the months ended March 31, |
|
|
|
2022 |
|
|
2021 |
|
| Cash flows from operating activities |
|
|
|
|
|
|
|
|
| Net loss |
|
$ |
(2,782,246 |
) |
|
$ |
370,650 |
|
| Adjustments to reconcile net loss to net cash used in operating activities |
|
|
|
|
|
|
|
|
| Depreciation |
|
|
408,690 |
|
|
|
427,522 |
|
| Unrealized gain on marketable securities |
|
|
944,804 |
|
|
|
(1,413,749 |
) |
| Amortization of intangible assets |
|
|
15,350 |
|
|
|
15,350 |
|
| Amortization of debt discount and non-cash interest expense |
|
|
263,271 |
|
|
|
– |
|
| Gain on forgiveness of payroll protection loan |
|
|
– |
|
|
|
(273,300 |
) |
| Changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
| Accounts receivable |
|
|
81,878 |
|
|
|
(133,160 |
) |
| Inventory |
|
|
(60,510 |
) |
|
|
(326,497 |
) |
| Prepaid expense and other assets |
|
|
44,715 |
|
|
|
(13,321 |
) |
| Accounts payable and accrued expenses |
|
|
533,312 |
|
|
|
436,583 |
|
| Operating lease liability, net |
|
|
114,694 |
|
|
|
114,694 |
|
| Net cash used in operating activities |
|
|
(436,043 |
) |
|
|
(795,228 |
) |
|
|
|
|
|
|
|
|
|
| Cash flows from investing activities |
|
|
|
|
|
|
|
|
| Net fixed asset acquisitions |
|
|
(9,725 |
) |
|
|
(86,769 |
) |
| Net Cash provided by (used in) investing activities |
|
|
(9,725 |
) |
|
|
(86,769 |
) |
|
|
|
|
|
|
|
|
|
| Cash flows from financing activities |
|
|
|
|
|
|
|
|
| Proceeds from payroll protection loan – related party |
|
|
– |
|
|
|
243,041 |
|
| Payments of principal on notes payable |
|
|
(230,201 |
) |
|
|
(115,000 |
) |
| Proceeds from Note payable-related party |
|
|
712,192 |
|
|
|
767,000 |
|
| Cash provided by financing activities |
|
|
481,991 |
|
|
|
895,041 |
|
|
|
|
|
|
|
|
|
|
| Net increase (decrease) in Cash and Cash Equivalents |
|
|
36,223 |
|
|
|
13,044 |
|
| Cash and Cash Equivalents, Beginning of Period |
|
|
19,774 |
|
|
|
84,379 |
|
| Cash and Cash Equivalents, End of Period |
|
$ |
55,997 |
|
|
$ |
97,423 |
|
|
|
|
|
|
|
|
|
|
| Noncash investing and financing activity |
|
|
|
|
|
|
|
|
| Conversion of Preferred A shares to Note Payable |
|
|
385,000 |
|
|
|
– |
|
| Capitalized assets purchased on account – related party |
|
$ |
102,344 |
|
|
$ |
120,170 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
PANACEA LIFE SCIENCES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2021
NOTE 1 – NATURE OF ORGANIZATION
Organization and Business Description
PANACEA LIFE SCIENCES HOLDINGS, Inc. (the “Company”, “we”, “us”, “our”) was incorporated on January 18, 2008 in the State of Nevada. In January 2019, the Company added to the scope of its business activities, efforts to produce, market and sell products made from industrial hemp containing cannabidiol (“CBD”). On June 30, 2021 the Company entered into a Securities Exchange Agreement (the “Exchange Agreement”) with Panacea Life Sciences, Inc., (“Panacea”) a seed to sale CBD company, and the stockholders of Panacea. Pursuant to the Exchange Agreement, the former Panacea stockholders assumed majority control of the Company and all operations are now operated by Panacea, which as a result of the share exchange, became a wholly-owned subsidiary of the Company. In October 2021, the Company changed its name from Exactus Inc. to Panacea Life Sciences Holdings, Inc.
The Company is a GMP certified, seed-to-sale cannabinoid and nutraceutical manufacturer and research company that produces purposeful, natural pharmaceutical alternatives for consumers and pets. In addition to manufacturing raw materials from industrial hemp, we custom formulate and manufacture softgels (both bovine and vegan), gummies, tinctures, sublingual tablets, patches, K-Tape, topical pain relief and skin care products. Panacea was founded by Leslie Buttorff in 2017 as a woman-owned business, was formed to own and engage in creating disruptive healthcare and veterinary natural relief products to make a difference in the lives of humans and pets.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and principles of consolidation
The Company’s consolidated financial statements include the financial statements of Panacea Life Sciences, Inc., a wholly owned subsidiary acquired on June 30, 2021.
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America and the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) for interim financial information, which includes consolidated unaudited interim financial statements and present the consolidated unaudited interim financial statements of the Company and its wholly-owned subsidiary as of March 31, 2022. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America. All intercompany transactions and balances have been eliminated. In the opinion of management, all adjustments necessary to present fairly our financial position, results of operations, stockholders’ equity and cash flows as of March 31, 2022, and 2021, and for the periods then ended, have been made. Those adjustments consist of normal and recurring adjustments. Operating results for the three ended March 31, 2022 and 2021 are not necessarily indicative of the results that may be expected for any subsequent quarters or for the year ending December 31, 2022. Certain information and note disclosures normally included in our annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted.
Going concern
These unaudited condensed consolidated financial statements are presented on the basis that the Company will continue as a going concern. Panacea has combined with Panacea Life Sciences Holdings, Inc. (formerly Exactus), so the below items reflect the consolidated company. The going concern concept contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Since our inception in later 2017, we have generated losses from operations. As of March 31, 2022, our accumulated deficit was $19.5 million, and we had $2.903 million in cash and liquid stock. As of March 31, 2022 the shares of common stock we hold in 22nd Century Group, Inc. (1,227,017 shares) ( Nasdaq: XXII) (“XXII”) was valued at approximately $2.847 million. The XXII stock is pledged to secure a $4.063 million promissory note in favor of Quintel-MC, Incorporated (“Quintel”) and a $1.624 million promissory note in favor of Leslie Buttorff, CEO of the Company. Quintel-MC, Inc. is owned by the CEO. These items are shown on the balance sheet as related party loans. The current plan with respect to the XXII stock is to hold this stock during the short-term pending XXII’s application for MRTP FDA approval. These factors raise doubt about the Company’s ability to continue as a going concern for a period of 12 months from the issuance date of this report. Management cannot provide assurance that the Company will ultimately achieve or maintain profitable operations or become cash flow positive or raise additional debt and/or equity capital. In addition, due to insufficient revenue, we will need to obtain further funding through public or private equity offerings, debt financing, collaboration arrangements or other sources in order to maintain active business operations. We currently do not have sufficient cash flow to pay our ongoing financial obligations on a consistent basis. The issuance of any additional shares of Common Stock, preferred stock or convertible securities could be substantially dilutive to our shareholders. In addition, adequate additional funding may not be available to us on acceptable terms, or at all. These unaudited condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. In November 2021, the Company closed a $1.1 million convertible note and warrants financing and received $1 million.
COVID-19
The COVID-19 pandemic has resulted in a global slowdown of economic activity which may reduce the future demand for a broad variety of goods and services, while also disrupting sales channels, marketing activities and supply chains. The Company’s business operations have been negatively impacted by the COVID-19 pandemic and related events. While the lockdowns and disruptions have largely ended, we cannot predict whether future variants will cause adverse consequences. However, recent supply chain disruptions and delays may hinder our ability to continue our operations and generate revenue. The impact to date has included a decline in CBD product and sales demand. Further, in 2020, the Company (Panacea) invested in personal protective equipment (PPE) materials to sell hand sanitizers, testing kits and masks, and sales of PPE products, which constituted a significant portion of our revenue during the fiscal quarter ended June 30, 2021 and prior periods. These revenues have declined as vaccines continue to be administered and mask mandates and similar requirements have been lifted or reduced in many places. Although the Company is unable to predict the full impact and duration of COVID-19 on its business, the Company is actively managing its financial expenditures in response to the current uncertainty.
The impact of the COVID-19 pandemic and related events, including actions taken by various government authorities in response, have increased market volatility and make the estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes more difficult. As of the date of issuance of the financial statements, the Company is not aware of any specific event or circumstance that would require it to update its estimates, judgments or revise the carrying value of its assets or liabilities. These estimates may change, as new events occur and additional information is obtained, and are recognized in the condensed consolidated financial statements as soon as they become known.
Use of Estimates
The Unaudited Condensed Consolidated Financial Statements have been prepared in conformity with US GAAP and required management of the Company to make estimates and assumptions in preparation of these statements. Actual results may differ significantly from those estimates. Significant estimates made by management include but are not limited to the useful life of property and equipment, incremental borrowing rate used in the calculation of right of use asset and lease liability, reserves for inventory, allowance for doubtful accounts, revenue allocations, valuation allowance on deferred tax assets, assumptions used in assessing impairment of long-term assets, assumptions used in the calculation of net realizable value of inventory and fair value of non-cash equity transactions.
Cash and Cash Equivalents
For purposes of balance sheet presentation and reporting of cash flows, the Company considers all unrestricted demand deposits, money market funds and highly liquid debt instruments with an original maturity of less than 90 days to be cash and cash equivalents. There were no cash equivalents. The Company places its cash and cash equivalents with high-quality financial institutions. At times, balances in the Company’s cash accounts may exceed the Federal Deposit Insurance Corporation (“FDIC”) limit. On March 31, 2022, the Company’s cash balances did not exceed the FDIC limit.
Accounts Receivable
Accounts receivable are generally unsecured. The Company establishes an allowance for doubtful accounts receivable based on the age of outstanding invoices and management’s evaluation of collectability. Accounts are written off after all reasonable collection efforts have been exhausted and management concludes that likelihood of collection is remote. Any future recoveries are applied against the allowance for doubtful accounts. An allowance of $10,000 was taken at the beginning of 2022 to allow for any doubtful accounts to be expensed. As of March 31, 2022 $5,850 of this allowance was expensed. The Company’s accounts receivable policy changed in 2021 to only provide larger, well-established companies with Net 30 payment terms. For all other sales they are paid by credit card or wires received before the product is shipped to the customer.
Inventory
Inventories are stated at low of cost or net realizable value. Inventories of purchased materials are valuated using a moving average method and managed by first in first out basis (FIFO). Inventories of internally manufactured materials are valuated using a standard costing method and are also managed on a FIFO basis. Production related costs that are capitalized as inventory as part of the standard cost valuation include the direct materials consumed, direct labor used, indirect labor used, and manufacturing overhead. Overhead is calculated based on specific manufacturing process and allocated on an order-by-order basis. Production variances that occur between standard cost valuation and actual costs are expensed as incurred in the income statement as part of cost of goods sold.
Marketable securities
The Company’s marketable securities consists of 1,227,017 shares of XXII which are classified as available-for-sale and included in current assets as they are pledged to secure two promissory notes (see Note 2 – Going Concern). Securities are valued based on market prices for identical assets using third party certified pricing sources. Available-for-sale securities are carried at fair value with unrealized and realized gains and losses reported as a component of income (loss). Realized gains and losses, if any, are calculated on the specific identification method and are included in other income in the condensed consolidated statements of operations.
Fair Value Measurements
The Company adopted the provisions of Accounting Standard Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures”, which defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value, and expands disclosure of fair value measurements. The guidance prioritizes the inputs used in measuring fair value and establishes a three-tier value hierarchy that distinguishes among the following:
|
● |
Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. |
|
|
|
|
● |
Level 2—Valuations based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and models for which all significant inputs are observable, either directly or indirectly. |
|
|
|
|
● |
Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement. |
The following table shows, by level within the fair value hierarchy, the Company’s assets and liabilities at fair value on a recurring basis as of March 31, 2022 and December 31, 2021:
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
| Marketable securities |
|
$ |
2,846,679 |
|
|
$ |
2,846,679 |
|
|
$ |
– |
|
|
|
– |
|
|
$ |
3,719,483 |
|
|
$ |
3,719,483 |
|
|
$ |
– |
|
|
$ |
– |
|
| Total |
|
$ |
2,846,679 |
|
|
$ |
2,846,679 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
3,719,483 |
|
|
$ |
3,719,483 |
|
|
$ |
– |
|
|
$ |
– |
|
|
|
March 31, 2022 |
|
| Balance at beginning of year |
|
$ |
3,791,483 |
|
| Unrealized loss on marketable securities, net |
|
|
944,804 |
|
| Balance at end of period |
|
$ |
2,846,679 |
|
As of March 31, 2022, the Company has no liabilities that are re-measured at fair value.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method on the various asset classes over their estimated useful lives, which range from 3 to ten years when placed in service. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition.
Intangible Assets and Goodwill
The Company has intangible assets. Goodwill is comprised of the purchase price of business combinations in excess of the fair market value assigned at acquisition to the tangible and intangible assets acquired. Goodwill is not amortized. The Company tests goodwill for impairment on an annual basis. The Company performed its most recent goodwill impairment using a discounted cash flow analysis and found that the fair value exceeded the carrying value. It has $2.189 million of goodwill from the acquisition of the assets of Phoenix Life Sciences, Inc. (“Phoenix”) in October 2017 and intangible assets of $0.077 million as of March 31, 2022 and $0.123 million for as of December 31, 2020. In the acquisition of Phoenix, the Company acquired product formulas which is classified as an intangible asset.
|
|
Estimated Life |
|
| Goodwill from Phoenix Acquisition |
|
|
Tested Yearly for Impairment |
|
| Intangibles – Formulations |
|
|
5 Years |
|
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
| Goodwill |
|
$ |
2,188,810 |
|
|
$ |
2,188,810 |
|
| Intangibles – Formulations |
|
|
307,001 |
|
|
|
307,001 |
|
| Less accumulated amortization |
|
|
(260,950 |
) |
|
|
(245,600 |
) |
| Net intangible assets |
|
$ |
46,051 |
|
|
$ |
61,401 |
|
Leases
The Company determines if an arrangement is a lease at inception. Contracts containing a lease are further evaluated for classification as an operating or finance lease. In determining the leases classification, the Company assesses among other criteria: (i) 75% or more of the remaining economic life of the underlying asset is a major part of the remaining economic life of that underlying asset; and (ii) 90% or more of the fair value of the underlying asset comprises substantially all of the fair value of the underlying asset. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities and long-term operating lease liabilities in the Company’s consolidated balance sheets. Finance leases are included in property, plant and equipment, net, other current liabilities, and long-term finance lease liabilities in the Company’s consolidated balance sheets. ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. For leases with terms greater than 12 months, the Company records the ROU asset and liability at commencement date based on the present value of lease payments according to their term.
The Company uses incremental borrowing rates based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. The ROU asset also includes any lease payments made and excludes lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expenses are recognized on a straight-line basis over the lease term or the useful life of the leased asset.
In addition, the carrying amount of the ROU and lease liabilities are remeasured if there is a modification, a change in the lease term, a change in the in-substance fixed lease payments or a change in the assessment to purchase the underlying asset.
Convertible Notes Payable
The Company has issued convertible notes, which contain variable conversion features, whereby the outstanding principal and accrued interest automatically convert into common shares at a fixed price which may be a discount to the common stock at the time of conversion. Some of the conversion features of these notes are contingent upon future events, whereby, the holder agreed not to convert until the contingent future event has occurred.
Revenue Recognition
The Company accounts for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers.
The Company accounts for a contract when it has been approved and committed to, each party’s rights regarding the goods or services to be transferred have been identified, the payment terms have been identified, the contract has commercial substance, and collectability is probable. Revenue is generally recognized net of allowances for returns and any taxes collected from customers and subsequently remitted to governmental authorities. However, the Company’s sales are primarily through retail stores, purchase orders or ecommerce; thus, currently contract liabilities are negligible. The Company does not have any multiple-element arrangements.
Some of the Company’s contract liabilities consist of advance customer payments. Contract liability results from transactions in which the Company has been paid for products by customers, but for which all revenue recognition criteria have not yet been met. Once all revenue recognition criteria have been met, the contract liabilities are recognized. The Company recorded $18,912 and $24,585 in advanced customer payments as of March 31, 2022 and December 31, 2021, respectively and these amounts are included in the balance sheet line item of accounts payable and accrued expenses.
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
| Balance, beginning of period |
|
$ |
24,585 |
|
|
$ |
121,300 |
|
| Payments received for unearned revenue |
|
|
1,957 |
|
|
|
41,465 |
|
| Revenue earned |
|
|
7,630 |
|
|
|
138,180 |
|
|
|
|
|
|
|
|
|
|
| Balance, end of period |
|
$ |
18,912 |
|
|
$ |
24,585 |
|
Revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration that an entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amount of revenue that is recorded reflects the consideration that the Company expects to receive in exchange for those goods. The Company applies the following five-step model in order to determine this amount: (i) identification of the promised goods in the contract; (ii) determination of whether the promised goods are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.
Revenue related to the sale of products is recognized once goods have been sold to the customer and the performance obligation has been completed. In both contracted purchase and retail sales, we offer consumer products through our online stores. Revenue is recognized when control of the goods is transferred to the customer. This generally occurs upon our delivery to a third-party carrier or, to the customer directly. Revenue from tolling services is recognized when the performance obligation, such as processing of the material, has been completed and output material has been transferred to the customer.
Revenue is generally recognized net of allowances for returns and any taxes collected from customers and subsequently remitted to governmental authorities. A contract liability results from transactions in which the Company has been paid for products by customers, but for which all revenue recognition criteria have not yet been met. Once all revenue recognition criteria have been met, the contract liabilities are recognized. However, the Company’s sales are primarily through retail stores, purchase orders or ecommerce; thus, currently contract liabilities are negligible. The Company does not have any multiple-element arrangements.
The Company also has recorded other income related to rental income it receives from leasing out space in the laboratory it occupies.
Shipping and Handling Costs
The Company accounts for shipping and handling fees in accordance with ASC 606. The amounts charged to customers for shipping products are recognized as revenues and the related freight costs of shipping products are classified in general and administrative costs as incurred. Shipping costs are included as a component of general and administrative and were $14,184 and $2,789 for the three months ended March 31, 2022 and 2021, respectively.
Advertising & Marketing
Advertising costs are expensed when incurred and are included in advertising and promotional expense in the accompanying statements of operations. Included in this category are expenses related to public relations, investor relations, new package design, website design, design of promotional materials, cost of trade shows, cost of products given away as promotional samples, and paid advertising. The Company recorded advertising costs included in general and administrative costs of $66,796 and $151,183 for the three months ended March 31, 2022 and 2021, respectively.
Segment Information
The Company follows the provisions of ASC 280-10 Segment Reporting. This standard requires that companies disclose operating segments based on the manner in which management disaggregates the Company in making internal operating decisions. Segment identification and selection is consistent with the management structure used by the Company’s chief operating decision maker to evaluate performance and make decisions regarding resource allocation, as well as the materiality of financial results consistent with that structure. Based on the Company’s management structure and method of internal reporting, the Company has one operating segment. The Company’s chief operating decision maker does not review operating results on a disaggregated basis; rather, the chief operating decision maker reviews operating results on an aggregate basis.
Earnings per Share
The Company computes basic and diluted earnings per share amounts in accordance with ASC Topic 260, “Earnings per Share”. Basic earnings per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the reporting period. Diluted earnings per share reflects the potential dilution that could occur if preferred stock converted to common stock and warrants are exercised. Preferred stock and warrants are excluded from the diluted earnings per share calculation if their effect is anti-dilutive.
The Business Combination on June 30, 2021 was accounted for as a recapitalization of equity structure. In October, 2021 the Company completed 1-for-28 reverse stock split. Pursuant to GAAP, the Company retrospectively recasted the weighted-average shares included within its condensed consolidated statements of operations for the three months ended March 31, 2021. The basic and diluted weighted-average Panacea ordinary shares are retroactively converted to shares of the Company’s common stock to conform to the recasted condensed consolidated statements of stockholders’ equity.
The following financial instruments were not included in the diluted loss per share calculation for the three months ended March 31, 2022 and 2021 because their effect was anti-dilutive:
|
|
For the three months ended March 31, |
|
|
|
2022 |
|
|
2021 |
|
| Options to purchase common stock |
|
|
61,446 |
|
|
|
– |
|
| Warrants to purchase common stock |
|
|
56,377 |
|
|
|
– |
|
| Series B-1 Convertible Preferred |
|
|
6,679 |
|
|
|
– |
|
| Series B-2 Convertible Preferred |
|
|
26,786 |
|
|
|
– |
|
| Series C Convertible Preferred |
|
|
2,289,220 |
|
|
|
– |
|
| Series C-1 Convertible Preferred |
|
|
1,064,908 |
|
|
|
– |
|
| Series D Convertible Preferred |
|
|
1,628,126 |
|
|
|
– |
|
| Total |
|
|
5,133,541 |
|
|
|
– |
|
Income Taxes
Income taxes are accounted for under the asset and liability method prescribed by FASB ASC Topic 740. These standards require a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more likely than not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements. Deferred income taxes are recorded for temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and liabilities reflect the tax rates expected to be in effect for the years in which the differences are expected to reverse. A valuation allowance is provided if it is more likely than not that some or all of the deferred tax asset will not be realized.
Recently Issued Accounting Standards
In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40), Accounting for Convertible Instruments and Contract’s in an Entity’s Own Equity. The ASU simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU simplifies the diluted net income per share calculation in certain areas. The ASU is effective for annual and interim periods beginning after December 31, 2021, and early adoption is permitted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company does not expect the adoption of ASU 2020-6 to have any material impact on its consolidated financial statements.
In May 2021, the Financial Accounting Standards Board (“FASB”) issued ASU 2021-04 “Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation— Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815- 40) Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options” which clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. An entity should measure the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange as follows: i) for a modification or an exchange that is a part of or directly related to a modification or an exchange of an existing debt instrument or line-of-credit or revolving-debt arrangements (hereinafter, referred to as a “debt” or “debt instrument”), as the difference between the fair value of the modified or exchanged written call option and the fair value of that written call option immediately before it is modified or exchanged; ii) for all other modifications or exchanges, as the excess, if any, of the fair value of the modified or exchanged written call option over the fair value of that written call option immediately before it is modified or exchanged. The amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. The Company is currently evaluating the impact of this standard on its consolidated financial statements.
The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.
NOTE 3 – PROPERTY, EQUIPMENT, NET OF ACCUMULATED DEPRECIATION
Property and equipment, net including any major improvements, are recorded at historical cost. The cost of repairs and maintenance is charged against operations as incurred. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets, generally as follows:
|
|
Estimated Life |
|
| Computers and technological assets |
|
|
3 – 5 Years |
|
| Furniture and fixtures |
|
|
3 – 5 Years |
|
| Machinery and equipment |
|
|
5 – 10 Years |
|
| Leasehold improvement |
|
|
10 Years |
|
Property and equipment, net consists of the following:
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
| Computers and technological assets |
|
$ |
3,616,765 |
|
|
$ |
3,514,421 |
|
| Furniture and fixtures |
|
|
55,950 |
|
|
|
55,950 |
|
| Machinery and equipment |
|
|
7,531,387 |
|
|
|
7,530,787 |
|
| Land |
|
|
92,222 |
|
|
|
92,222 |
|
| Leasehold improvements |
|
|
1,508,915 |
|
|
|
1,508,915 |
|
| Total |
|
|
12,805,239 |
|
|
|
12,702,295 |
|
| Less accumulated depreciation |
|
|
(4,261,879 |
) |
|
|
(3,862,313 |
) |
| Total property and equipment, net |
|
$ |
8,543,360 |
|
|
$ |
8,839,982 |
|
Depreciation expenses for the three-month period ended March 31, 2022 and 2021 were $408,690 and $427,522 respectively.
NOTE 4 – INVENTORY
Inventory consists of the following components:
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
| Raw Materials |
|
$ |
937,108 |
|
|
$ |
970,393 |
|
| Semi-Finished |
|
|
1,552,243 |
|
|
|
1,466,763 |
|
| Finished Goods |
|
|
1,819,887 |
|
|
|
1,805,779 |
|
| Packaging |
|
|
15,549 |
|
|
|
15,549 |
|
| Trading |
|
|
|
|
|
|
5,793 |
|
| Total |
|
$ |
4,324,787 |
|
|
$ |
4,264,277 |
|
Inventories are stated at lower of cost or net realizable value using the standard costing method for its work in process and finished goods. For its raw materials, trading goods, and packaging supplies, the Company utilizes the moving average method for costing purposes and FIFO. At this time there are no inventory reserves required.
NOTE 5 –OPERATING LEASE RIGHT-OF-USE ASSETS AND OPERATING LEASE LIABILITIES – RELATED PARTY
Right of Use
The Company adopted Accounting Standards Update (“ASU”) No. 2016-02, “Leases” (“ASC 842”) on January 1, 2019, the start of our 2019 fiscal year. The Company has one lease arrangement with a related party entered into on December 22, 2018 for 3-year term starting with January 1, 2019 for certain laboratory facilities, with a nine-year extension option. This lease was extended and now expires on December 31, 2030. At inception, the Company recognized a Right of Use Asset and a corresponding lease liability in the amount of $4,595,509. The Company’s lease arrangements may contain both lease and non-lease components. The Company has elected to combine and account for lease and non-lease components as a single lease component. The Company has incorporated residual value obligations in leases for which there is such occurrences. Regarding short-term leases, ASC 842-10-25-2 permits an entity to make a policy election not to apply the recognition requirements of ASC 842 to Short-term leases. The Company has elected not to apply the ASC 842 recognition criteria to any leases that qualify as Short-Term Leases.
The Company leases a portion of the property (formerly the Environmental Protection Agency building) in Golden, CO from J&N Real Estate, owned by the CEO, a related party with a term expiring on December 31, 2030. The lease consists of all laboratory space including testing facilities, water treatment, extraction and production. The lease of the property is based on the fair market rent and triple net lease (NNN) values competitive in the marketplace for a cGMP facility. The Company also subleases some of its laboratory space to other CBD companies. This income is presented under the Other Income line items of the statements of operations. The leases vary from short-term monthly leases to 3-year leases but are all cancellable.
Below is a summary of our right of use assets and liabilities as of March 31, 2022.
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
| Right-of-use assets |
|
$ |
3,507,887 |
|
|
$ |
3,595,100 |
|
|
|
|
|
|
|
|
|
|
| Present value of operating lease liabilities |
|
$ |
3,607,095 |
|
|
$ |
3,692,392 |
|
| Less: Long-term portion of operating lease liability |
|
|
(3,258,312 |
) |
|
|
(3,347,335 |
) |
| Short-term portion of operating lease liability |
|
|
348,783 |
|
|
|
345,057 |
|
| Unpaid balances |
|
|
1,391,811 |
|
|
|
1,279,033 |
|
| Total short-term lease liability obligations |
|
$ |
1,740,594 |
|
|
$ |
1,624,090 |
|
| Weighted-average remaining lease term (Ends December 31, 2030) |
|
|
8.75 years |
|
|
|
9 years |
|
|
|
|
|
|
|
|
|
|
| Weighted-average discount rate |
|
|
|
|
|
|
3.0 |
% |
During the three months ended March 31, 2022 and 2021, we recognized approximately $114,693 respectively in operating lease costs. Operating lease costs are included in operating expenses in our consolidated statement of operations.
Approximate future minimum lease payments for our right of use assets over the remaining lease periods as of March 31, 2022, are as follows:
| 2022 |
|
|
338,333 |
|
| 2023 |
|
|
455,622 |
|
| 2024 |
|
|
460,178 |
|
| 2025 |
|
|
464,780 |
|
| 2026 |
|
|
469,427 |
|
| Thereafter |
|
|
1,925,123 |
|
| Total undiscounted operating lease payments |
|
|
3,887,908 |
|
| Less: Imputed interest |
|
|
(506,368 |
) |
| Present value of operating lease liabilities |
|
$ |
3,607,095 |
|
NOTE 6 – NOTES PAYABLE
Convertible Note Payable
On November 18, 2021, the Company entered into a Securities Purchase Agreement (“SPA”) with Lincoln Park Capital Fund, LLC (the “Purchaser”) pursuant to which the Company agreed to sell a 10% original issue discount senior convertible promissory note in the principal amount of $1,100,000 (the “Convertible Note”) and five-year warrants to purchase 785,715 shares of the Company’s common stock, par value $0.0001 per share at an exercise price of $1.40 per share (the “Warrants”) pursuant to the terms and conditions of the SPA for a total purchase price of $1,000,000.
The Note will be due November 18, 2022, which is one year from the issuance date. The Note initially does not bear any interest, however upon and during any event of default by the Company, the Note will accrue interest at a rate of 18% per annum. Events of default include the failure to file all required reports and other documents with the SEC pursuant to Exchange Act by January 2022, suspension of trading or quotation of the Company’s common stock on the OTCQB or a national securities exchange, and failure to reserve a sufficient number of shares for the conversion or exercise of all securities sold under the SPA. Further, upon an event of default, the holder will have the right to cause the Company to redeem the outstanding principal and accrued interest on the Note at a 125% premium.
The principal and accrued interest on the Note is convertible into common stock at a conversion price of $1.40 per share, subject to certain adjustments summarized as follows: (i) if an event of default has occurred prior to the maturity date, a reduction to 80% of the conversion price then in effect, (iii) anti-dilution adjustment upon certain issuances of common stock or derivative securities at a price per share that is lower than the conversion price, (iii) customary adjustments for stock splits, stock dividends and similar corporate events, and (iv) adjustment upon a public offering by the Company meeting certain delineated criteria, as summarized below.
Under the terms of the Note, upon a public offering by the Company of common stock, either alone or in units or with other securities pursuant to an effective registration statement resulting in gross proceeds to the Company of at least $10,000,000, and in connection with which the common stock is approved for listing listed on a national securities exchange (a “Qualified Offering”), the conversion price will be reduced to 90% of the offering price per share in the Qualified Offering, if that price is lower than the conversion price then in effect. Additionally, immediately prior to a Qualified Offering, the Company may redeem all or part of the outstanding principal and accrued interest on the Note at a 115% premium.
The Note also contains customary negative covenants prohibiting the Company from certain actions while the Note remains outstanding.
The Warrants will be exercisable for a five-year term beginning on May 18, 2022, at an exercise price of $1.40 per share, subject to certain adjustments which are substantially similar to those contained in the Note, including the Qualified Offering adjustment.
Each of the Note and the Warrants contain a 4.99% beneficial ownership limitation pursuant to which neither may be converted or exercised, as applicable, if and to the extent that following such conversion or exercise the holder would beneficially own more than 4.99% of the Company’s outstanding common stock, subject to increase to 9.99% upon 61 days’ prior written notice by the holder.
Pursuant to the SPA, the Company entered into a Registration Rights Agreement dated November 18, 2021, by and between the Company and the Purchaser, in which the Company has agreed to file a Registration Statement on Form S-1 with the SEC following request by the Purchaser at any time following the 180-day period after the initial closing.
The Company calculated the fair value of the Warrants using the Black Scholes method as $877,261 and recorded their fair value along with the $100,000 original issue discount and relates issuance costs of $20,249 as a debt discount which will be amortized using the straight-line method over the one year note period. Amortization of the debt discount for the year ended December 31, 2021 amounted to $117,515. The loan balance, net of discount was $220,005 as of December 31, 2021.
On March 3, 2022, the Company entered into an Exchange Agreement (the “Agreement”) with an institutional investor (the “Investor”) pursuant to which the Company agreed to issue a 10% original issue discount senior convertible promissory note in the principal amount of $385,000 (the “Second Note”) and five-year warrants to purchase 275,000 shares of the Company’s common stock, par value $0.0001 per share at an exercise price of $1.40 per share (the “Warrants”) in exchange for 350 shares of the Company’s Series A Convertible Preferred Stock (“Series A”). The Second Note matures on March 3, 2023. The Agreement was entered into after the Investor exercised the most favored nations rights contained in Section 7(b) of the Company’s Certificate of Designation of Preferences, Rights and Limitations of the Series A in connection with the consummation of a private placement with the Purchaser on November 18, 2021. The warrant fair value of $190,638 and the original issue discount of $35,000 were treated as a discount to the Second Note and will be amortized over the term of the Second Note. Amortization of the debt discount for the three months ended March 31, 2022, was $17,309 and was recorded as interest expense. The debt discount balance at March 31, 2022, was $208,283.
Paycheck Protection Program Funding U.S. Small Business Administration Loan
On May 28, 2020 , the Company received a secured, 30-year, Economic Injury Disaster Loan in the amount of $99,100 from the U.S. Small Business Administration. The loan carries interest at a rate of 3.75% per year, requires monthly payments of principal and interest, and matures in 30 years. Installment payments, including principal and interest, of $483 monthly, will begin 12 months from the date of the promissory Note. The SBA loan is secured by a security interest in the Company’s tangible and intangible assets. The loan proceeds are to be used as working capital to alleviate economic injury caused by the Covid-19 disaster occurring in the month of January 31, 2020 and continuing thereafter. As of March 31, 2022 the current principal balance of this note amounted to $99,100 and accrued interest was approximately $2,047.
Regarding Panacea Life Sciences, Inc.’s (PLS) Small Business Administration (SBA) loans, PLS received the PPP first draw loan in the amount of $273,300.00 on April 29, 2020. All funds were used to cover payroll expenses. The first draw loan, including any accrued interest, was officially forgiven by the SBA and the respective lending bank, FirstBank, on March 3, 2021. On January 28, 2021, PLS received the PPP second draw loan in the amount of $243,041.00; the second draw loan was forgiven on June 28, 2021.
PLS’s accounting treatment of the PPP loans and forgiveness follows best practice from the AICPA and accounted for the loan as a financial liability in accordance with FASB ASC 470 and accrue interest in accordance with the interest method under FASB ASC 835-30.
The aforementioned forgiveness of the first draw loan was recorded in the Company’s consolidated statement of operations as gain on extinguishment of debt.
Employer Retention Credit
The Company received an employer retention credit from the federal government of $253,791 in 2021.
Notes payable – related party and other liability
As part of the Exchange Agreement certain loan balances (“Quintel Loans”) from Quintel-MC Incorporated, an affiliate of the Company’s CEO, (“Quintel”) and historical interest owed of $1,932,358 were combined into a new promissory note with the principal amount of $4.062 million (“Quintel Note”). The Quintel Note bears annual interest at 12% and was secured by a pledge of certain XXII common stock owned by Panacea (See Note 2 Going concern).
On June 30, 2021, the Company issued its CEO, Ms. Buttorff, a 10% promissory note in the amount of $1,624,000 (the “Buttorff Note”). The Buttorff Note was secured by a pledge of certain XXII common stock owned by the Company (See Note 2 Going concern). This demand note replaced a prior working capital note that the Company had issued on January 1, 2021. On July 1, 2021, the Company issued Ms. Buttorff a 10%, $1 million line of credit note at 10% annual rate which Ms. Buttorff has increased that expired in January 2022, which Ms. Buttorff has extended (see Note 6 – Notes Payable – Buttorff Note). In January, 2022, the Buttorff line of credit was increased to $1.5 million and is now due on January 31, 2023. To date the balance due is $1,175,459.
On June 30, 2021 the $7 million of convertible debt (“XXII Debt”) was retired in exchange for a portion of the Needle Rock Farm ($2.2 million), $500,000 was converted to common stock and J&N Real Estate Company assumed a $4.3 million loan.
During October 2019, the Company issued a short-term promissory note to an officer of Exactus, for an aggregate principal amount of $55,556. The note originally became due and payable between October 18, 2019 and December 16, 2019 and bore interest at a rate of twelve 12% per annum prior to the maturity date, and 18% per annum if unpaid following the maturity date. The current interest rate is 18%. The note is an unsecured obligation of the Company. The note carry a 10% original issue discount of $5,556 which has been amortized and recorded in interest expense on the accompanying consolidated statements of operations. As of December 31, 2021, the principal balance under this note was paid off.
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
| Quintel Note |
|
$ |
4,062,713 |
|
|
$ |
4,062,713 |
|
| CEO Note |
|
|
2,861,144 |
|
|
|
2,379,153 |
|
| Total related party notes |
|
$ |
6,923,857 |
|
|
$ |
6,441,866 |
|
Other long-term liabilities, related party
The Company has recorded a related party liability (“Fixed Asset Loan”) in the amounts of $2,899,919 and $2,749,638 as of March 31, 2022 and December 31, 2021, respectively, relating to SAP software and support fees which were paid by an affiliate company of the CEO. The balance bears interest of 6% and the maturity date has not yet been determined.
In 2020, the Company recorded an additional related party liability in the amount of $513,390 in respect to certain building improvements, due to J&N Real Estate Company (a company owned by the CEO) (“J&N Building Loan”). This balance bears no interest, and the maturity date has not yet been determined.
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
| Other long-term liabilities, related party |
|
|
|
|
|
|
|
|
| Fixed Asset Loan |
|
$ |
2,899,919 |
|
|
$ |
2,749,638 |
|
| J&N Building Loan |
|
|
513,390 |
|
|
|
513,390 |
|
| Total |
|
$ |
3,413,309 |
|
|
$ |
3,263,028 |
|
NOTE 7 – STOCKHOLDERS’ EQUITY
Common stock
The Company’s authorized common stock consists of 650,000,000 shares with a par value of $0.0001 per share.
During the three months ended March 31, 2022, the Company issued 679,694 shares of common stock in respect of the share exchange effected in 2021. In addition, 8,940 shares of common stock were issued to a service provider for a platform license for the year ended December 31, 2022.
Common stock options
Stock Option Plan
On June 30, 2021 the Company’s stockholders approved the 2021 Equity Incentive Plan (the “2021 Plan”). The 2021 Plan provided for the issuance of 4,049,409 incentive awards in the form of non-qualified and incentive stock options, restricted stock awards, restricted stock unit awards, warrants and preferred stock. The awards may be granted by the Company’s Board of Directors to its employees, directors and officers and to consultants, agents, advisors and independent contractors who provide services to the Company or to a subsidiary of the Company. The exercise price for stock options must not be less than the fair market value of the underlying shares on the date of grant. The incentive awards shall either be fully vested and exercisable from the date of grant or shall vest and become exercisable in such installments as the Board of Directors or Compensation Committee may specify. Stock options expire no later than ten years from the date of grant. Unless sooner terminated, the Plan shall terminate in 10 years.
Previously the Company had adopted the 2018 Equity Incentive Plan (the “2018 Plan”). The 2018 Plan provides for the issuance of incentive awards in the form of non-qualified and incentive stock options, stock appreciation rights, restricted stock awards, and restricted stock unit awards. The awards may be granted by the Company’s Board of Directors to its employees, directors and officers and to consultants, agents, advisors and independent contractors who provide services to the Company or to a subsidiary of the Company. The exercise price for stock options must not be less than the fair market value of the underlying shares on the date of grant. The incentive awards shall either be fully vested and exercisable from the date of grant or shall vest and become exercisable in such installments as the Board or Compensation Committee may specify. Stock options expire no later than ten years from the date of grant. The aggregate number of shares of common stock which may be issued pursuant to the Plan is 4,049,409 unless sooner terminated, the Plan shall terminate in 10 years. This plan had 196,491 fully vested options outstanding at the time of the share exchange. There have been no options granted under this plan subsequent to the share exchange.
Stock Options
A summary of the stock option activity is presented below:
|
|
Options Outstanding as of March 31, 2022 |
|
|
|
Number of
Shares Subject
to Options |
|
|
Weighted
Average
Exercise
Price Per
Share |
|
|
Weighted
Average
Remaining
Contractual
Life (in years) |
|
|
Aggregate
Intrinsic
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance on December 31, 2021 |
|
|
196,491 |
|
|
$ |
3.51 |
|
|
|
3.20 |
|
|
$ |
|
|
| Options granted |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
| Options exercised |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
| Options canceled / expired |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
| Balance at March 31, 2022 |
|
|
196,491 |
|
|
$ |
3.51 |
|
|
|
2.95 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Vested and exercisable at March 31, 2022 |
|
|
196,491 |
|
|
$ |
3.51 |
|
|
|
2.95 |
|
|
$ |
|
|
Stock Warrants
On March 3, 2022, the Company entered in an Exchange Agreement with an institutional investor pursuant to which the Company issued a 10% original issue discount senior convertible promissory note in the principal amount of $385,000 (the “Note”) and five-year warrants to purchase 275,000 shares of the Company’s common stock, par value $0.0001 per share at an exercise price of $1.40 per share in exchange for 350 shares of the Company’s Series A Convertible Preferred Stock.
As of March 31, 2022, the Company also had outstanding warrants to purchase an aggregate of 56,377 shares of common stock. These warrants were previously issued by the Company prior to the exchange agreement.
The Company’s outstanding warrants as of March 31, 2022 are summarized as follows, and all were exercisable at that date.
|
|
Warrants Outstanding as of March 31, 2022 |
|
|
|
Number of
Shares Subject
to Warrants |
|
|
Weighted
Average
Exercise
Price Per
Share |
|
|
Weighted
Average
Remaining
Contractual
Life (in years) |
|
|
Aggregate
Intrinsic
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance on December 31, 2021 |
|
|
56,377 |
|
|
$ |
13.64 |
|
|
|
2.01 |
|
|
|
– |
|
| Options granted |
|
|
275,000 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
| Options exercised |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
| Options canceled / expired |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
| Balance at March 31, 2022 |
|
|
331,377 |
|
|
$ |
3.48 |
|
|
|
4.39 |
|
|
$ |
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Vested and exercisable at March 31, 2022 |
|
|
331,377 |
|
|
$ |
3.48 |
|
|
|
4.39 |
|
|
$ |
– |
|
As of March 31, 2022, the outstanding warrants have no intrinsic value.
Restricted Stock
A summary of the restricted stock activity is presented below:
|
|
Restricted Stock Common Stock |
|
| Balance at December 31, 2021 |
|
|
107,993 |
|
| Balance at March 31, 2022 |
|
|
107,993 |
|
As of March 31, 2022, there were no unamortized or unvested stock-based compensation costs related to restricted share arrangements.
Preferred Stock
The Company’s authorized preferred stock consists of 50,000,000 shares with a par value of $0.0001.
On March 3, 2022, the Company entered into an Exchange Agreement with the Investor pursuant to which the company agreed to issue the Note in the principal amount of $385,000 and the Warrants in exchange for 350 shares of the Company’s Series A Convertible Preferred Stock. On April 19, 2022, the Company filed a Withdrawal of Designation of the Series A Convertible Preferred Stock with the Secretary of State and the State of Nevada.
NOTE 8 – COMMITMENTS AND CONTINGENCIES
Legal Matters
In the ordinary course of business, the Company enters into agreements with third parties that include indemnification provisions which, in its judgment, are normal and customary for companies in the Company’s industry sector. These agreements are typically with business partners, and suppliers. Pursuant to these agreements, the Company generally agrees to indemnify, hold harmless, and reimburse indemnified parties for losses suffered or incurred by the indemnified parties with respect to the Company’s products, use of such products, or other actions taken or omitted by us. The maximum potential number of future payments the Company could be required to make under these indemnification provisions is unlimited. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. As a result, the estimated fair value of liabilities relating to these provisions is minimal. Accordingly, the Company has no liabilities recorded for these provisions as of March 31, 2022.
Concentrations
The Company has no contingencies, material commitments, or purchase obligations or sales obligations.
On the revenue side, in the three months ended March 31, 2022, we have a concentration of two customers. One is a customer who purchased PPE items and represents 22% of revenue. The other is a tolling partner who represents 17% of revenue. In the three months ended March 31, 2021, there was one customer who represented 25% of revenue and another that represented 11% of revenue.
The other concentration is in the accounts receivable category, where three customer accounts for 66% of the accounts receivable. One of the three customer contracts is unique in that we produced all of the products for them to sell, and they pay Panacea as the items are sold in the ecommerce marketplace. Thus, until their inventory is depleted, we will have accounts receivable. This customer receivable is 45% of the 66%.
NOTE 9 – RELATED PARTY TRANSACTIONS
Notes Payable and Accrued Interest – Related Parties
For information on related party loans to the Company and other related party transactions, see Notes 5 and 6, Operating Lease and Notes Payable.
The accrued interest and interest expenses recorded for related party loans are shown below.
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
| Accrued Interest |
|
|
|
|
|
|
|
|
| Related party loan-Quintel |
|
$ |
380,616 |
|
|
$ |
249,939 |
|
| Related party loan-CEO loan |
|
|
130,724 |
|
|
|
86,060 |
|
| Related party loan – Line of credit |
|
|
59,370 |
|
|
|
29,235 |
|
|
|
Three months ended
March 31, 2022 |
|
|
Three months ended
March 31, 2021 |
|
| Interest Expense |
|
|
|
|
|
|
|
|
| Related party loan-Quintel |
|
$ |
130,678 |
|
|
$ |
280,539 |
|
| Related party loan-CEO loan |
|
|
29,652 |
|
|
|
18,736 |
|
|
|
|
|
|
|
|
|
|
| Related party loan – Line of Credit |
|
|
30,135 |
|
|
|
– |
|
Other
The Company continues to hold 1,227,017 shares of XXII stock which is available for sale. On August 25, 2021 70,000 shares were sold and the proceeds from the sale was $230,296. XXII recently moved from the NYSE to NASDAQ. As of March 31, 2022 XXII is a common shareholder of the Company.
NOTE 11– SUBSEQUENT EVENTS
On April 19, 2022, the Company filed a Withdrawal of Designation of the Series A with the Secretary of State and the State of Nevada.
In the second quarter we established a Scientific Advisory Board (“SAB”) consisting of seven members. These members were provided restricted stock. Since the legalization of industrial hemp extracts through the 2018 Agriculture Improvement Act, more commonly known as the Farm Bill, cannabinoids have exploded into the dietary supplement and food space. Marketers of cannabidiol (“CBD”), claim CBD products cure everything from arthritis to yeast infections with no substantial data to support such claims. Since its inception, the Company has committed to providing scientific and clinical data to better understand the impact of cannabinoids on human and animal health and to educate customers on how to use these products. Assembling a SAB consisting of experts in various scientific and medical specialties enhances the Company’s ability to design and evaluate clinical studies as well as provide guidance on product development. The SAB will be a critical element in assisting the Company to develop products with purpose. Currently, the Company has launched two analytical chemistry projects focused on isolation of minor cannabinoids and pesticide remediation, clinical animal studies to evaluate analgesia in dairy cattle and evaluation of CBD in canine age-related dementia. The latter is a translational model to understand the potential of CBD in slowing down or regressing Alzheimer’s Disease. The SAB has also reviewed human clinical studies to measure bioavailability of a variety of the Company’s products, CBD and Cannabigerol (“CBG”) in anxiety, CBG effects to support the digestive system as a potential supplement for those with irritable bowel syndrome and is collaborating with CU Anschutz on CBD and CBG effects in female patients diagnosed with chronic pelvic pain.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Business Overview
The Company is a Nevada corporation organized in 2008. The Company has pursued opportunities in Cannabidiol, which we refer to as “CBD”, since December 2018 when we expanded our focus to pursue opportunities in hemp-derived CBD. Effective October 25, 2021, we changed our name to Panacea Life Sciences Holdings, Inc. To that end, on June 30, 2021 we entered into the Exchange Agreement with Panacea and the Panacea stockholders and as a result became a seed-to-sale CBD company. The former Panacea stockholders have assumed majority control of the Company, and all our operations are now operated through Panacea which because of the share exchange became a wholly-owned subsidiary of the Company. Leslie Buttorff, who became the Company’s Chief Executive Officer and a director upon the closing of the share exchange, also became our principal stockholder through common stock and Convertible Preferred Stock issued to her and entities she controls.
Panacea, the Company’s subsidiary after the share exchange, which was founded by Leslie Buttorff in 2017 as a woman-owned business, attracted a $14 million investment from 22nd Century Group, Inc., or XXII, a plant biotechnology company which also has a focus on CBD products and technology, during 2019. XXII has retained a 15% stake in the Company following the share exchange. Through Panacea, we are dedicated to developing and producing the highest-quality, most medically relevant, legal, hemp-derived cannabinoid products for consumers and pets. Beginning at a farm Panacea has the option to own a parcel of the farm located at Needle Rock, Colorado and leases laboratory space within a 51,000 square foot, state-of-the-art, cGMP, extraction, manufacturing, testing and fulfillment center located in Golden, Colorado, Panacea operates in every segment of the CBD product value chain. From cultivation to finished goods, Panacea ensures its products with stringent testing protocols employed at every stage of the supply chain. Panacea endeavors to offer pure natural remedies within product lines for every aspect of life: PANA Health®, PANA Beauty®, PANA Sport®, PANA Pet®, PANA Pure® and PANA Life®
In the first quarter of 2022 we obtained additional registration on two more of our six brands and our mark, so we now have registered trademarks on all of our brands.
Currently Panacea sells over 60 different product SKUs of CBD and CBG products. In addition, we offer “white label” licensing to retail businesses and contract manufacturing services to smaller CBD companies and softgel manufacturing to nutraceutical companies.
We were also engaged by a third-party company to develop various formulations for pet products and human products.
We believe that our competitive advantages are derived from being vertically integrated that allows for extraction, enrichment and manufacturing under a cGMP quality environment: 1) Using pharmaceutical formulation methods to optimize the delivery of various hemp products, 2) Developing both full spectrum and THC-free products, 3) Hemp supply, and 4) utilize Good Manufacturing Practice to produce goods that are safe and quality products that deliver consistent dosing. The ability to produce both full spectrum products (those that contain <0.3%) and THC-free products allows us to optimize dosage and delivery to various human conditions. Removal of the THC from products is a difficult and expensive process, but we believe this is essential for specific patient populations; such as, athletes where testing positive for THC would lead to disqualification, first responders who would be terminated for testing positive for THC, and in animal products where even a small amount of THC can lead to toxicity and potential lethality. Industrial hemp extracts are found to have particular application as neuroprotectants, for example in limiting neurological damage and increasing speed of recovery with traumatic brain injury. The cannabinoids have also been reported to treat human disease conditions where currently multiple pharmacologicals are needed to address, e.g., Post Traumatic Stress Disorder (PTSD), or where there is no current cure such as Alzheimer’s, Parkinson’s Disease, and age-related dementia, to name a few.
Although numerous reports describe cannabis/hemp extract health benefits the industry lacks sufficient clinical data and quality control to provide patient benefit. We are combining human and pet clinical studies with Good Manufacturing Process manufacturing to generate a panel of products. Our products are formulated with delivery methods for health benefits including an intellectual property portfolio enabling development of topical creams, sublinguals, oral soft gel capsules, patches, and sprays. Our products are derived from organic practices industrial hemp grown in Colorado.
We believe a multitude (hundreds) of companies, large and small, have launched or intend to launch retail brands and white label products containing cannabinoids like CBD, including retail and seed-to-sale companies that are larger and better capitalized than we are and/or which offer products similar to ours with a larger geographic scope of operations and a market presence. Many of these are dependent upon third parties to provide raw material inventory for sale. We believe this makes many of the participants in the industry vulnerable to shortages, quality issues, reliability, and pricing variability. Our industry relationships may allow us to build an efficient supply chain that will put us among the few companies that maintain a competitive pricing and supply advantage. The CBD-based consumer product industry is highly fragmented with numerous companies. There are also large, well-funded companies that currently do not offer hemp-based consumer products including large agribusiness companies but may do so in the future and become significant competitors. Our goal is to be a leader in wholesale and retail sales channels for end-products, such as nutraceuticals, supplements and pet and farm products. As government regulation of CBD and related products becomes more lenient in certain jurisdictions, and other barriers to entry decline, we anticipate experiencing an increase in competition and an intensifying competitive environment, including potentially the introduction of new seed-to-sale companies and/or the expansion of operations by current competitors. Further, numerous other factors are expected to be critical to our ability to be and remain competitive in our business and goals, including product quality and prices, brand strength, production and distribution capabilities and geographic scope of operations and market presence. Additionally, market conditions can shift demand for CBD products, such as competitive pricing, the effects of inflation, regulatory changes and economic or geopolitical turmoil.
Our Industrial Hemp Supply
In 2019, Panacea acquired Needle Rock Farms (NRF) in Crawford, Colorado. Our 2020 hemp crop was grown at NeedleRock Farms. Also, in December, 2019 XXII made a $14 million investment in Panacea which consisted of $7 million in preferred stock and $7 million in convertible debt. XXII also was to provide an additional $10 million in funding at a later point in time. On June 30, 2021 Panacea and XXII agreed to dissolve the agreement and agreed on the following: the preferred stock was converted to common stock; a $4.3 million loan was secured against the laboratory space owned by J&N Real Estate, LLC (owned by Panacea’s CEO), the NRF and equipment would be transferred to XXII in exchange for a reduction of $2.2 million in convertible debt, 10 acres of the farm would be sub platted to Panacea, $500,000 in hemp would be delivered from the 2021 crop yield, and a 15-year agreement for hemp supply would be finalized after the deal was completed. In 2021 XXII was the grower at NRF and achieved USDA Organic certification for the farm. As of the date of this Report, XXII has not delivered the $500,000 of hemp to Panacea, nor have we closed on the 10 acres. However, we also have the 2020 NRF crop and several hemp tolling contracts in which the output of crude and or distillate is shared with the growers to process.
Partnership with Universities
The grand opening of the Panacea Life Sciences Cannabinoid Research Center at Colorado State University was held on October 19, 2021. The first studies at the center are underway for isolation of rare cannabinoids, examining cannabidiol’s effects on Inflammatory Bowel Disease (IBS), canine and human dementia, as well as supporting research into chronic pelvic pain. We have also signed an agreement with the Colorado School of Mines in the area of developing hemp-based sustainability products.
Company Information Technology Infrastructure
The ERPCannabis system is based on an SAP architecture and was used to develop the base installation. All financial, human resource, payroll, procurement, production planning and materials management business processes are represented in this system. In addition, the system is linked to our e-Commerce website www.panacealife.com. This system allows us to update product costing and determine inventory levels which will be critical as the company expands. In addition, sophisticated financial and payroll processing are inherent in the solution; thus, offering investors detailed accounting results related to company investments. We plan to expand on the use of this infrastructure for acquisitions and service offerings.
Results of Operations
Set forth below is the discussion of the results of operations of the Company for the three months ended March 31, 2022 compared to the three months ended March 31, 2021. The information which follows relates to the operations of Panacea which under applicable accounting rules are treated as the operation of the Company.
Three Months Ended March 31, 2022 and 2021
Net Revenues
We are principally engaged in the business of producing and selling products made from industrial hemp. Revenue consists of sales of our six category of brand products, white label and contract manufacturing sales to other CBD companies, raw material sales (distillate and isolate), tolling products, and leasing space. We also have revenue from the sale of our Personal Protection Equipment (PPE) inventory and non-CBD nutraceutical companies.
Our revenues for the three months ended March 31, 2022, decreased by $45,664, or 9%, to $466,474 as compared to $512,138 for the three months ended March 31, 2021. The decrease in sales in 2022 was due primarily to fewer white label customers.
Cost of Sales
Cost of sales for the three months ended March 31, 2022, increased by $36,254 or 11% to $366,091 as compared to $329,837 for the three months ended March 31, 2021. The increase in cost of sales was due primarily to increased raw material costs. The primary components of cost of sales include the cost of manufacturing the CBD products.
Operating Expenses
Operating expenses for the three months ended March 31, 2022, increased by $474,390, or 37%, to $1,748,367 as compared to $1,273,977 for the three months ended March 31, 2021. This is due to increases in both operating expenses and general and administrative expenses.
Operating expenses for the three months ended March 31, 2022, increased by $299,882, or 30%, to $1.288 million as compared to $0.988 million during the three months ended March 31, 2021. The increase in production related operating expenses is primarily due to increased salary and labor costs and increased storage costs.
General and administrative expenses for the three months ended March 31, 2022, increased by $174,508, or 59%, to $0.456 million as compared to $0.286 million during the three months ended March 31, 2021. The increase in general and administrative costs is primarily due to increased legal and audit costs as part of becoming a publicly traded company as well as a one-time fee paid for entrance into the Brazil market.
Other income (expense)
Other income for the three months ended March 31, 2022, decreased by $2,596,589 or 178% to ($1,134,262) as compared to 1,462,326 for the three months ended March 31, 2021. The decrease in other income is primarily due to the unrealized loss of marketable securities held.
Liquidity and Capital Resources
Cash flows from operating activities
The largest source of operating cash is from our customers. A large majority of our customers purchase CBD on-line, so credit card payments are collected and paid within 1-2 business days. Other white label and contract manufacturing customers pay before the products are released. Some larger customers have either net 10-, 2%- or 30-day net terms. Net cash used in operating activities was $436,043 and $795,228 for three months ended March 31 for 2022 and 2021, respectively. Approximately $2.1 million of our $2.8 million net loss in 2022 was non-cash.
Cash flows from investing activities
Cash outlay for the acquisition of fixed assets comprised the majority of this category and were $0.010 million and $0.087 million for the three months ended March 31, 2022 and 2021, respectively.
Cash flows from financing activities
Net cash provided by financing activities for the three months ended March 31, 2022 was $0.482 million. For the same period in 2021 the financing was $0.895 million. In both years the primary financing was cash provided by Company’s CEO. In 2021, there was a cash payment received of $0.243 from the paycheck loan program.
On March 31, 2022, we had $2.903 million in cash and liquid stock of XXII. The Chief Executive Officer of the Company holds the XXII shares pursuant to the pledge agreement and has the power at any time to permit the Company to sell the shares to provide working capital. In August 2021, 70,000 shares were sold for working capital. Panacea has borrowed substantial sums from Leslie Buttorff, our Chief Executive Officer, to meet its working capital obligations. On March 31, 2022 Panacea issued an affiliate of Ms. Buttorff a 12% demand promissory note for $4.063 million and issued Ms. Buttorff a 10% demand promissory note for $1.624 million secured by a pledge of certain XXII common stock owned by Panacea. On July 1, 2021, the Company issued Ms. Buttorff a $1 million line of credit note at 10% annual rate which Ms. Buttorff has increased that expired in January 2022, which Ms. Buttorff has extended to January, 2023 and increased the line of credit to $1.5 million.
We do not have sufficient cash resources to sustain our operations for the next 12 months, particularly if the large sales agreements and purchase orders we have do not result in the revenue anticipated. We may be dependent on obtaining financing from one or more debt or equity offerings or further loans from Ms. Buttorff assuming she agrees to advance further funds.
These unaudited condensed consolidated financial statements are presented on the basis that the Company will continue as a going concern. The going concern concept contemplates the realization of assets and satisfaction of liabilities in the normal course of business. No adjustment has been made to the carrying amount and classification of the Company’s assets and the carrying amount of its liabilities based on the going concern uncertainty. These factors raise substantial doubt about the Company’s ability to continue as a going concern for a period of 12 months from the issuance date of this report. Management cannot provide assurance that the Company will ultimately achieve profitable operations or become cash flow positive or raise additional debt and/or equity capital. In addition, due to insufficient revenue, we will need to obtain further funding through public or private equity offerings, debt financing, collaboration arrangements or other sources in order to maintain active business operations. We currently do not have sufficient cash flow to pay our ongoing financial obligations on a consistent basis. The issuance of any additional shares of common stock, preferred stock or convertible securities could be substantially dilutive to our stockholders. In addition, adequate additional funding may not be available to us on acceptable terms, or at all. If we are unable to raise capital, we will be forced to borrow additional sums from our Chief Executive Officer or delay, reduce or eliminate our research and development programs, we may not be able to continue as a going concern, and we may be forced to discontinue operations. These unaudited condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Off Balance Sheet Arrangements
As of March 31, 2022, we had no material off-balance sheet arrangements.
Potential Impacts of the COVID-19 Pandemic on Our Business Operations
As disclosed in Note 2, the COVID-19 pandemic has had a notable impact on general economic conditions, including but not limited to the temporary closures of many businesses, “shelter in place” and other governmental regulations, reduced business and consumer spending due to both job losses and reduced investing activity, among many other effects attributable to the COVID-19 pandemic. Presently we do not know whether future variants will have an adverse effect on our operations.
Various variants may extend throughout 2023.
Potential Impacts of Certain Current and Proposed Regulations on Our Business and Operations
Recently, a bill titled the Cannabis Administration and Opportunity Act, put forward by Senate Majority leader Chuck Schumer, D-NY, would amend the definition of a dietary supplement to remove the prohibition on marketing CBD as a dietary supplement. Management sees the bill, if enacted, as an opportunity for the FDA to accelerate their decision to classify CBD products as a dietary supplement. This would be a significant step for hemp/CBD companies as it would open the door to new selling opportunities, such as getting into retail stores, who have largely been hesitant to welcome CBD in their doors without a clear position from the FDA.
Many people are increasingly turning to CBD products for several reasons: CBD is non-psychoactive, so it does not produce a “high” like THC, there are few known contraindications, the properties of different cannabinoids can positively affect a wide range of ailments, and cannabinoids work directly and indirectly with the body’s endocannabinoid system to create balance known as homeostasis. As demand increases, we believe the FDA must provide more clarity about CBD’s legalization, and this bill is a promising first step.
For now, many companies that produce hemp-derived CBD products including Panacea undertake to abide by the same regulations as any other dietary supplements like ingredient filings, good manufacturing practices (GMP), and labeling and marketing provisions. Panacea will continue to sell CBD and other hemp-derived products while still awaiting a clear path from the FDA about how CBD products can be marketed and used.
Cautionary Statement Regarding Forward-Looking Statements
This quarterly report on Form 10-Q (this “Report”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about our new operations in the hemp industry through Panacea, our expected revenue growth, our human resources following our recent acquisition of Panacea, proposed federal legislation and its potential impact on the CBD industry, our business relationship with XXII, our plans to raise capital, and our liquidity. Words such as “expects,” “anticipates,” “plans,” “believes,” “seeks,” “estimates,” “could,” “would,” “may,” “intends,” “targets” and similar expressions or variations of such words are intended to identify forward-looking statements but are not the exclusive means of identifying forward-looking statements in this Report. The identification of certain statements as “forward-looking” is not intended to mean that other statements not specifically identified are not forward-looking. All statements other than statements about historical facts are statements that could be deemed forward-looking statements, including, but not limited to, statements that relate to our future revenue, product development, customer demand, market acceptance, growth rate, competitiveness, gross margins, and expenditures.
Although forward-looking statements in this Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Further information on the risks and uncertainties affecting our business is contained in our filings with the SEC, including this Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. We undertake no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or otherwise. Such risks, uncertainties and changes in condition, significance, value, and effect could cause our actual results to differ materially from those expressed herein and in ways not readily foreseeable. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report and are based on information currently and reasonably known to us. We undertake no obligation to revise or update any forward-looking statements to reflect any event or circumstance that may arise after the date of this Report, other than as required by law. Readers are urged to carefully review and consider the various disclosures made in this Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.
Critical Accounting Estimates and New Accounting Pronouncements
New Accounting Pronouncements
See Note 2, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES to the unaudited condensed consolidated financial statements contained in Part I, Item 1 of this amendment No. 1 to the Quarterly Report on Form 10-Q.
Critical Accounting Estimates
The discussion and analysis of the Company’s financial condition and results of operations is based upon the Company’s condensed consolidated financial statements, which have been prepared in accordance with US GAAP. The preparation of the Company’s condensed consolidated financial statements requires its management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures. The Company’s management bases its estimates, assumptions and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Different assumptions and judgments would change the estimates used in the preparation of the Company’s condensed consolidated financial statements which, in turn, could change the results from those reported. In addition, actual results may differ from these estimates and such differences could be material to the Company’s financial position and results of operations.
Critical accounting estimates are those that the Company’s management considers the most important to the portrayal of the Company’s financial condition and results of operations because they require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company’s critical accounting estimates in relation to its condensed consolidated financial statements include those related to:
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Business combinations |
Goodwill and Indefinite-Lived Intangibles
We allocate the cost of acquired companies to the identifiable tangible and intangible assets acquired and liabilities assumed, with the remaining amount classified as goodwill. The identification and valuation of these intangible assets and the determination of the estimated useful lives at the time of acquisition, as well as the completion of impairment tests, require significant management judgments and estimates. These estimates are made based on, among other factors, review of projected future operating results and business plans, economic projections, anticipated highest and best use of future cash flows and the cost of capital. The use of alternative estimates and assumptions could increase or decrease the estimated fair value of goodwill and other intangible assets, and potentially result in a different impact to our results of operations. Further, changes in business strategy and/or market conditions may significantly impact these judgments and thereby impact the fair value of these assets, which could result in an impairment of the goodwill or intangible assets.
Goodwill is not amortized but is tested for impairment annually and whenever events or circumstances change that indicate impairment may have occurred. We tested goodwill for impairment and determined there was no impairment and found not impairment charge based on the excess of a reporting unit’s carrying amount over our fair value.
Fair value of marketable securities
Marketable securities are recorded at fair value using the quoted market prices and changes in fair value are recorded as net realized gains or losses in comprehensive income. We monitor these investments for impairment and make appropriate reductions in carrying values as necessary.
Incremental Borrowing Rate used Right of Use Asset Calculations
We determine if a contract is a lease or contains a lease at the inception of the contract and reassess that conclusion if the contract is modified. All leases are assessed for classification as an operating lease or a finance lease. Operating lease right-of-use, or ROU, assets are included in non-current other assets on our consolidated balance sheet. Operating lease liabilities are separated into a current portion, included within other accrued liabilities on our consolidated balance sheet, and a non-current portion, included within other long-term liabilities on our consolidated balance sheet. We do not have any finance lease ROU assets or liabilities. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. We do not obtain and control the right to use the identified asset until the lease commencement date.
Our lease liabilities are recognized at the applicable lease commencement date based on the present value of the lease payments required to be paid over the lease term. Because the interest rate implicit in the lease is not readily determinable, we generally use our incremental borrowing rate to discount the lease payments to present value. The estimated incremental borrowing rate is derived from information available at the lease commencement date. We factor in publicly available data for instruments with similar characteristics when calculating our incremental borrowing rates. Our ROU assets are also recognized at the applicable lease commencement date. The ROU asset equals the carrying amount of the related lease liability, adjusted for any lease payments made prior to lease commencement and lease incentives provided by the lessor. Variable lease payments are expensed as incurred and do not factor into the measurement of the applicable ROU asset or lease liability.
Business Combinations
We have applied significant estimates and judgments in order to determine the fair value of the identified assets acquired, liabilities assumed and goodwill recognized in connection with our business combinations to ensure the value of the assets and liabilities acquired are recognized at fair value as of the acquisition date. In measuring the fair value, we utilize valuation techniques consistent with the market approach, income approach, or cost approach.
The valuation of the identifiable assets and liabilities includes assumptions made in performing the valuation, such as projected revenue, weighted average cost of capital, discount rates, estimated useful lives, and other relevant assessments. These assessments can be significantly affected by our estimates, judgments, and assumptions. If actual results are not consistent with our estimates, judgments, or assumptions, or if additional or new information arises in the future that affects our fair value estimates, then adjustments to our initial fair value estimates may have a material impact to our purchase accounting or our results of operations. If actual results are not consistent with our estimates, judgments, or assumptions, or if additional or new information arises in the future, beyond our one-year measurement period, that affects our fair value estimates, then adjustments to our initial fair value estimates may have a material impact to our results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
A smaller reporting company is not required to provide the information required by this Item.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Our management carried out an evaluation, with the participation of our Principal Executive Officer (who also now serves as our Principal Financial Officer), required by Rule 13a-15 or 15d-15 of the Securities Exchange Act of 1934 (the “Exchange Act”) of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act. Based on their evaluation, our Principal Executive Officer (who also now serves as our Principal Financial Officer) concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
For the year-ended December 31, 2021, our Principal Executive Officer (who also now serves as our Principal Financial Officer) concluded that our disclosure controls and procedures were ineffective as of the end of that period. Since then, the Company has implemented three primary types of accounting controls that fall into categories of detection, preventive and corrective controls. These allow us to maintain effective controls for our financial reports. Using our ERP SAP system many accounting controls are already configured such as segregation of duties, independent user IDs and passwords and bank reconciliations. Other trial balance checks are completed within the system. In addition, monthly inventory and asset reconciliations are completed. Standard Operating Procedures are used throughout the organization, not only in the financial areas, but in all areas to maintain our GMP certifications for manufacturing. As a result, we believe that we have remediated the underlying issues.
Except as noted above, there were no changes in our internal control over financial reporting as defined in Rule 13a-15(f) or 15d-15(f) under the Exchange Act that occurred during the period covered by this report that have materially affected, or are 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 legal proceedings arising in the ordinary course of business. We are unable to predict the outcome of any such matters or the ultimate legal and financial liability, and at this time cannot reasonably estimate the possible loss or gain or range of loss/gain and accordingly have not accrued a related liability.
ITEM 1A. RISK FACTORS.
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES OR USE OF PROCEEDS.
During the three months ended March 31, 2022, the Company Issued 123,334 shares of the Company’s common stock to the former Chief Strategy Officer of the Company in connection with the cashless exercise of stock options, as well as 447 shares the Company owed the former Chief Strategy Officer for inadvertently issuing less shares of common stock than the amount indicated on the Subscription Agreement dated January 18, 2019. The issuance of the shares was exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933 and Rule 506(b) promulgated thereunder.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
* Management contract or compensatory plan or arrangement.
** Exhibits and/or Schedules have been omitted. The Company hereby agrees to furnish to the Securities and Exchange Commission upon request any omitted information.
*** This exhibit is being furnished rather than filed and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K.
+Portions of this exhibit have been omitted as permitted by the rules of the SEC. The information excluded is both (i) not material and (ii) would be competitively harmful if publicly disclosed. The Company undertakes to submit a marked copy of this exhibit for review by the SEC Staff, to the extent it has not been previously provided, and provide supplemental materials to the SEC Staff promptly upon request.
Copies of this report (including the financial statements) and any of the exhibits referred to above will be furnished at no cost to our shareholders who make a written request to Panacea Life Sciences Holdings, Inc., at the address on the cover page of this report, Attention: Corporate Secretary.
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.
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Panacea Life Sciences Holdings, Inc. |
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/s/ Leslie Buttorff |
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Leslie Buttorff |
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Chief Executive Officer |
nd ensure maximum efficacy.
