UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For
the fiscal year ended: September 30, 2022
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission
file number: 000-30233
Endexx
Corporation
(Exact
name of registrant as specified in its charter)
|
Nevada |
|
30-0353162 |
|
(State
of jurisdiction of |
|
(I.R.S.
Employer |
|
Incorporation
or organization) |
|
Identification
No.) |
|
38246 North Hazelwood Circle, Cave Creek, AZ |
|
85331 |
|
(Address
of principal executive offices) |
|
(Zip
Code) |
Registrant’s
telephone number, including area code: (480)
595-6900
Securities
registered pursuant to Section 12(b) of the Act
|
Title
of Each Class |
|
Trading
Symbol(s) |
|
Name
of each Exchange on which registered |
|
None |
|
EDXC |
|
None |
Securities
registered pursuant to Section 12(g) of the Act:
Common stock with a par value of $0.0001 per
share
(Title
of Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes ☐
No ☒
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐
No ☒
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes ☒
No ☐
Indicate
by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit 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.
Yes ☐
No ☐
Indicate
by check mark whether the registrant has filed a report on and
attestation to its management’s assessment of the effectiveness of
its internal control over financial reporting under Section 404(b)
of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report.
☐
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Act).
Yes ☐
No ☒
The
aggregate market value of the registrant’s voting and non-voting
common equity held by non-affiliates (based on the closing price of
the registrant’s common stock as quoted on the OTC Markets Group
Inc.’s Pink® Open Market as of the last business day of the
registrant’s most recently completed second fiscal quarter was
approximately $0.0399.
As of
January 9, 2023, there were 505,157,952 shares of common stock,
$0.0001 par value per share, outstanding.
TABLE
OF CONTENTS
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report contains forward-looking statements that involve
risks and uncertainties. These forward-looking statements are not
historical facts but rather are plans and predictions based on
current expectations, estimates, and projections about our
industry, our beliefs, and assumptions.
We
use words such as “may,” “will,” “could,” “should,” “anticipate,”
“expect,” “intend,” “project,” “plan,” “believe,” “seek,” “assume,”
and variations of these words and similar expressions to identify
forward-looking statements. These statements are not guarantees of
future performance and are subject to certain risks, uncertainties,
and other factors, some of which are beyond our control, are
difficult to predict and could cause actual results to differ
materially from those expressed or forecasted in the
forward-looking statements. These risks and uncertainties include
those described in the section entitled “Risk Factors.” You should
not place undue reliance on these forward-looking statements
because the matters they describe are subject to certain risks,
uncertainties, and assumptions that are difficult to predict. Our
forward-looking statements are based on the information currently
available to us and speak only as of the date on which they were
made. Over time, our actual results, performance, or achievements
may differ from those expressed or implied by our forward-looking
statements, and such difference might be significant and materially
adverse to our security holders. Except as required by law, we
undertake no obligation to update publicly any forward-looking
statements, whether as a result of new information, future events,
or otherwise. We have identified some of the important factors that
could cause future events to differ from our current expectations
and they are described in this Annual Report on Form 10-K (“Annual
Report”) under the captions “Risk Factors,” and “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations,” as well as in other documents that we may file with
the Securities and Exchange Commission (“SEC”), all of which you
should review carefully. Please consider our forward-looking
statements in light of those risks as you read this Annual
Report.
PART
I
Item 1. Business.
Overview
We
develop hemp-derived, cannabidiol-based products, each formulated
to address key segments of the health and wellness market. Through
our subsidiaries and strategic partnerships, we sell high-end,
full-spectrum oils, extracts, topicals, and pet products, all with
the shared purpose of supporting the potential of relief of pain
and inflammation for humans and pets through our e-commerce site
www.cbdunlimited.com, as well as other online and in-store
retailers. Our products are built upon three key fundamentals:
targeted-delivery, controlled-dosing, and dual-therapy
applications. Our products have been formulated with input from
nutrition experts, cosmetic specialists, and Doctors of Podiatric
Medicine; use American-sourced hemp-derived materials; and use the
highest quality natural ingredients. Each product undergoes
rigorous quality control checks to ensure that the final product is
of the highest possible quality and is tested and verified by
independent laboratories. (See, “Government Regulation.”) We
continue to invest in research and development in order to develop
new products and delivery methods. We plan to scale our production
to meet growing consumer demand by entering into new joint ventures
and securing commitments from large retailers with national
presence.
In
addition to our consumer products, our Gorilla-Tek division offers
a state-of-the art automated dispensing system providing a secure
method of distributing hemp-based products. The proprietary system
enables retailers to increase sales channels without opening a
physical storefront location. Complementing our retail products and
Gorilla-Tek divisions, we also own and operate a number of
wholly-owned subsidiaries that offer technology and consulting
solutions to the hemp and hemp-derived product industry, including
an easy to use “Seed-to-Shelf” compliance and inventory tracking
and process management system for regulated products in a front of
counter pharmacy support platform.
We
are led by a management team and advisory group that has decades of
experience in the pharmacy, medical, hemp-derived products,
nutraceutical, and health supplement industries. Our strategic
partnerships include leading regulated hemp farms, manufacturers,
marketers, and retailers with national presence, all supporting the
development and sale of our hemp-derived products. We are based in
Cave Creek, Arizona.
Historical Overview
The
Company was incorporated in the State of Nevada on September 5,
1997 as Micron Solutions, Inc. (“Micron Solutions”), in order to
complete a merger with Shillelagh Ventures Chartered, a Utah
corporation (“Shillelagh”). In November 1997, Shillelagh merged
with and into Micron Solutions, with Micron Solutions as the
surviving entity.
In
2002, Micron Solutions entered into an Exchange Agreement (the
“Exchange Agreement”) with PanaMed, Inc., a California corporation,
formerly known as PanaMed Africa, Inc., and all of its
shareholders, pursuant to which they transferred and assigned their
common shares to Micron Solutions in exchange for an equal number
of shares of common stock of Micron Solutions, thereby causing
PanaMed, Inc. to become a wholly-owned subsidiary of Micron
Solutions. In connection with the Exchange Agreement, Micron
Solutions (i) changed its name to PanaMed Corporation (“PanaMed
Corporation”), (ii) effected a 1-for-10 reverse stock split, such
that every ten shares of PanaMed Corporation’s common stock became
one share of its common stock, and (iii) amended its Articles of
Incorporation similarly to decrease the number of its authorized
shares of capital stock by the same ratio as the reverse stock
split ratio. From 2002 to 2005, PanaMed Corporation operated as a
biotech service and licensing company, investing capital into
biotechnologies and conducting therapeutic treatment programs in
the Ivory Coast, Africa.
In
June 2005, we filed a Certificate of Amendment to our Articles of
Incorporation with the Secretary of State of the State of Nevada to
change our name to Endexx Corporation. At that time, we adopted our
current trading symbol, “EDXC.” In September 2005, we acquired
Visual Board Books, Inc. (“VBB”), a Software-as-a-Service (“SaaS”)
developer, through a merger, whereby VBB merged with and into us,
and we were the surviving entity. Subsequently, we operated as a
diversified technology and SaaS and compliance and tracking systems
company until we shifted our focus to the hemp-derived product
industry in August 2014. In October 2018, we changed our name to
CBD Unlimited, Inc., and in May 2020, we changed our name back to
Endexx Corporation, with CBD Unlimited, Inc., becoming our
wholly-owned subsidiary. On January 25, 2021, we filed our Amended
and Restated Articles of Incorporation.
Operating Subsidiaries
We
currently have two primary operating subsidiaries:
Go
Green Global Enterprises, Inc.
We
acquired Go Green Global Enterprises, Inc., a Nevada corporation
(“Go Green Global”), pursuant to a Common Stock Share Exchange
Agreement (the “GG Share Exchange Agreement”), dated May 1, 2018,
with Go Green Global, as subsequently amended by the First Amended
Common Stock Share Exchange Agreement, dated July 10, 2018 (the
“Amendment”; and, together with the GG Share Exchange Agreement,
the “Amended Exchange Agreement”). Pursuant to the Amended Exchange
Agreement, we issued 10,000,000 restricted shares of our Common
Stock to the two former equity owners of Go Green Global in
exchange for 20,000,000 restricted shares of Go Green Global’s
common stock, which constituted all of its post-closing issued and
outstanding shares of common stock, and resulted in Go Green Global
becoming our wholly-owned subsidiary. The GG Share Exchange
Agreement was the first step in our proposed entry into the
Jamaican cannabis market.
In
June 2018, Go Green Global entered into an Agreement for the
Assignment and Assumption of Contracts, Intellectual Property,
Trade Secrets, and Business Opportunities (the “Go Green Global and
Jamaica Assignment”) with Go Green Global Enterprises Limited, a
Jamaican corporation (“Go Green Jamaica”), in furtherance of Go
Green Global’s business strategy to commence operations in Jamaica.
As a result of the Go Green Global and Jamaica Assignment, Go Green
Global now owns 49% of the ordinary shares of Go Green Jamaica. The
remaining 51% of the ordinary shares are held by Go Green Jamaica’s
legacy equity owners (including one of its directors, Kent Gammon),
each of whom is otherwise unaffiliated with the Company. Our Chief
Executive Officer, Todd Davis, serves as one of the three directors
of Go Green Jamaica and as its President.
Pursuant
to the Go Green Global and Jamaica Assignment, Go Green Jamaica
assigned to Go Green Global certain assets, including (i) two
consulting agreements, (ii) a lease for approximately 1,200 square
feet of retail space to be operated as a “retail herb house” to be
located in Ocho Rios, Jamaica, now that a “Retailer Licence” has
been obtained from the Cannabis Licensing Authority of Jamaica (the
“Jamaica CLA”), (iii) a lease for approximately one acre to be used
to grow cannabis once the relevant license for growing operations
has been obtained from the Jamaica CLA, and (iv) license
applications to grow, cultivate, process, package, and sell medical
cannabis in Jamaica. As of June 17, 2021, Go Green Global has
become licensed by the Jamaica CLA for retail sales and, prior to
the date of this Annual Report on Form 10-K, the Jamaica CLA
granted a provisional license for cultivation. We expect to
commence retail operations on or about September 1, 2021. We expect
that the cultivation license process will be completed in
approximately six months, which will allow Go Green Jamaica then to
commence its cultivation operations in Jamaica.
Together
One Step Closer, LLC
We
acquired Together One Step Closer, LLC, an Arizona limited
liability company, doing business as Holistic Earth Remedies
(“Holistic Earth Remedies”), pursuant to a Stock Purchase Agreement
(the “Holistic SPA”), dated November 8, 2017, entered into between
Holistic Earth Remedies and us. Pursuant to the Holistic SPA, we
acquired all of the issued and outstanding equity interests in
Holistic Earth Remedies and, in consideration thereof, we issued
1,000,000 restricted shares of our Common Stock to its then-sole
member, who was otherwise unaffiliated with us. Holistic Earth
Remedies specializes in the formulation, production, and sales of a
full line of topical lotions, gels, salves, balms, and spray
applications for the potential natural relief of pain,
inflammation, stress, and mild skin irritation. Holistic Earth
Remedies currently has limited operations. It distributes
third-party manufactured hemp-derived products that are sold at
select health spas, fitness centers and alternative medicine
outlets.
Additionally,
we recently completed three acquisitions in connection with our
business plan:
Kush
Inc.
On
February 1, 2020, we entered into a Stock Purchase Agreement with
Kush Inc. (aka Kushwear; “Kush”), pursuant to which agreement we
acquired all of the issued and outstanding shares of capital stock
of Kush. In consideration thereof, at the closing of the
transaction, we issued 500,000 restricted shares of our Common
Stock to Charles Mohr, the sole shareholder of Kush, and are
obligated to issue up to an additional 500,000 restricted shares of
our Common Stock upon meeting certain milestones. One hundred
twenty-five thousand of such additional restricted shares of our
Common Stock will be issued upon the occurrence of each of the
following events: (i) Kush clients generating $150,000 in gross
sales revenue, (ii) 3,000 points of distribution being established,
(iii) a positive return on investment being established in the
first year of the agreement (which event did not occur), and (iv)
the achievement of 200,000 “likes or engagements” (in any
combination) in social media. We purchased Kushwear for rebranding
purposes to reach a younger demographic with our clothing line and
hemp-derived products. As of the date of this Amended Registration
Statement, the website has been completed, but we have not launched
our sales activities.
CBD
Life Brands, Inc.
On
March 1, 2020, we entered into a term sheet with CBD Life Brands,
Inc. (“CBDLB”), for the purchase of all of CBDLB’s digital and
social assets, intellectual property, and formulas/recipes for its
cannabidiol (“CBD”)-infused beverages for which we paid $100,000.
In connection with this transaction, the key employees of CBDLB
agreed to enter into standard three-year non-competition agreements
for our benefit. We are still in the process of developing
CBD-infused beverage formulations, and expect to launch new
products in late-2023.
Khode,
LLC
On
October 1, 2020, we entered into an LLC Operating Agreement of
Khode, LLC (“Khode”) and, in May of 2021, we entered into a
Membership Interest Purchase Agreement that resulted in a minor
adjustment to the holdings of the parties thereto. By virtue of
that agreement, we now own 70.01% of the membership interests of
Khode and, pursuant to the provisions of the Khode Operating
Agreement, are required to make a capital contribution of
$3,500,000. As of the date of this Annual Report on Form 10-K, we
have made a partial capital contribution in the amount of
approximately $1,500,000 and expect to raise the balance through
limited, private sales of our debt and equity securities. We cannot
provide any assurance that such financing will be available on
terms acceptable to us, at times required by us, if at all. If we
fail to make the entire capital contribution, we will be in breach
of our obligations under the Khode Operating Agreement. In the
event of such a breach, the 24.99% interest holder in Khode, a
Florida corporation known as Serious Promotions, Inc., will have
the right, exercisable by written notice given at any time on or
before the date which is twenty Business Days following the
occurrence of such event of default, to terminate the Endorsement
Agreement (as described in the second paragraph, below), with Khode
having a ten-month sell-off period with respect to all Branded
Products (as defined in the Khode Operating Agreement) then
manufactured but not yet sold.
Effective
January 22, 2021, we entered into a Percentage Payment Agreement
with a third party that is not otherwise affiliated with Khode,
pursuant to which we are obligated to pay to that third party an
amount equivalent to 2.1% of all cash received by Khode from its
net sales of certain products during the term of that Percentage
Payment Agreement, which will terminate when Khode has been
dissolved. As of the date of this Amended Registration Statement,
Khode has not generated any revenues and we cannot provide any
assurance that it will generate any revenues.
During
October 2020, Khode entered into a five-year Endorsement and
License Agreement with Serious Promotions, Inc., a Florida
corporation, f/s/o Khaled, professionally known as DJ Khaled, who
is an American artist, record executive and producer, and media
personality. Pursuant to that agreement, Khode is to create a
custom line of hemp-derived-infused oils, creams, and other beauty
products under DJ Khode’s brand and he is to promote the products
through personal appearances, the use of social media platforms,
participation in presentation videos, video, and audio “drops,” and
media quotes. In connection with DJ Khaled’s services, Khode is
obligated to make quarterly payments totaling an aggregate of
$5,000,000 by July 1, 2025, of which aggregate amount, as of the
date of this Annual Report on Form 10-K, Khode has tendered
$750,000 and expects to finance the balance of the quarterly
payments through cash flow from operations of Khode. As of the date
of this Annual Report on Form 10-K, Khode has not generated any
positive cash flow from operations and we cannot provide any
assurance that it will generate any cash flow from operations in
the future in an amount sufficient to, among other things, make
such quarterly payments.
Effective
August 31, 2022, we closed a transaction contemplated by an
Agreement (the “Hyla August Agreement”) with HYLA UK Holdco
Limited, a United Kingdom limited company (“Hyla UK”). Pursuant to
the terms thereof, we, through our specially formed transaction
subsidiary, purchased (the “Hyla Transaction”) 51% of the issued
and outstanding capital stock of Hyla US Holdco Limited, a Delaware
corporation (“Hyla”), a wholly-owned operating subsidiary of Hyla
UK. We are holding that 51% as an investment. (See Item
9b.)
Present and Future State of Operations
Among
our subsidiaries, acquisitions, and partnerships, CBD Unlimited,
Inc., Phytobites Inc., Holistic Earth Remedies, Go Green Global
Enterprises, and our operating agreement with Khode, LLC are
operational and in full effect. Over the coming months and years,
we intend to: (i) launch Go Green Global’s retail operation in
Jamaica; (ii) re-brand Kushwear’s line-up of sustainable clothing
and hemp-derived products; and (iii) develop CBDLB’s formula of
hemp-derived and infused beverages, and integrate them into our
product offering.
Overview of the Hemp-Derived Product Industry
The
Difference Between Hemp and Marijuana
Both
marijuana and hemp come from the same species of plant called
“Cannabis.” Hemp is a unique strain or species known as “Cannabis
Sativa L,” which, by dry weight, contains less than 0.3% THC
concentration. Cannabis Sativa L plants contain unique compounds
called cannabinoids and terpenoids. CBD is one of approximately 66
cannabinoids found in the Cannabis Sativa L plant and shares many
properties with cannabis (i.e., marijuana). Unlike CBD
derived from marijuana, CBD derived from the aerial parts of the
hemp plant contains less than three-tenths of one percent (0.3%) of
THC, the component that causes the psychoactive side-effects
commonly associated with marijuana. In general, hemp CBD-based
products that have a THC concentration of less than 0.3% is
generally considered “legal” in the United States, and yields a
product that some consumers believe contains the observed medicinal
benefits of traditional cannabis, without inducing its “high” in
consumers. Notwithstanding the beliefs of many consumers, the FDA
has not recognized any medical benefits derived from CBD. CBD is
available in several forms, such as isolates, distillates, and oil
extracts, including (i) hemp seed oil, which has no CBD, (ii)
full-spectrum CBD, which contains phyto-cannabinoids, such as THC,
CBN, THCA, CBC, and CBG in variable concentrations, and is
considered the most natural form of CBD, and (iii) broad-spectrum
CBD, which contains less-to-non-detectable THC than full-spectrum
CBD.
Market
Opportunity
We
believe that, with recent regulatory changes, the hemp-derived
product industry is poised for growth. Recent projections from BDS
Analytics Inc. and Arcview Market Research project that the
collective market for hemp-derived product sales is poised to
exceed $20 billion in the United States by 2024. This forecast
takes into account products sold through licensed dispensaries,
pharmaceuticals, and in the general retail market.
Many
believe this current and prospective growth is driven by education
and shifting attitudes towards hemp-derived Products. According to
a January 2019 Consumer Reports survey, an estimated 64 million
Americans have tried CBD in the preceding 24 months. A June 2019
Harris Poll reported that 86% of the survey takers had some
awareness of CBD and 56% of the survey takers indicated that they
support using CBD as a potential replacement for traditional pain
killers. The June 2019 Harris Poll also indicated that CBD users
tend to be younger, with over 10% of Americans between the ages of
18 and 44 years old using CBD regularly. Overall, males are more
likely to have tried CBD and are more likely to use it regularly:
10% of males responded that they used CBD on a regular basis, as
compared to just 4% of female respondents.
Our Products
The
hemp-derived product industry is still largely underserved against
the demand for natural and nutritional supplements and topicals.
With the industry poised for growth in the coming years, our
established portfolio of products and industry solutions can serve
multiple market segments. Our current products and service
offerings consist of two groups: (i) consumer products and (ii)
technology solutions.
Our
Current Consumer Products
Our
focus is on the development, manufacture, and distribution of
nutritional supplements and delivery systems for healthy living for
the nutraceutical consumer market in the form of hemp-based,
non-psychoactive cannabinoids and terpenoid extracts that are
infused into products. Our current products encompass hemp-derived
oils, topicals, extracts, drinks, premium chocolates, and a newly
launched premium blue line of hemp-derived health and beauty care
products. Our Phyto-bites are hemp-derived soft chews for animal
use that are formulated to promote health and potentially support
an improved quality of life.
According
to the National Institutes of Health, a “dietary supplement” is a
product that is intended to supplement the diet. A dietary
supplement contains one or more dietary ingredients (including
vitamins, minerals, herbs or other botanicals, amino acids, and
other substances) or their components; is intended to be taken by
mouth as a pill, capsule, tablet, or liquid; and is identified on
the front label of the product as being a dietary supplement. None
of our products is a dietary supplement.
We
have built a network of reliable suppliers of high-quality,
hemp-derived products and provide pharmacy-grade delivery systems
with consistent and precise dosages. The derived and finished
products are tested at the point of origin and retested in the
certified labs for contaminants, trace elements, potency, and
purity. All products are developed and produced in ISO 9000 and GMP
and OTC-certified facilities in collaboration with our distribution
partners throughout the United States and established licensed
medical hemp manufacturing and processing facilities.
We
believe that our product line is establishing a new standard in
quality, transparency, consistency, and accuracy. Using current
extraction technologies and sustainable cultivation practices, our
ultimate goal is to improve the safety, quality, and
bioavailability of hemp-derived products to our customers. All of
our products are sold on our e-commerce site,
www.cbdunlimited.com, which seamlessly brings together our
products, marketing content, and education into a single platform.
The Premium Blue Line is marketed to the mass pharmacy, mass
retail, and mass food markets.
Our
existing consumer products include energy drinks, water products,
tea bags, and K-Cup Pods and hemp-derived creams and
mists.
Products
Under Development and Implementation
Gorilla-Tek
We
have developed and, subject to manufacturing, are implementing
“Gorilla-Tek,” a secure automated inventory control and dispensing
system developed for managing high value items. The technology has
been re-engineered for the hemp-derived product and pharmacy
industries and offers retailers a new venue for selling
hemp-derived products in a safe and secure manner. The dispensing
system is a kiosk that comes in multiple forms and is no larger
than traditional vending machines. We also recently launched a
propriety application as an “end cap” machine designed to service,
educate, and advertise hemp-derived products as a self-contained
full-service store within in a store.
Gorilla-Tek
was acquired in connection with our acquisition of Dispense Labs
LLC in 2013 and uses proprietary software that is specifically
designed to secure and control compliant transactions and manage
inventory. We believe this will significantly improve
profitability, accountability, security, and customer satisfaction.
Gorilla-Tek is specifically designed and configured to dispense
hemp-derived products, regulated products, and prescription
refills, while also managing the supply chain, providing
up-to-the-minute accounting details, and protecting the security of
the product, as well as the consumer and/or patient accessing the
system. Gorilla-Tek has been tested in high-risk one in each of
three geographically dispersed locations: Santa Ana, California;
Denver, Colorado; and Kingston, Jamaica in licensed dispensaries.
Originally known as “Autospense,” Gorilla-Tek was rebranded to
reflect automated retail and remote retail applications better,
where additional security, age compliance, and tracking are
required. The Gorilla-Tek machines were strategically positioned at
high-traffic areas in order to promote easy access and significant
use. Initial results were promising, as retailers saw increased
sales, reduced theft of products, and stronger inventory control.
Subsequent to completion of testing, one of the machines is
currently located at the manufacturing facility in California, the
second is located at a retail establishment in Kingston, Jamaica,
and the third is located at the retail facility in Kingston,
Jamaica that we will operate now that we have received our license
for retail sales from the Jamaica CLA. We expect to release
Gorilla-Tek to the broader market in late-2022 and 2023, where we
intend to partner with national retailers interested in selling
hemp-derived products.
Dudad
“Dudad”
is an Acoustic Fingerprint Audio Ad Capture and advertising
application platform. Development of the base operating system has
been finalized. Additional investments will be required to
commercialize the technology, and there can be no assurance that we
will expend the resources necessary for commercialization, that we
will have available resources, or that the technology can even be
commercialized successfully. In order to commercialize Dudad, we
will need to update the software app to current Python integration
capabilities and then we will need to market it to the advertising
industry. Python is an open-source programming language managed by
the Python Software Foundation. WE believe that third-party
programmers will be able to update the software for an expenditure
of not more than $100,000. We do not currently know the economic
extent of the marketing required for Dudad. When ready, as to which
there can be no assurance, we expect to promote Dudad through
advertisements in Advertising Age and other industry
outlets.
Distribution Methods
All
of our products are currently sold online through our e-commerce
platform www.cbdunlimited.com, select distributors,
specialty sales groups, and brick-and-mortar retailers.
We
distribute our products throughout the United States, and now that
the Cannabis Licensing Authority of Jamaica has granted Go Green
Jamaica a “Retailer Licence,” we expect to commence the
distribution of our products on a limited basis in Jamaica through
Go Green Global and Go Green Jamaica commencing on or about
September 1, 2021. Our product offerings to be sold in Jamaica
through Go Green Global are expected to include medical cannabis
products regulated by the Jamaica CLA, hemp-derived products,
clothing, and other shop-related products. A portion of our sales
comes through our e-commerce platform, and orders are fulfilled at
our fulfillment center, which is located at our headquarters in
Cave Creek, Arizona. Demand for our products is generally
increasing and we are contemplating a transition of our
distribution to a third-party fulfillment center.
In
addition to our e-commerce website, several distributors carry our
products and sell them into mass pharmacy, retail stores, food
chains, convenience stores, gas station stores, and specialty
shops. Our current retail strategy entails targeting accounts and
regions throughout the United States where we believe our products,
including our hemp-derived creams and mists, are most likely to
succeed with retail shoppers. Our distribution and retail strategy
aims to increase our brand exposure and drive follow-on purchases
at retail locations that carry our products and through our
e-commerce platform. We intend to utilize social media, print,
radio, and digital marketing, as well as broad distribution
agreements. We currently have distribution agreements
with:
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Southern
Glazer’s Wine and Spirits, LLC: we entered into a 10-year (subject
to successive automatic five-year renewals) Master Distribution
Agreement, dated March 27, 2020, pursuant to which we appointed
SGWS as our sole and exclusive distributor of certain of our
products (as defined in the Agreement) to retail accounts that are
licensed to sell alcoholic beverages in the territory (as defined
in the Agreement), subject our rights to sell our products to
end-users in the territory through electronic commerce. |
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Impulse
Health LLC: we entered into a two-year (subject to successive
automatic two-year renewals) Sales Representative Agreement, dated
April 1, 2020, pursuant to which pursuant to which we appointed
Impulse Health as our exclusive sales representative of certain of
our products (as defined in the Agreement) to certain accounts (as
defined in the Agreement). |
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Beauty
Strategy Group, LLC: we entered into a 12-month (subject to
extension mutually agreeable to the parties) Brand Consulting
Agreement, dated April 21, pursuant to which we granted Beauty
Strategy the right to act as our consultant and the authorization
to solicit orders from Ulta and Sephora in accordance with our
regular terms of sale and prices then in effect. |
Effective
on October 9, 2020, Khode entered into a Master Service Agreement
with Impact Brokers, LLC, for a term that continues for the
duration of the transactions contemplated by the Khode Operating
Agreement. During the term of that agreement, Impact Brokers will
provide to Khode strategic, creative, and operational support for
those transactions.
The
above summary description of each of the four agreements is not
intended to be comprehensive. For a more complete understanding of
each of the agreements, please see Exhibits 10.27, 10.28, 10.29,
and 10.30 to this Annual Report on Form 10-K.
During
our 2022 fiscal year, we did not have any significant
customer concentrations.
Marketing
The
key goal of our sales and marketing campaign is to provide broad
exposure of our products and their demonstrated potential
effectiveness to our target markets. We have adopted a
multi-pronged approach to market our products and build brand
awareness, encompassing digital, social, educational, and affiliate
marketing:
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Social
Media Marketing: We are capitalizing on the reach of social
media platforms, including Facebook, Instagram, and Twitter, to
work with social media influencers to increase our brand
awareness. |
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Digital
Ads and Search Engine Optimization: We are developing
personalized digital advertisements to target different consumer
segments and explain the potential benefits of our products.
Additionally, we intend to work with our partners and public
relations team to optimize search engine results for our brand in
the hemp-derived product category.
We
expect that our future marketing campaign will include:
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Affiliate
Marketing: We are in the process of adopting an affiliate marketing
campaign, where our sales teams and social media influencers will
market and sell our products through their network of contacts and
followers. We expect that our affiliate marketing campaign will
offer commissions on sales and referrals that should enable the
growth of our sales and brand awareness. |
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Television
and Radio Content: We intend to make regular appearances on
radio stations and news segments to discuss our Company and its
brands, and the hemp-derived product industry as a
whole. |
Competition
The
hemp-derived product industry is subject to significant competition
and is comprised of thousands of businesses, ranging from growers,
extractors, and manufacturers to distributors and retailers, and
this number is expected to grow substantially in the coming years.
We directly compete with small-to-mid-sized manufacturers with
annual revenues between $2 million and $20 million. However, if we
are successful in achieving our future growth targets, of which
there can be no assurance, we would compete with much larger
companies that generate annual revenues in excess of $50 million.
Some of our key competitors include Alternate Health Corp.,
Charlotte’s Web Holdings, Inc., Cresco Labs, Inc., Curaleaf
Holdings Inc., CV Sciences, Inc., Elixinol Global Ltd., Eviana
Health Corp., KannaLife, Inc., Ovation Science Inc., and Zynerba
Pharmaceuticals, Inc.
Competition
against these brands is fierce, with each manufacturer offering a
host of hemp-derived products directly competing with us. This can
over-populate the market with indistinguishable products and
brands, forcing customers to buy products with little information.
With so many brands in the market, having a competitive
differentiator is essential to attract customers. We believe our
products are superior to those of many of our competitors because
we have established formulations with controlled dosing and
delivery systems, and have tested this platform within the
healthcare industry with physicians, pharmacists, healthcare
service providers, and veterinarians through clinical trials or
other pharmacy collaborations. Additionally, we believe that
providing good customer service to our customers, through
transparency and education, will set us apart from our competitors.
However, it is possible that one or more of our competitors could
develop significant research or marketing advantages over us that
allows them to provide superior products or pricing, respectively,
which could put us at a competitive disadvantage.
Suppliers
We
have a network of suppliers and third-party service providers,
including state-certified hemp suppliers, manufacturers, and
distributors. We source all of our hemp from certified American
growers, and manufacture all of our products in CGMP, OTC,
Cosmetic, and ISO-certified facilities. Additionally, all of our
ingredients and finished goods are tested for purity and quality by
ISO-certified third-party laboratories: Delta Verde Laboratories,
DB Labs, LLC, and a division of Eurofins Scientific SE. We make
available to our customers copies of the laboratories’ certificates
of analysis, which disclose THC concentration, presence of metals,
pesticides, or any other harmful contaminants. We continuously
manage the risks associated with third-party suppliers and service
providers by continuously evaluating our supply chain for any
quality or manufacturing problems, and are continually identifying
alternative solutions to any potential issues.
Our Customers
We
are not dependent on any single customer for a significant portion
of our sales. However, we have customers who purchase our products
on a regular basis. We believe this loyalty is an essential factor
that will help differentiate our brand and products from our
competition. Our goal is to continue to build this loyalty from our
customers by offering the highest quality products and best
customer service in the hemp-derived product industry.
In
addition to the customers who visit our e-commerce platform, we
have strong relationships with wholesalers, distributors, and
retailers. Our products are now in approximately 6,400 retail
locations .
Government Regulation
In
2014, Congress enacted Section 7606 of the Agriculture Act of 2014
(the “2014 Farm Bill”), which provides for the domestic cultivation
of industrial hemp as part of agricultural pilot programs adopted
by individual states for the purposes of research by state
departments of agriculture and institutions of higher education.
The 2014 Farm Bill provides for the domestic cultivation of
industrial hemp in these pilot programs, notwithstanding other
federal laws, such as the Controlled Substances Act (the “CSA”).
The 2014 Farm Bill governed any current domestic production of
industrial hemp.
The
2014 Farm Bill’s provisions require states that choose to adopt
agricultural pilot programs to study the growth, cultivation, or
marketing of industrial hemp to do so in a manner that (i) ensures
that only institutions of higher education and state agriculture
departments are used to grow or cultivate industrial hemp; (ii)
requires that sites used for growing or cultivating industrial hemp
be certified with, and registered by, the states; and (iii)
authorizes state agriculture departments to regulate the pilot
programs. Within those parameters, the 2014 Farm Bill gives
significant discretion to states to determine whether to adopt an
industrial hemp pilot program, and to adopt regulations governing
industrial hemp (including marketing research involving products
derived from industrial hemp) under those pilot programs. Many of
the states that have adopted pilot programs have registered private
companies to participate in the pilot program. We worked with farms
and extraction facilities that were registered under Arizona’s
agricultural pilot program.
Under
the 2014 Farm Bill, any cannabis plant, plant part, or plant
product that contains a higher concentration of THC than permitted
in industrial hemp is considered a Schedule I substance under the
CSA and is not protected by the 2014 Farm Bill. In addition, any
industrial hemp plant, plant part, or plant product that is
produced outside of a state agricultural pilot program may be
considered unlawful but not a controlled substance.
In
December 2018, the Agriculture Improvement Act of 2018 (the “2018
Farm Bill”) was signed into law. Prior to its passage, hemp, a
member of the cannabis family, and hemp-derived products were
classified as Schedule I controlled substances, and so were
considered illegal under the CSA. With the passage of the 2018 Farm
Bill, hemp cultivation is broadly permitted outside of the state
agricultural pilot programs. The 2018 Farm Bill explicitly allows
the transfer of hemp-derived products across state lines for
commercial or other purposes. It also puts no restrictions on the
sale, transport, or possession of hemp-derived products, so long as
those items are produced in a manner consistent with the
law.
Additionally,
there will be significant, shared state-federal regulatory power
over hemp cultivation and production. Pursuant to the 2018 Farm
Bill, state agriculture departments must consult with the state’s
governor and chief law enforcement officer to devise a plan that
must be submitted to the Secretary of the United States Department
of Agriculture (the “USDA”). A state’s plan to license and regulate
hemp can only commence once the Secretary of the USDA approves the
state’s plan. In states opting not to devise a hemp regulatory
program, the USDA will construct a regulatory program under which
hemp cultivators in those states must apply for licenses and comply
with a federally-run program. This system of shared regulatory
programming is similar to options states had in other policy areas,
such as health insurance marketplaces under the Affordable Care
Act, or workplace safety plans under the Occupational Health and
Safety Act – both of which had federally-run systems for states
opting not to set up their own systems. The USDA has deferred
review and approval of state plans, establishing its umbrella plan
for hemp production in states without approved plans, and issuing
federal licenses to producers in such states until the agency
promulgates final implementing regulations. Until such time as the
USDA issues such final regulations, commercial hemp production
under the 2018 Farm Bill cannot legally begin. However,
research-related activities involving industrial hemp under the
more-restrictive 2014 Farm Bill may continue. The USDA has
expressed an intention to issue such final regulations in time for
producers to cultivate hemp for commercial purposes during the 2020
growing season; however, the timing and content of the USDA’s final
implementing regulations cannot be assured. Moreover, the 2018 Farm
Bill permits states to establish additional restrictions on hemp
production and hemp products than required under federal law,
although states may not interfere with the interstate
transportation of hemp or hemp products produced in compliance with
the 2018 Farm Bill.
Even
though the 2018 Farm Bill removed industrial hemp from the Schedule
I list, the 2018 Farm Bill preserved the regulatory authority of
the Food and Drug Administration (the “FDA”) over cannabis and
cannabis-derived compounds used in food and pharmaceutical products
pursuant to the Federal Food, Drug, and Cosmetic Act (the “FD&C
Act”) and Section 351 of the Public Health Service Act. The FDA has
stated that it intends to treat products containing cannabis or
cannabis-derived compounds as it treats any other FDA-regulated
products. The FDA requires a cannabis product (hemp-derived or
otherwise) that is marketed with a claim of therapeutic benefit, or
with any other disease claim, to be approved by the FDA for its
intended use before it may be introduced into interstate
commerce.
The
FDA has also stated that it is unlawful under the FD&C Act to
introduce food containing added CBD or THC into interstate
commerce, or to market CBD or THC products as, or in, dietary
supplements, regardless of whether the substances are hemp-derived.
Even though products containing cannabis and cannabis-derived
compounds remain subject to the FDA’s regulatory authority, there
are methods available for those companies who seek to lawfully
introduce these products into interstate commerce. For example, a
company can seek approval from the FDA to market a human or animal
drug that is derived from cannabis with therapeutic claims. In June
2018, the FDA approved Epidiolex, which is a CBD-derived drug
approved to treat epilepsy. The approval was based on adequate and
well-controlled clinical studies, which gives prescribers
confidence in the drug’s uniform strength and consistent delivery
that support appropriate dosing needed for treating patients with
epilepsy. The FDA’s position leaves a great deal of uncertainty in
interpreting the legal standing of CBD – the 2018 Farm Bill
legalizes the interstate commerce of hemp, but the FDA has made
statements indicating its desire to regulate CBD products, which
could significantly limit interstate commerce of CBD
products.
Additionally,
the Federal Trade Commission (“FTC”) regulates advertising of all
products, including for FDA-regulated articles made from hemp and
CBD derived from hemp.
Accumulated Deficit
We
have incurred operating losses since inception and have negative
cash flow from operations. As of September 30, 2022, we had an
accumulated deficit of $43,642,790 and incurred a net loss of
$4,128,946 for the year then ended. Additionally, as of September
30, 2021 we had an accumulated deficit of $39,513,844 and incurred
a net loss of $6,808,154 for our 2021 fiscal year.
Our
continuation as a going concern is dependent on our ability to
obtain additional financing until we can generate sufficient cash
flow from operations to meet our obligations. We intend to continue
to seek additional debt or equity financing to continue our
operations, but there can be no assurance that such financing will
be available on terms acceptable to us, if at all.
Intellectual Property
We do
not hold, nor have we applied for, any patents. As of the date of
this Annual Report on Form 10-K, we have one service mark for
“Endexx.” Additionally, we have applied for several trademarks of
our products’ names and logos, including “CBD Unlimited,” “Khode,”
and “Phyto-Bites.” As of the date of this Annual Report on Form
10-K, the US Patent and Trademark Office (USPTO) has not approved
any CBD-related trademarks, and, accordingly, our applications are
still pending.
Research and Development
Our
research and development expenses for the years ended September 30,
2022 and 2021 totaled $27,067 and $10,145, respectively, and relate
to the development of our products. None of these costs was borne
directly by our customers.
Employees
As of
January 12, 2023, we have approximately ten full-time employees.
None of our employees is covered by any collective bargaining
agreements and we have never experienced a major work stoppage,
strike, or dispute. We consider our relationship with our employees
to be outstanding.
Reports to Security Holders
We
are not currently required to file periodic reports with the
Commission, nor are we required to deliver an annual report to our
stockholders. However, in compliance with OTC Markets Group Inc.
(the “OTCM”) Alternative Reporting Standards, we file alternate
annual and interim reports, all of which can be found on the
disclosure tab of our company profile on the OTCM’s website at
https://www.otcmarkets.com/stock/EDXC/disclosure.
Because
our class of Common Stock is now registered pursuant to Section
12(g) of the Exchange Act, we are subject to the requirements of
Section 13(a) thereunder, which will require us to file Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current
Reports on Form 8-K, and are required to comply with all other
obligations of the Exchange Act applicable to issuers pursuant to
Section 12(g). Further, our directors and named executive officers
and beneficial owners of five percent (5%) or more of our Common
Stock will be subject to certain disclosure obligations under the
Exchange Act.
You
may read and copy this Annual Report on Form 10-K and any future
reports we file with the Commission free of charge through the
Commission’s website at www.sec.gov. You may obtain further
information about us on our websites at https://endexx.com/
and www.cbdunlimited.com. We caution the reader that none of
the information contained on such websites is incorporated into
this Annual Report on Form 10-K.
Item 1A. Risk Factors.
Investing
in our securities involves a high degree of risk. You should
carefully consider the risks and uncertainties described below,
together with all of the other information contained in this Annual
Report on Form 10-K or in any other documents incorporated by
reference into this Annual Report on Form 10-K, in light of your
particular investment objectives and financial circumstances.
Moreover, the risks so described are not the only risks we face.
Additional risks not presently known to us or that we currently
perceive as immaterial may ultimately prove more significant than
expected and impair our business operations. Any of these risks
could adversely affect our business, financial condition, results
of operations, or prospects. The quoted price of the Common Stock
could decline due to any of these risks and you may lose all or
part of your investment.
Risks
Related to Our Business
We have a limited operating history on which to judge our new
business prospects and management. We commenced operations
in the hemp-derived product industry in 2014 in the same year as
the 2014 Farm Bill became law and four years prior to the passage
of the 2018 Farm Bill. Accordingly, we have only a limited
operating history upon which to have to base an evaluation of our
business and prospects. Operating results for future periods are
subject to numerous uncertainties and we cannot assure you that we
will achieve or sustain profitability. Our prospects must be
considered in light of the risks encountered by companies in the
early stage of development, particularly companies in new and rapid
evolving markets. We cannot assure you that we will successfully
address any of these risks.
We have incurred significant net losses and cannot assure you that
we will achieve or maintain profitable operations. Our net
losses were $9,163,000 for the year ended September 30, 2020 and
$8,276,000 for the year ended September 30, 2019. As of September
30, 2020, we had a stockholders’ deficit of $11,654,000. The
increase in net losses was the result of the sum of certain
positive results in the 2020 fiscal year compared to the 2019
fiscal year (nominally increased revenues, enhanced by a $422,000
decrease in cost of revenues, a $378,000 decrease in inventory
impairment, a $342,000 decrease in professional fees-related party,
a $1,480,000 decrease in combined financing costs, interest
expenses, and default penalties, and a $2,510,000 non-cash gain in
fair value of derivative liability) offset by certain negative
results between the years (a $200,000 increase in advertising and
promotion expenses, a $100,000 increase in payroll expenses, a
$70,000 increase in professional fees, a $255,000 increase in
general and administrative expenses, and a net 428,000 loss on
acquisition and unrealized loss on investments). We may continue to
incur significant losses in the future for a number of reasons,
including unforeseen expenses, difficulties, complications, and
delays, and other unknown events.
Accordingly,
we cannot assure you that we will achieve sustainable operating
profits as we continue to expand our product line and otherwise
implement our growth initiatives. Any failure to achieve and
maintain profitability would have a materially adverse effect on
our ability to implement our business plan, our results and
operations, and our financial condition, and could cause the value
of our Common Stock to decline, resulting in a significant or
complete loss of your investment.
Our independent registered public accounting firm’s reports for the
fiscal years ended September 30, 2022 and 2021 have raised
substantial doubt as to our ability to continue as a “going
concern.” Our independent registered public accounting firm
indicated in its reports on our audited consolidated financial
statements as of and for the years ended September 30, 2022 and
2021 that there is substantial doubt about our ability to continue
as a going concern. A “going concern” opinion indicates that the
financial statements have been prepared assuming we will continue
as a going concern and do not include any adjustments to reflect
the possible future effects on the recoverability and
classification of assets, or the amounts and classification of
liabilities that may result if we do not continue as a going
concern. Therefore, you should not rely on our consolidated balance
sheet as an indication of the amount of proceeds that would be
available to satisfy claims of creditors, and potentially be
available for distribution to stockholders, in the event of
liquidation. The presence of the going concern note to our
financial statements may have an adverse impact on the
relationships we are developing and plan to develop with third
parties as we continue the commercialization of our products and
could make it challenging and difficult for us to raise additional
financing, all of which could have a material adverse impact on our
business and prospects and result in a significant or complete loss
of your investment.
Our ability to grow and compete in the future will be adversely
affected if adequate capital is not available to us or not
available on terms favorable to us. We have limited capital
resources. To date, we have financed our operations through a mix
of equity and debt investments by investors, and we expect to
continue to do so in the foreseeable future. Our ability to
continue our normal and planned operations, to grow our business,
and to compete in our industry will depend on the availability of
adequate capital.
We
cannot assure you that we will be able to obtain additional funding
from those or other sources when or in the amounts needed, on
acceptable terms, or at all. If we raise capital through the sale
of equity, or securities convertible into equity, it would result
in dilution to our then-existing stockholders, which could be
significant depending on the price at which we may be able to sell
our securities. If we raise additional capital through the
incurrence of additional indebtedness, we would likely become
subject to further covenants restricting our business activities,
and holders of debt instruments may have rights and privileges
senior to those of our then-existing stockholders. In addition,
servicing the interest and principal repayment obligations under
debt facilities could divert funds that would otherwise be
available to support development of new programs and marketing to
current and potential new clients. If we are unable to raise
capital when needed or on attractive terms, we could be forced to
delay, reduce, or eliminate development of new products or future
marketing efforts, or reduce or discontinue our operations. Any of
these events could significantly harm our business, financial
condition, and prospects.
The COVID-19 pandemic could have a material adverse impact on our
business, results of operations, and financial condition.
In December 2019, a novel strain of coronavirus was reported to
have surfaced in Wuhan, China. In January 2020, the WHO declared
the COVID-19 outbreak a “Public Health Emergency of International
Concern.” This worldwide outbreak has resulted in the
implementation of significant governmental measures, including
lockdowns, closures, quarantines, and travel bans intended to
control the spread of the virus. Companies are also taking
precautions, such as requiring employees to work remotely, imposing
travel restrictions, and temporarily closing businesses and
facilities. These restrictions, and future prevention and
mitigation measures, have had an adverse impact on global economic
conditions and have had an adverse impact on consumer confidence
and spending on certain products and services, which could
materially adversely affect the supply of, as well as the demand
for, our products. Uncertainties regarding the economic impact of
COVID-19 are likely to result in sustained market turmoil, which
could also negatively impact our business, financial condition, and
cash flow. As of the date of this Annual Report on Form 10-K, many
of the governmental restrictions are in the process of being
lessened or lifted, which actions we expect should have a positive
impact on consumer confidence and spending and a related positive
impact on our business and, thereafter, our financial condition and
cash flow.
Our
co-packers source raw materials used in our products from suppliers
located in the United States. The impact of COVID-19 on these
suppliers, or any of our other suppliers, distributors, and
resellers, or transportation or logistics providers, has negatively
affected the price (through increases) and the availability of our
ingredients and/or packaging materials (through longer lead times)
and has accordingly negatively impacted our supply chain. As these
disruptions caused by COVID-19 have continued for an extended
period of time, our ability to meet the demands of our consumers
has been and may be further materially impacted. To date, we have
not experienced any reduction in the available supply of our
products. Additionally, many of our employees, including members of
our management team, have been working remotely as a result of the
closure of our offices and warehouses in compliance with local and
state regulations in response to the COVID-19 pandemic. If our
operations or productivity continue to be impacted by the COVID-19
outbreak and government-mandated closures, those occurrences will
continue to impact our business, financial condition, and cash
flow, all in a negative manner. The extent to which the COVID-19
pandemic will further impact our business will depend on future
developments and, given the uncertainty around the extent and
timing of the potential future spread or mitigation and around the
imposition or relaxation of protective measures, we cannot
reasonably estimate the impact to our business at this time.
However, we expect that, during our current fiscal year, the
adverse impact of COVID-19 on our business will slowly abate, as
the positivity rate in tests for COVID-19 continues to decrease
along with the new infection and mortality rates and the number of
people becoming vaccinated continues to increase.
Nevertheless,
the extent of the effect of COVID-19 on our operational and
financial performance will continue to depend on future
developments of the outbreak, which remain uncertain and difficult
to predict, considering the rapidly evolving landscape, including
the spread of the new Delta variant of COVID-19. As a result, it is
not currently possible to ascertain the short- and medium-term
impact of COVID-19 on our business. However, as the pandemic has
continued for a prolonged period, it has had a material adverse
effect on our business, results of operations, financial condition,
and cash flow and may have contributed to the volatility in the
quoted price of our Common Stock on the OTCM.
The 2018 Farm Bill passed in December 2018, along with undeveloped
shared state-federal regulations over hemp cultivation and
production that may impact our business. The 2018 Farm Bill
was signed into law on December 20, 2018. Pursuant to the terms of
the 2018 Farm Bill, state agriculture departments must consult with
the state’s governor and chief law enforcement officer to devise a
plan that must be submitted to the Secretary of the USDA. A state’s
plan to license and regulate hemp can only commence once the
Secretary of the USDA approves the state’s plan. In states opting
not to devise a hemp regulatory program, the USDA will need to
construct a regulatory program under which hemp cultivators in
those states must apply for licenses and comply with a
federally-run program. The details and scopes of each state’s plans
are not known as of the date of this Registration Statement and may
contain varying regulations that may impact our business. Even if a
state creates a plan in conjunction with its governor and chief law
enforcement officer, the Secretary of the USDA must approve it.
There can be guarantee that any state plan will be approved. Review
times may be extensive. There may be amendments and the ultimate
plans, if approved by states and the USDA, may materially limit our
business depending upon the scope of the regulations.
Laws and regulations affecting our industry to be developed under
the 2018 Farm Bill are in development. As a result of the
2018 Farm Bill’s recent passage, there will be constant evolution
of laws and regulations affecting the hemp industry could
detrimentally affect our operations. Local, state, and federal hemp
laws and regulations may be broad in scope and subject to changing
interpretations. These changes may require us to incur substantial
costs associated with legal and compliance fees and ultimately
require us to alter our business plan. Furthermore, violations of
these laws, or alleged violations, could disrupt our business and
result in a material adverse effect on our operations. In addition,
we cannot predict the nature of any future laws, regulations,
interpretations, or applications, and it is possible that
regulations may be enacted in the future that will be directly
applicable to our business.
The possible FDA regulation of hemp and industrial hemp-derived
products, and the possible registration of facilities where hemp is
grown and hemp-derived products are produced, if implemented, could
negatively affect the cannabis industry generally, which could
directly affect our financial condition. The 2018 Farm Bill
established that hemp containing less than 0.3% THC was no longer
under the CSA. Previously, the FDA had not approved cannabis,
industrial hemp, or CBD derived from cannabis or industrial hemp as
a safe and effective drug for any indication. The FDA considered
hemp and hemp-derived CBD as illegal Schedule I drugs. As of the
date of this Annual Report on Form 10-K, we have not, and do not
intend to file an investigational new drug (“IND”) application with
the FDA, concerning any of our products that may contain cannabis,
industrial hemp, or CBD derived from industrial hemp. Further, the
FDA concluded that products containing hemp or CBD derived from
hemp are excluded from the dietary supplement definition of the
FD&C Act. However, as a result of the passage of the 2018 Farm
Bill, at some indeterminate future time, the FDA may choose to
change its position concerning products containing hemp, or CBD
derived from hemp, and may choose to enact regulations that are
applicable to such products, including, but not limited to, the
growth, cultivation, harvesting, and processing of hemp;
regulations covering the physical facilities where hemp is grown;
and possible testing to determine efficacy and safety of
hemp-derived CBD. In such event, our products could be subject to
regulation. However, we do not know what impact would be on the
hemp industry in general, and what costs, requirements, and
possible prohibitions may be enforced in the future. If we are
unable to comply with the conditions and possible costs of such
regulations and/or registrations, we may be unable to continue to
operate our business.
The FDA limits companies’ ability to discuss the medical benefits
of hemp-derived products. Under FDA rules, it is illegal
for companies to make “health claims” or any claim that a product
has a specific medical benefit without first getting FDA approval
for such claim. The FDA has not recognized any medical benefits
resulting from the consumption of hemp-derived products, which
means that no companies are legally permitted to advertise any
health claims related to hemp-derived products. Because of the
perception among many consumers that hemp-derived CBD is a
health/medicinal product, our inability to make health claims about
the hemp-derived materials in our products may limit our ability to
market and sell the products to consumers, which would negatively
impact our revenues and profits.
The FDA has recently called into question the legality of products
containing hemp-derived ingredients sold as dietary
supplements. In November 2019, the FDA issued warning
letters to 15 companies for selling products that contain CBD in
ways that violate the FD&C Act and stated therein that products
containing CBD cannot be sold as dietary supplements. In a series
of letters in 2016 and 2017, the FDA stated that, “based on
available evidence, FDA has concluded that cannabidiol products are
excluded from the dietary supplement definition (the “IND
Preclusion”) under Section 201(ff)(3)(B)(ii) of the FD&C Act.”
Under that provision, if a substance (such as CBD) has been
authorized for investigation as a new drug for which substantial
clinical investigations have been instituted and for which the
existence of such investigations has been made public, the products
containing that substance are excluded from the Section
201(ff)(3)(B)(ii) definition of a dietary supplement. There is an
exception to the IND Preclusion if the substance was “marketed as”
a dietary supplement or as a conventional food before substantial
clinical investigations were instituted pursuant to an
authorization for investigation of a new drug and made public, as
further discussed below; however, based on available evidence, the
FDA concluded that this is not the case for cannabidiol, as it has
not concluded that CBD is generally recognized as safe (GRAS) among
qualified experts for its use in human or animal food. The FDA has
not instituted any rulemaking procedures or provided an opportunity
for public comment in arriving at its conclusion regarding CBD in
dietary supplements.
The
IND preclusion language from Section 201(ff) of the FD&C Act
includes several requirements that must be met for a certain
ingredient to be precluded from the definition of a dietary
supplement. First, the ingredient must have been authorized by FDA
for investigation as a new drug. Next, substantial clinical
investigations must have been instituted. These substantial
clinical investigations must also be made public. Lastly, all of
the above must have occurred prior to the marketing of the
ingredient as a dietary supplement or food. That is, all of these
conditions must be met before the article can be precluded from the
definition of a dietary supplement under Section 201(ff)(3)(B)(ii)
of the FD&C Act.
According
to the National Institutes of Health, a “dietary supplement” is a
product that is intended to supplement the diet. A dietary
supplement contains one or more dietary ingredients (including
vitamins, minerals, herbs or other botanicals, amino acids, and
other substances) or their components; is intended to be taken by
mouth as a pill, capsule, tablet, or liquid; and is identified on
the front label of the product as being a dietary supplement. None
of our products is a dietary supplement.
We
believe that CBD has been marketed as a dietary supplement prior to
commencement and public notice of any substantial clinical
investigations instituted on CBD, as the investigations that were
publicized were not substantial and they were limited in number and
preliminary in nature, thereby rendering the IND Preclusion
inapplicable.
U.S. federal and foreign regulation and enforcement may adversely
affect the implementation of cannabis laws and regulations and may
negatively impact our revenue, or we may be found to be violating
the CSA or other federal, state, or foreign laws. Even
though we do not cultivate, process, market, or distribute cannabis
or any products that contain cannabis, some of our customers do
engage in such activities. Cannabis, though not strictly defined in
the 2018 Farm Bill, is a Schedule I controlled substance and is
illegal under federal law. Even in those states where the use of
cannabis has been legalized, its use remains a violation of federal
law. A Schedule I controlled substance is defined as a substance
that has no currently accepted medical use in the United Stated, a
lack of safety for use under medical supervision and a high
potential for abuse. The Department of Justice defines Schedule I
controlled substances as “the most dangerous drugs of all the drug
schedules with potentially severe psychological or physical
dependence.”
At
present, numerous states and the District of Columbia allow their
citizens to use medical cannabis. Additionally, many states have
approved legalization of cannabis for adult recreational use. The
laws of these states relative to cannabis are in conflict with the
CSA, which makes cannabis use and possession illegal on a national
level. If the federal government decides to enforce the CSA with
respect to cannabis, persons that are charged with distributing,
possessing with intent to distribute, or growing cannabis could be
subject to fines and imprisonment. Any such change in the federal
government’s enforcement of current federal laws could cause
significant financial damage to us.
Cannabis and cannabis products remain illegal under federal
law. Cannabis and CBD containing in excess of 0.3% THC are
Schedule I controlled substances and are illegal under federal law,
specifically the CSA. Even in those states in which the use of
marijuana has been legalized, its use remains a violation of
federal law. CBD and cannabinoids derived from industrial hemp are
not distinguishable. Although our hemp-derived products contain
less than 0.3% THC, if there were mistakes in processing or
mislabeling and THC in excess of 0.3% were found in our products,
we could be subject to enforcement and prosecution, which would
have a negative impact on our business and operation.
Variations in state and local regulation, and enforcement in states
that have legalized cannabis, may restrict cannabis-related
activities, which may negatively impact our revenues and
prospective profits. Individual state laws do not always
conform to the federal standard or to other states’ laws. States
that have decriminalized cannabis have created legal regimes,
structures, and rules related to the use, cultivation, manufacture,
distribution, transportation, and sale of medical cannabis and
related products. These legal regimes often require companies to
apply for and be awarded a license in order to operate a cannabis
business operation. Although our products contain less than 0.3%
THC, if there were mistakes in processing or mislabeling and THC in
excess of 0.3% was found in our products, we could be found to be
in violation of these states laws and regulations for not obtaining
required licenses.
State
laws and regulations are also still in flux as states figure out
how best to regulate new products. State laws may change in
unexpected ways that could result in our partners losing their
licenses, being forced to change their products or services, or
raise prices, all of which could impact our revenues and
prospective profits.
Laws regarding the transportation of cannabis may change, which may
negatively impact our business. Transportation of cannabis
is governed by both state and federal law. The interaction between
these two legal regimes creates legal and practice difficulties in
getting products to market. Changes in state law related to the
transportation of cannabis may significantly impact our ability to
get products to market or may raise the cost of doing so, which
would impact our revenue and potential profits. Although federal
law now allows the transportation of products derived exclusively
from industrial hemp, both state and federal law make it illegal to
transport cannabis products across state lines. Any accidental or
intentional transportation of cannabis in our products across state
lines could, therefore, result in significant consequences
including loss of a state issued license or permit, financial
penalties, seizure of our products, and prosecution for the illegal
transportation of a Schedule I substance. These consequences may
impact our revenues, potential profits, or ability to continue
operating in this line of business.
The approach in the enforcement of cannabis laws may be subject to
change, which creates uncertainty for our business. As a
result of the conflicting views between state legislatures and the
federal government regarding cannabis, investments in, and the
operations of, cannabis businesses in the United States are subject
to inconsistent laws and regulations. Laws and regulations
affecting the cannabis industry are constantly changing, which
could detrimentally affect our operations. Local, state, and
federal cannabis laws and regulations are broad in scope and
subject to evolving interpretations, which could require us to
incur substantial costs associated with compliance or alter our
business plan. In addition, violations of these laws, or
allegations of such violations, could disrupt our business and
result in material adverse effect on our operations. It is also
possible that regulations may be enacted in the future that will be
directly applicable to our business. Since the passage of the 2018
Farm Bill, there has been little other legislation passed at the
federal level pertaining to the cultivation, transportation, and
sale of CBD products. Conversely, numerous laws and guidance have
passed on the state and local levels, providing for
non-standardized legal standing throughout the US. These
ever-changing regulations could even affect federal tax policies
that may make it difficult to claim tax deductions on our returns.
In light of these changes and to the best of our knowledge, we are
in compliance with all existing regulations.
We
cannot predict the nature of any future laws, regulations,
interpretations, or applications, nor can we determine what effect
additional governmental regulations or administrative policies and
procedures, when and if promulgated, could have on our
business.
Because our business is dependent upon continued market acceptance
by consumers, any negative trends will adversely affect our
business operations. We are substantially dependent on
continued market acceptance and proliferation of consumers of hemp
and hemp-derived products. We believe that, as hemp and
hemp-derived products become more accepted as a result of the
passage of the 2018 Farm Bill, the stigma associated with hemp and
hemp-derived products will diminish and, as a result, consumer
demand will continue to grow. While we believe that the market and
opportunity in the hemp space continues to grow, we cannot predict
the future growth rate and size of the market. Any negative outlook
on the hemp industry will adversely affect our business
operations.
We face intense competition and many of our competitors have
greater resources that may enable them to compete more
effectively. We are involved in a highly competitive
industry where we may compete with numerous other companies who
offer alternative methods or approaches, who may have far greater
resources, more experience, and personnel perhaps more qualified
than we. Our competitors may devote their resources to developing
and marketing products that will directly compete with our product
lines. Due to this competition, there is no assurance that we will
not encounter difficulties in obtaining revenues and market share
or in the positioning of our products and services. There are no
assurances that competition in our respective industries will not
lead to reduced prices for our products. If we are unable to
successfully compete with existing companies and new entrants to
the hemp market, this will have a negative impact on our business
and financial condition.
Our products and services are new, and our industry is rapidly
evolving. Due consideration must be given to our prospects
in light of the risks, uncertainties, and difficulties frequently
encountered by companies in their early stage of development,
particularly companies in the rapidly evolving legal hemp industry.
To be successful in this industry, we must, among other
things:
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develop
and introduce functional and attractive product and service
offerings; |
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attract
and maintain a large base of consumers; |
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increase
awareness of our brands and develop consumer loyalty; |
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establish
and maintain strategic relationships with distribution partners and
service providers; |
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respond
to competitive and technological developments; and |
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attract,
retain, and motivate qualified personnel. |
We
cannot guarantee that we will succeed in achieving any or all of
these goals, and our failure to do so would have a material adverse
effect on our business, prospects, financial condition, and
operating results.
Some
of our products and services are new and are only in early stages
of commercialization. We are not certain that these products and
services will function as anticipated or be desirable to its
intended market. Also, some of our products may have limited
functionalities, which may limit their appeal to consumers and put
us at a competitive disadvantage. If our current or future products
and services fail to function properly or if we do not achieve or
sustain market acceptance, we could lose customers or could be
subject to claims that could have a material adverse effect on our
business, financial condition, and operating results.
As is
typical in a new and rapidly evolving industry, demand, and market
acceptance for recently introduced products and services are
subject to a high level of uncertainty and risk. Because our market
is new and evolving, it is difficult to predict with any certainty
the size of this market and its growth rate, if any. We cannot
guarantee that a market for our products and services will develop
or that a demand for our products and services will emerge or be
sustainable. If the market fails to develop, develops more slowly
than expected, or becomes saturated with competitors, our business,
financial condition, and operating results would be materially
adversely affected.
Federal intellectual property laws may limit our ability to protect
our trademarks, names, logos, and other intellectual
property. U.S. trademark law makes it unlawful to trademark
any product that cannot legally be sold across state lines. Because
the sale and transportation of cannabis and cannabis products is
still prohibited under federal law, this may limit our ability to
secure trademark protection for our products. We applied for
trademark protection with the understanding that our products are
derived from industrial hemp and other legal sources; however,
because of the current state of cannabis law, the U.S. Patent and
Trademark Office may reject our current or future applications.
This would negatively impact our ability to protect our
intellectual property, which could negatively impact our revenues
and prospective profits.
If we fail to protect our intellectual property, our business could
be adversely affected. Our viability will depend, in part,
on our ability to develop and maintain the proprietary aspects of
our intellectual property to distinguish our products from our
competitors’ products. We rely on trade secrets and confidentiality
provisions to establish and protect our intellectual property,
including our proprietary formulas and manufacturing techniques. We
may not be able to enforce some of our intellectual property rights
because cannabis is illegal under federal law.
Any
infringement or misappropriation of our intellectual property or
proprietary formulations could damage its value and limit our
ability to compete. We may have to engage in litigation to protect
the rights to our intellectual property, which could result in
significant litigation costs and require a significant amount of
our time. In addition, our ability to enforce and protect our
intellectual property rights may be limited in certain countries
outside the United States, which could make it easier for
competitors to capture market position in such countries by
utilizing technologies that are similar to those developed or
licensed by us.
Competitors
may also harm our sales by designing products that mirror our
products or processes without infringing on our intellectual
property rights. If we do not obtain sufficient protection for our
intellectual property, or if we are unable to effectively enforce
our intellectual property rights, our competitiveness could be
impaired, which would limit our growth and future
revenue.
We
may also find it necessary to bring infringement or other actions
against third parties to seek to protect our intellectual property
rights. Litigation of this nature, even if successful, is often
expensive and time-consuming to prosecute and there can be no
assurance that we will have the financial or other resources to
enforce our rights or be able to enforce our rights or prevent
other parties from developing similar products or processes or
designing around our intellectual property.
Although we believe that our products and processes do not and will
not infringe upon the patents or violate the proprietary rights of
others, it is possible such infringement or violation has occurred
or may occur, which could have a material adverse effect on our
business. We are not aware of any infringement by us of any
person’s or entity’s intellectual property rights. In the event
that products we sell or processes we employ are deemed to infringe
upon the patents or proprietary rights of others, we could be
required to modify our products or processes or obtain a license
for the manufacture and/or sale of such products or processes or
cease selling such products or employing such processes. In such
event, there can be no assurance that we would be able to do so in
a timely manner, upon acceptable terms and conditions, or at all,
and the failure to do any of the foregoing could have a material
adverse effect upon our business.
There
can be no assurance that we will have the financial or other
resources necessary to enforce or defend a patent infringement or
proprietary rights violation action. If our products or processes
are deemed to infringe or likely to infringe upon the patents or
proprietary rights of others, we could be subject to injunctive
relief and, under certain circumstances, become liable for damages,
which could also have a material adverse effect on our business and
our financial condition.
Tax laws related to cannabis may impact our ability to generate
revenue or potential profits. Section 280E of the Internal
Revenue Code prohibits cannabis businesses from deducting their
ordinary and necessary business expenses, forcing us to pay higher
effective federal tax rates compared to similar companies in other
industries. With the passage of the 2018 Farm Bill, we believe that
Section 280E of the Internal Revenue Code will not apply to us.
However, if we inadvertently produce or sell products that are
considered cannabis, or are deemed to engage in a cannabis business
despite the passage of the 2018 Farm Bill, we may be subject to
Section 280E of the Internal Revenue Code, which would prohibit us
from deducting our ordinary and necessary business expenses. In
such instance, our business may be less profitable than it could
otherwise be.
State
tax laws are also changing. Even though state taxes are already
high, many local jurisdictions are imposing heavy additional taxes
either as a disincentive for cannabis companies to operate there or
in order to cash in on the growing number of cannabis companies
paying taxes. It is unknown how states will treat companies
engaging in the hemp-derived product industry from a tax
perspective. High taxes could overwhelm our partner companies
causing them to go out of business or raise prices for their
services, which in turn may impact our revenues and profits by
forcing us to find different partners in more tax friendly areas or
pay higher prices.
We may not be able to obtain the necessary permits and
authorizations to operate our business in the future. We
may not be able to obtain or maintain the necessary licenses,
permits, authorizations, or accreditations for our business, or may
only be able to do so at great cost. In addition, we may not be
able to comply fully with the wide variety of laws and regulations
applicable to the cannabis and hemp-derived product industries.
Failure to comply with or to obtain the necessary licenses,
permits, authorizations, or accreditations could result in
restrictions on our ability to operate, which could have a material
adverse effect on our business.
Changes in the regulations governing cannabis outside of the United
States may adversely impact our prospects. Our growth
strategy with respect to international expansion of the new
business lines continues to evolve as regulations governing the
cannabis and hemp-derived product industries in foreign
jurisdictions become more fully developed. Interpretation of these
laws, rules, and regulations and their application is ongoing.
Amendments to current laws, regulations, and guidelines, more
stringent implementation, or enforcement thereof, enactment of new
laws, the adoption of new regulations, or other unanticipated
events, including changes in political regimes and attitudes toward
cannabis and hemp-derived products are beyond our control and could
material adverse effect on our international growth
prospects.
We cannot assure you that we will be able to expand our operations
into legal jurisdictions outside of the United States, and any such
expansion will be subject to risks. There can be no
assurance that any market for cannabis products to be offered by us
will develop in any jurisdiction outside of the United States.
Laws, regulations, and perceptions pertaining to cannabis and
hemp-derived products vary widely internationally, and the scope or
pace of legalization of cannabis and hemp-derived products cannot
be predicted or assured. If and when additional legal markets for
cannabis and hemp-derived products develop, our pursuit of such
markets may expose it to new or unexpected risks or significantly
increase its exposure to one or more existing risk factors,
including economic instability, changes in laws and regulations,
and the effects of competition. These factors may limit our
capability to successfully expand our operations into such
jurisdictions and may have a material adverse effect on our
business, financial condition, and results of
operations.
We will become subject to further laws and regulations as we expand
internationally. In addition to initiating business
operations in Jamaica, we plan on expanding our business
internationally. If and as this international expansion occurs, we
will become subject to the laws and regulations of (as well as
international treaties among) the foreign jurisdictions in which we
operate or import or export products or materials. In addition, we
may avail ourselves of proposed legislative changes in certain
jurisdictions to expand our product portfolio, which expansion may
include business and regulatory compliance risks as yet
undetermined. Failure by us to comply with the current or evolving
regulatory framework in any jurisdiction could have a material
adverse effect on our business, financial condition, and results of
operations. There is the possibility that any such international
jurisdiction could determine that we were not or is not compliant
with applicable local regulations. If our historical or current
sales or operations were found to be in violation of such
international regulations, we may be subject to enforcement actions
in such jurisdictions including, but not limited to civil and
criminal penalties, damages, fines, the curtailment or
restructuring of our operations or asset seizures and the denial of
regulatory applications, each of such circumstances could have a
material adverse effect on our business, financial condition, and
results of operations.
Reliance on third-party suppliers, service providers,
manufacturers, and distributors may result in disruption to our
business lines’ supply chains. Suppliers, service
providers, and distributors of our products may elect, at any time,
to breach or otherwise cease to participate in supply, service, or
distribution agreements, or other relationships, on which the
operations of our business rely. The loss of suppliers, service
providers, manufacturers, or distributors would have a material
adverse effect on the business and operational results of our
business.
Industrial hemp is vulnerable to specific agricultural risks that
could have a material adverse effect on the availability of hemp to
be purchased by us for use in our products. Our suppliers
may grow their industrial hemp outdoors. As such, the risks
inherent in engaging in outdoor agricultural businesses apply.
Agricultural production by its nature contains elements of risk and
uncertainty that may adversely affect our business and operations,
including but not limited to the following: (i) any future climate
change with a potential shift in weather patterns leading to
droughts and associated crop losses; (ii) potential insect, fungal,
and weed infestations resulting in crop failure and reduced yields;
(iii) wild and domestic animals damaging the crops; and (iv) crop
raiding, sabotage, or vandalism, all of which could affect the
availability of hemp that we can purchase for use in our products.
If hemp is not readily available, our business and financial
condition would be materially adversely effected.
Loss of key contracts with our suppliers, renegotiation of such
agreements on less favorable terms or other actions these third
parties may take could harm our business. Most of our
agreements with suppliers of our industrial hemp, including our key
supplier contract, may be subject to cancellation or non-renewal.
The loss of these agreements, or the renegotiation of these
agreements on less favorable economic or other terms, could limit
our ability to procure raw material to manufacture our products.
This could negatively affect our ability to meet consumer demand
for our products. Upon expiration or termination of these
agreements, our competitors may be able to secure industrial hemp
from our existing suppliers which will put us at a competitive
disadvantage in the market.
We have a limited number of supply sources and depend solely on
United States-based suppliers, which may subject us to additional
risks. We believe that our continued success will depend
upon the availability of raw materials that permit us to meet
labeling claims and quality control standards. The supply of our
industrial hemp is subject to the same risks normally associated
with agricultural production, such as climactic conditions, insect
infestations, and availability of manual labor or equipment for
harvesting. Any significant delay in or disruption of the supply of
raw materials could substantially increase the cost of such
materials, could require product reformulations, the qualification
of new suppliers, and repackaging and could result in a substantial
reduction or termination by us of our sales of certain products,
any of which could have a material adverse effect upon us.
Accordingly, there can be no assurance that the disruption of our
supply sources will not have a material adverse effect on
us.
We
also exclusively obtain our raw product from United States’
suppliers. Therefore, our business is subject to the risks
generally associated with a lack of geographic diversity in our
suppliers poses, including the potential for enforcement activity,
natural disasters affecting key geographic locations where our
ingredients are grown, and possible challenges with exporting our
products abroad.
The market for industrial hemp and hemp-derived products in the
United States is relatively new and is subject to risks associated
with an emerging industry. This industry and market may not
continue to exist or grow as anticipated or we may ultimately be
unable to succeed in this industry or market. The hemp and
hemp-derived product industry in the United States is highly
speculative and is a relatively new industry that appears to be
rapidly expanding but ultimately may not be successful. We face
inherent challenges associated with being in a new market,
including establishing reliable agricultural supply chains and
processing and manufacturing to compete with producers in other
countries where industrial hemp cultivation has already been
established. Therefore, we are subject to all of the business risks
associated with a new business in a niche market, including risks
of unforeseen capital requirements, failure of widespread market
acceptance of hemp products, failure to establish business
relationships, and competitive disadvantages as against larger and
more established competitors.
Laws governing our access to banking services are uncertain and are
in a state of flux. Since the commerce in cannabis is
illegal under federal law, most federally chartered banks will not
accept funds for deposit from businesses involved with cannabis.
Consequently, businesses involved in the cannabis industry often
have difficulty finding a bank willing to accept their business.
With the passage of the 2018 Farm Bill, we expect the banking
industry will be more open to doing business with compliant hemp
business. However, banks may still refuse to open bank accounts,
make loans, or initiate currency transactions with us.
Additionally, major credit card processors also may be hesitant to
do business with us and, as a result, we may be forced to find less
reputable credit card processing solutions abroad, or pay higher
transaction fees.
The
House of Representatives approved the Secure and Fair Enforcement
Banking Act in September 2019 and its provisions were included in
the HEROES Act relief bill that it approved in May 2020. Those
provisions are designed to protect banks that service the cannabis
industry from being penalized by federal regulators as well as to
protect ancillary business that work with the cannabis industry
from being charged with money laundering and other financial
crimes. However, whether the provisions of this bill will be
introduced again and ultimately passed is unknown and, even if it
is passed, it may not result in a more open banking climate. Our
inability to open and maintain bank accounts would make it
difficult for us to operate our business, increase our operating
costs, and pose additional operational, logistical, and security
challenges and could result in our inability to implement our
business plan. Similarly, many of our suppliers, partners, and
customers are involved in cannabis and/or hemp businesses and
further restriction to their ability to access banking services may
make it difficult for them to purchase our products, which could
have a material adverse effect on our business, financial
condition, and results of operations.
Banking regulations in our business are costly and time consuming,
which may negatively impact our business. In assessing the
prospective risk of providing services to hemp-related business,
financial institutions may conduct customer due diligence that
includes: (i) verifying with the appropriate state authorities
whether the business is duly licensed and registered; (ii)
reviewing the license application (and related documentation)
submitted by the business for obtaining a state license to operate
its cannabis-related or hemp-related businesses; (iii) requesting
from state licensing and enforcement authorities available
information about the business and related parties; (iv) developing
an understanding of the normal and expected activity for the
business, including the types of products to be sold; (v) ongoing
monitoring of publicly available sources for adverse information
about the business and related parties; (vi) ongoing monitoring for
suspicious activity, including for any of the red flags described
in this guidance; and (vii) refreshing information obtained as part
of customer due diligence on a periodic basis and commensurate with
the risk. With respect to information regarding state licensure
obtained in connection with such customer due diligence, a
financial institution may reasonably rely on the accuracy of
information provided by state licensing authorities, where states
make such information available. These regulatory reviews may be
time consuming and costly.
Due to our involvement in the hemp industry, we may have a
difficult time obtaining the various insurances that are desired to
operate our business, which may expose us to additional risk and
financial liability. Insurance that is otherwise readily
available, such as general liability and product liability, may be
more difficult for us to obtain and has been more expensive,
because of our involvement in the hemp industry. There are no
guarantees that we will be able to find such insurance in the
future, or that the cost will be affordable to us. If we are forced
to go without such insurance, it may prevent us from entering into
certain business sectors, may inhibit our growth, and may expose us
to additional risk and financial liability.
We are dependent on the popularity of consumer acceptance of our
product lines and service offerings. Our ability to
generate revenue and be successful in the implementation of our
business plan is dependent on consumer acceptance and demand of our
product lines and service offerings. Acceptance of our products and
services will depend on several factors, including availability,
cost, ease of use, familiarity of use, convenience, effectiveness,
safety, and reliability. If customers do not accept our products,
or if we fail to meet customers’ needs and expectations adequately,
our ability to continue generating revenues could be reduced. Due
to the changing consumer preferences, it is also difficult to
forecast demand for hemp-derived products. There is a high risk
that hemp-derived products’ ultimate popularity will decline,
leading to lower revenues.
A drop in the retail price of hemp-derived products may negatively
impact our business. The demand for our products depends in
part on the price of commercially grown hemp. Fluctuations in
economic, market, and agricultural conditions that impact the
prices of commercially grown hemp, such as increases in the supply
of such hemp and the decrease in the price of products using
commercially grown hemp, could cause the demand for hemp-derived
products to decline, which would have a negative impact on our
business.
We could suffer reputational and financial damage in the event of
injury from our products or product recalls. As a
manufacturer and distributor of products intended for human
consumption or use, we are subject to product liability claims if
the use of our products by others is alleged to have resulted in
harm or injury. Our products consist of hemp-derived oils, creams,
lotions, extracts, and other ingredients that are not subject to
pre-market regulatory approval in the United States or
internationally, as well as snacks and health, but not dietary,
supplements. Previously unknown adverse reactions resulting from
human consumption or use of these ingredients could occur, which
would likely result in product liability claims against us, and
which would increase our costs and adversely affect our reputation
and harm our business. We may be held liable if any illness or
injury caused by any product we develop, manufacture, or
distribute, if any such product is found to be unsuitable for use.
In addition to any reputational damage we would suffer, we cannot
guarantee that our product liability insurance or that of any of
our suppliers would fully cover potential liabilities. In the event
of litigation, any adverse judgments against us would have a
material adverse effect on our financial condition, including our
cash balances, and results of operations.
The presence of THC in our hemp-derived products may cause adverse
consequences to users of such products that will expose us to the
risk of liability and other consequences. Our products are
made from industrial hemp, which contains THC, though typically at
a low level. As a result of the variability of agricultural
products, certain of our products contain varying levels of THC.
THC is an illegal or controlled substance in many jurisdictions.
Whether or not ingestion of THC (at low levels or otherwise) is
permitted in a particular jurisdiction, there may be adverse
consequences to end users who test positive for THC attributed to
use of our products through unintentional presence in its products
of THC, even if only in trace amounts. In addition, certain
metabolic processes in the body may negatively affect the results
of drug tests. Positive tests may adversely affect the end user’s
reputation, ability to obtain or retain employment, and
participation in certain athletic or other activities. A claim or
regulatory action against us based on such positive test results
could materially adversely affect our reputation, potentially
expose us to material liability, and potentially require us to
recall our products.
Our future success depends on our key executive officers and our
ability to attract, retain, and motivate qualified
personnel. Our future success largely depends upon the
continued services of our executive officers and management team.
If one or more of our executive officers are unable or unwilling to
continue in their present positions, we may not be able to replace
them readily, if at all. Additionally, we may incur additional
expenses to recruit and retain new executive officers. If any of
our executive officers joins a competitor or forms a competing
company, we may lose some or all of our customers. Finally, we do
not maintain “key person” life insurance on any of our executive
officers. Because of these factors, the loss of the services of any
of these key persons could adversely affect our business, financial
condition, and results of operations, and thereby an investment in
our stock.
Our
continuing ability to attract and retain highly qualified personnel
will also be critical to our success because we will need to hire
and retain additional personnel as our business grows. There can be
no assurance that we will be able to attract or retain highly
qualified personnel. We face significant competition for skilled
personnel in our industries. In particular, if the hemp industry
continues to grow, demand for personnel may become more
competitive. This competition may make it more difficult and
expensive to attract, hire, and retain qualified managers and
employees. Because of these factors, we may not be able to manage
or grow our business effectively, which could adversely affect our
financial condition or business. As a result, the value of your
investment could be significantly reduced or completely
lost.
We may not be able to manage our growth or improve our operational,
financial, and management information systems effectively, which
would impair our results of operations. In the near term,
we intend to expand the scope of our operations activities
significantly, including the launch of our new brand Blesswell, in
conjunction with the Khode LLC Joint Venture, expanding our
existing sales and distribution channels, along with the future
launch of Go Green Global’s operations in Jamaica, re-branding of
Kushwear’s product line-up, and developing and launching CBDLB’s
line-up of beverages. If we are successful in executing our
business plan, we will experience growth in our business that could
place a significant strain on our business operations, finances,
management, and other resources. The factors that may place strain
on our resources include, but are not limited to, the
following:
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|
● |
The
need for continued development of our financial and information
management systems; |
|
|
● |
The
need to manage strategic relationships and agreements with
manufacturers, customers, and partners; and |
|
|
● |
Difficulties
in hiring and retaining skilled management, technical, and other
personnel necessary to support and manage our business. |
Additionally,
our strategy envisions a period of rapid growth that may impose a
significant burden on our administrative and operational resources.
Our ability to manage growth effectively will require us to
substantially expand the capabilities of our administrative and
operational resources and to attract, train, manage, and retain
qualified management and other personnel. There can be no assurance
that we will be successful in recruiting and retaining new
employees or retaining existing employees.
We
cannot provide assurances that our management will be able to
manage this growth effectively. Our failure to successfully manage
growth could result in our sales not increasing commensurately with
capital investments or otherwise materially adversely affecting our
business, financial condition, or results of operations.
If we are unable to continually innovate and increase efficiencies,
our ability to attract new customers may be adversely
affected. In the area of innovation, we must be able to
develop new technologies and products that appeal to our customers.
This depends, in part, on the technological and creative skills of
our personnel and on our ability to protect our intellectual
property rights. We may not be successful in the development,
introduction, marketing, and sourcing of new technologies or
innovations, that satisfy customer needs, achieve market
acceptance, or generate satisfactory financial returns.
If we incur substantial liability from litigation, complaints, or
enforcement actions, our financial condition could suffer.
Our participation in the hemp-derived product industry may lead to
litigation, formal or informal complaints, enforcement actions, and
inquiries by various federal, state, or local governmental
authorities against us. Litigation, complaints, and enforcement
actions could consume considerable amounts of financial and other
corporate resources, which could have a negative impact on our
sales, revenue, profitability, and growth prospects. We have not
been, and are not currently, subject to any material litigation,
complaint, or enforcement action regarding cannabis or hemp (or
otherwise) brought by any federal, state, or local governmental
authority.
Risks
Relating to Our Common Stock
The market price of our Common Stock may fluctuate significantly,
which could negatively affect us and the holders of our Common
Stock. The trading price of our Common Stock may fluctuate
significantly in response to a number of factors, many of which are
beyond our control. For instance, if our financial results are
below the expectations of securities analysts and investors, the
market price of our Common Stock could decrease, perhaps
significantly. Other factors that may affect the market price of
our Common Stock include:
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|
● |
volatility
in the trading markets generally and in our particular market
segment; |
| |
|
|
| |
● |
limited
trading of our Common Stock; |
| |
|
|
| |
● |
actual
or anticipated fluctuations in our results of
operations; |
| |
|
|
| |
● |
the
financial projections we may provide to the public, any changes in
those projections, or our failure to meet those
projections; |
| |
|
|
| |
● |
announcements
regarding our business or the business of our customers or
competitors; |
| |
|
|
| |
● |
changes
in accounting standards, policies, guidelines, interpretations, or
principles; |
| |
|
|
| |
● |
actual
or anticipated developments in our business or our competitors’
businesses or the competitive landscape generally; |
| |
|
|
| |
● |
developments
or disputes concerning our intellectual property or our offerings,
or third-party proprietary rights; |
| |
|
|
| |
● |
announced
or completed acquisitions of businesses or technologies by us or
our competitors; |
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|
|
| |
● |
new
laws or regulations or new interpretations of existing laws or
regulations applicable to our business; |
| |
|
|
| |
● |
any
major change in our board of directors (our “Board”) or
management; |
| |
|
|
| |
● |
sales
of shares of our Common Stock by us or by our
stockholders; |
| |
|
|
| |
● |
lawsuits
threatened or filed against us; and |
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|
| |
● |
other
events or factors, including those resulting from war, incidents of
terrorism, or responses to these events. |
Statements
of, or changes in, opinions, ratings, or earnings estimates made by
brokerage firms or industry analysts relating to the markets in
which we operate or expect to operate could have an adverse effect
on the market price of our Common Stock. In addition, the stock
market as a whole, as well as our particular market segment, has
from time to time experienced extreme price and volume
fluctuations, which may affect the market price for the securities
of many companies, and which often have appeared unrelated to the
operating performance of such companies. Any of these factors could
negatively affect our stockholders’ ability to sell their shares of
Common Stock at the time and price they desire.
We may issue additional shares of Common Stock or preferred stock
in the future, which could cause significant dilution to all
stockholders. We are authorized to issue up to
1,000,000,000 shares of Common Stock and 10,000,000 shares of
preferred stock, par value $0.0001 per share, of which 505,157,952
shares of Common Stock and 4,878,048.8 shares of Series H
Convertible Preferred Stock (the “Series H Stock”) are currently
issued and outstanding as of January 9, 2023. The number of shares
of Common Stock issued and outstanding excludes the shares of
Common Stock underlying the shares of Series H Stock and shares
underlying common stock purchase warrants. We expect to seek
additional financing in order to provide working capital to our
business or may issue additional shares of Common Stock as
compensation. Our Board has the power to issue any or all of such
authorized but unissued shares of our Common Stock at any price
and, in respect of the preferred stock, at any price and with any
attributes, our Board considers sufficient, without stockholder
approval. The issuance of additional shares of Common Stock in the
future will reduce the proportionate ownership and voting power of
current stockholders and may negatively impact the market price of
our Common Stock.
We may issue additional securities with rights superior to those of
our Common Stock, which could materially limit the ownership rights
of our stockholders. We may offer additional debt or equity
securities in private and/or public offerings in order to raise
working capital or to refinance our debt. Our Board has the right
to determine the terms and rights of any debt securities and
preferred stock without obtaining the approval of our stockholders.
It is possible that any debt securities or preferred stock that we
sell would have terms and rights superior to those of our Common
Stock and may be convertible into shares of our Common Stock. Any
sale of securities could adversely affect the interests or voting
rights of the holders of our Common Stock, result in substantial
dilution to existing stockholders, or adversely affect the market
price of our Common Stock.
Quotation on the OTCM’s Pink® Open Market may be
volatile and sporadic. Currently, our Common Stock is
quoted on the OTCM’s Pink Open Market. Trading in stock quoted on
over-the-counter markets is often thin and characterized by wide
fluctuations in trading prices, due to many factors that may have
little to do with our operations or business prospects. This
volatility could depress or inflate the market price of our Common
Stock for reasons unrelated to operating performance. Moreover, the
OTCM is not a stock exchange, and trading of securities on this
market is often more sporadic than the trading of securities listed
on a national securities exchange, i.e., the New York Stock
Exchange, the NYSE American, or The Nasdaq Stock Market.
The Holders of our Series H Stock control more than half of our
voting securities; they can exert significant control over our
business and affairs and have actual or potential interests that
may depart from those of investors. The holders of our
Series H Preferred Stock control in excess of 50% of our total
voting power. As a result, they will have significant influence and
control over all corporate actions requiring stockholder approval,
irrespective of how our other stockholders may vote, including the
following actions:
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● |
to
elect or defeat the election of our directors; |
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● |
to
amend or prevent an amendment to our Articles of Incorporation or
Bylaws; |
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● |
to
effect or prevent a merger, sale of assets, or other corporate
transaction; and |
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● |
to
control the outcome of any other matter submitted to our
stockholders for a vote. |
This
concentration of ownership by itself may have the effect of
impeding a merger, consolidation, takeover, or other business
consolidation, or discouraging a potential acquirer from making a
tender offer for our Common Stock, which in turn could reduce our
stock price or prevent our stockholders from realizing a premium
over our stock price.
We will be a “controlled company” within the meaning of the Nasdaq
rules and the NYSE rules and, as a result, will qualify for, and
will rely on, exemptions from certain corporate governance
requirements that provide protection to the stockholders of
companies that are subject to such corporate governance
requirements. Because the holders of our Series H Preferred
Stock control in excess of 50% of our total voting power, we will
be a “controlled company” within the meaning of the corporate
governance standards of the Nasdaq rules and the NYSE rules. Under
these rules, a listed company of which more than 50% of the voting
power is held by an individual, group, or another company is a
“controlled company” and may elect not to comply with certain of
the exchange’s corporate governance requirements. As of the date of
this Annual Report on Form 10-K, our Common Stock is not listed on
the New York Stock Exchange, the NYSE American, or the Nasdaq Stock
Market and there cannot be any assurance that it ever will be
listed on a national securities exchange. If our Common Stock
qualifies to be listed on a national securities exchange and if we
choose to initiate the listing process, we will then determine
whether we characterize ourselves as a “controlled company” for
corporate governance requirements. As a company, whose Common Stock
is currently quoted on the OTCM’s Pink Open Market, we are not
required to abide by the corporate governance rules of a national
securities exchange and accordingly, do not have a fully
independent series of board committees. Thus, as a consequence of
our reliance on certain exemptions from the Nasdaq standards
provided to “controlled companies,” you will not have the same
protections afforded to stockholders of companies that are subject
to all of the corporate governance requirements of a national
securities exchange.
We are not subject to the rules of a national securities exchange
requiring the adoption of certain corporate governance measures
and, as a result, our stockholders do not have the same
protections. Separately from the “controlled company”
analysis of the previous risk factor, we are not subject to the
rules of a national securities exchange, such as the New York Stock
Exchange, the NYSE American, or The Nasdaq Stock Market. National
securities exchanges generally require more rigorous measures
relating to corporate governance that are designed to enhance the
integrity of corporate management. The requirements of the OTCM’s
Pink® Open Market afford our stockholders fewer
corporate governance protections than those of a national
securities exchange. Until we comply with such greater corporate
governance measures, even though such compliance is not required by
the OTCM for quotations of shares of our Common Stock on the OTCM’s
Pink Open Market, our stockholders will have fewer protections,
such as those related to director independence, stockholder
approval rights, and governance measures that are designed to
provide oversight of a corporation’s management by its board of
directors.
A decline in the price of our Common Stock could affect our ability
to raise working capital, which could adversely impact our ability
to continue our operations. A prolonged decline in the
price of our Common Stock could result in a reduction in the
liquidity of our Common Stock and a reduction in our ability to
raise capital. We may attempt to acquire a significant portion of
the funds we need in order to conduct our planned operations
through the sale of equity securities; thus, a decline in the price
of our Common Stock could be detrimental to our liquidity and our
operations because the decline may adversely affect investors’
desire to invest in our securities. If we are unable to raise the
funds we require for all of our planned operations, we may be
forced to reallocate funds from other planned uses and may suffer a
significant negative effect on our business plan and operations,
including our ability to develop new products or services and
continue our current operations. As a result, our business may
suffer, and we may be forced to reduce or discontinue operations.
We also might not be able to meet our financial obligations if we
cannot raise enough funds through the sale of our Common Stock and
we may be forced to reduce or discontinue operations.
Because we do not intend to pay any cash dividends on our shares of
Common Stock in the near future, our stockholders will not be able
to receive a return on their shares unless and until they sell
them. We intend to retain any future earnings to finance
the development and expansion of our business. We do not anticipate
paying any cash dividends on our Common Stock in the near future.
The declaration, payment, and amount of any future dividends will
be made at the discretion of our Board, and will depend upon, among
other things, the results of operations, cash flow, and financial
condition, operating and capital requirements, and other factors as
our Board considers relevant. There is no assurance that future
dividends will be paid, and, if dividends are paid, there is no
assurance with respect to the amount of any such dividend. Unless
our Board determines to pay dividends, our stockholders will be
required to look to appreciation of our Common Stock to realize a
gain on their investment. There can be no assurance that this
appreciation will occur.
If we are unable to establish appropriate internal financial
reporting controls and procedures, it could cause us to fail to
meet our reporting obligations, result in the restatement of our
financial statements, harm our operating results, possibly subject
us to regulatory scrutiny and sanctions, cause investors to lose
confidence in our reported financial information, and have a
negative effect on the market price for shares of our Common
Stock. Effective internal controls are necessary for us to
provide reliable financial reports and effectively to prevent
fraud. We maintain a system of internal controls over financial
reporting, which is defined as a process designed by, or under the
supervision of, our principal executive officer and principal
financial officer, or persons performing similar functions, and
effected by our Board, management, and other personnel, to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles (“GAAP”).
Because
our class of Common Stock is now registered pursuant to Section
12(g) of the Exchange Act, we will have significant requirements
for enhanced financial reporting and internal controls. We are
required to document and test our internal control procedures in
order to satisfy the requirements of Section 404 of the
Sarbanes-Oxley Act of 2002, which requires annual management
assessments of the effectiveness of our internal controls over
financial reporting. The process of designing and implementing
effective internal controls is a continuous effort that requires us
to anticipate and react to changes in our business and economic and
regulatory environments, and to expend significant resources to
maintain a system of internal controls that is adequate to satisfy
our reporting obligations as a public company.
We
cannot assure you that we will, in the future, identify areas
requiring improvement in our internal control over financial
reporting. We cannot assure you that the measures we will take to
remediate any areas in need of improvement will be successful or
that we will implement and maintain adequate controls over our
financial processes and reporting in the future as we continue to
grow. If we are unable to establish appropriate internal financial
reporting controls and procedures, it could cause us to fail to
meet our reporting obligations, result in the restatement of our
financial statements, harm our operating results, subject us to
regulatory scrutiny and sanction, cause investors to lose
confidence in our reported financial information, and have a
negative effect on the market price for shares of our Common
Stock.
We lack sufficient internal controls over financial reporting and
implementing acceptable internal controls will be difficult with a
limited number of management personnel, which will make it
difficult to ensure that information required to be disclosed in
our future reports filed and submitted under the Exchange Act is
recorded, processed, summarized, and reported as and when
required. As of the date of this Annual Report on Form
10-K, we currently lack certain internal controls over our
financial reporting. We have a limited number of management
personnel, which may make it difficult to implement such controls
at this time. The lack of such controls makes it difficult to
ensure that information required to be disclosed in our reports to
be filed and submitted under the Exchange Act (now that our class
of Common Stock is registered pursuant to Section 12(g) thereof)
will be recorded, processed, summarized, and reported, as and when
required.
The
reasons we believe that our disclosure controls and procedures are
not fully effective are because:
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|
● |
there
is a lack of segregation of duties necessary for a good system of
internal control due to insufficient accounting staff due to our
size; |
| |
|
|
| |
● |
the
staffing of our accounting department is weak due to the lack of
qualifications and training, and the lack of formal review
process; |
| |
|
|
| |
● |
our
control environment is weak due to the lack of an effective risk
assessment process, the lack of internal audit function, and
insufficient documentation and communication of the accounting
policies; and |
| |
|
|
| |
● |
failure
in the operating effectiveness over controls related to recording
revenue. |
We
cannot assure you that we will be able to develop and implement the
necessary internal controls over financial reporting. The absence
of such internal controls may inhibit investors from purchasing our
shares and may make it more difficult for us to raise debt or
equity financing.
Our Common Stock is categorized as “penny stock,” which may make it
more difficult for investors to sell their shares of Common Stock
due to suitability requirements. Our Common Stock is
categorized as “penny stock.” The Commission adopted Rule 15g-9,
which generally defines “penny stock” to be any equity security
that has a market price (as defined) of less than $5.00 per share
or an exercise price of less than $5.00 per share, subject to
certain exceptions. The price of our Common Stock is significantly
less than $5.00 per share and we did not qualify for any of the
other exceptions; therefore, our Common Stock is considered “penny
stock.” This designation imposes additional sales practice
requirements on broker-dealers who sell to persons other than
established customers and “accredited investors.” The term
“accredited investor” refers generally to institutions with assets
in excess of $5,000,000 or individuals with a net worth in excess
of $1,000,000 or annual income exceeding $200,000, or $300,000
jointly with his or her spouse. The penny stock rules require a
broker-dealer buying our securities, prior to a transaction in a
penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document in a form prepared by the
Commission that provides information about penny stocks and the
nature and level of risks in the penny stock market. The
broker-dealer also must provide the customer with current bid and
offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction and monthly
account statements showing the market value of each penny stock
held in the customer’s account. The bid and offer quotations, and
the broker-dealer and salesperson compensation information, must be
given to the customer orally or in writing prior to effecting the
transaction and must be given to the customer in writing before or
with the customer’s confirmation. In addition, the penny stock
rules require that, prior to a transaction in a penny stock not
otherwise exempt from these rules, the broker-dealer must make a
special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser’s written
agreement to the transaction. These disclosure requirements may
have the effect of reducing the level of trading activity in the
secondary market for the stock that is subject to these penny stock
rules. Consequently, these penny stock rules may affect the ability
and/or willingness of broker-dealers to trade our securities,
either directly or on behalf of their clients, may discourage
potential investor’s from purchasing our securities, or may
adversely affect the ability of our stockholders to sell their
shares.
The Financial Industry Regulatory Authority, Inc. (“FINRA”) has
adopted sales practice requirements that may limit a stockholder’s
ability to buy and sell our Common Stock, which could depress the
price of our Common Stock. In addition to the “penny stock”
rules described above, FINRA has adopted rules that require that,
in recommending an investment to a customer, a broker-dealer must
have reasonable grounds for believing that the investment is
suitable for that customer. Prior to recommending speculative
low-priced securities to their non-institutional customers,
broker-dealers must make reasonable efforts to obtain information
about the customer’s financial status, tax status, investment
objectives, and other information. Under interpretations of these
rules, FINRA believes that there is a high probability that
speculative low-priced securities will not be suitable for at least
some customers. Thus, the FINRA requirements may make it more
difficult for broker-dealers to recommend that their customers buy
our Common Stock, which could limit your ability to buy and sell
our Common Stock, have an adverse effect on the market for our
shares, and thereby depress our price per share of Common
Stock.
The elimination of monetary liability against our directors,
officers, and employees under Nevada law and the existence of
indemnification rights for our obligations to our directors,
officers, and employees may result in substantial expenditures by
us and may discourage lawsuits against our directors, officers, and
employees. Our Articles of Incorporation contain a
provision limiting the personal liability of our directors and
officers to our stockholders and to us for damages for the breach
of a fiduciary duty as a director or officer except with respect to
(i) acts or omissions that involve intentional misconduct, fraud,
or a knowing violation of the law or (ii) the payment of dividends
in violation of Nevada law. We also previously entered into
employment agreements with each of our officers pursuant to which
we have contractual indemnification obligations. The foregoing
indemnification obligations could result in us incurring
substantial expenditures to cover the cost of settlement or damage
awards against directors and officers, which we may be unable to
recoup. These provisions and the resulting costs may also
discourage us from bringing a lawsuit against directors and
officers for breaches of their fiduciary duties, and may similarly
discourage the filing of derivative litigation by our stockholders
against our directors and officers even though such actions, if
successful, might otherwise benefit our stockholders and
us.
Anti-takeover effects of certain provisions of Nevada state law
hinder a potential takeover of us. Nevada has a business
combination law that prohibits certain business combinations
between Nevada corporations and “interested stockholders” for three
years after an “interested stockholder” first becomes an
“interested stockholder,” unless the corporation’s board of
directors approves the combination in advance. For purposes of
Nevada law, an “interested stockholder” is any person who is (i)
the beneficial owner, directly or indirectly, of ten percent or
more of the voting power of the outstanding voting shares of the
corporation or (ii) an affiliate or associate of the corporation
and at any time within the three previous years was the beneficial
owner, directly or indirectly, of ten percent or more of the voting
power of the then-outstanding shares of the corporation. The
definition of the term “business combination” is sufficiently broad
to cover virtually any kind of transaction that would allow a
potential acquirer to use the corporation’s assets to finance the
acquisition or otherwise to benefit its own interests rather than
the interests of the corporation and its other
stockholders.
The
potential effect of Nevada’s business combination law is to
discourage parties interested in taking control of us from doing so
if these parties cannot obtain the approval of our Board. Both of
these provisions could limit the price investors would be willing
to pay in the future for shares of our Common Stock.
Item 1b. Unresolved Staff
Comments.
None.
Item
2. Properties.
Our
principal executive offices are located at 38246 North Hazelwood
Circle, Cave Creek Arizona 85331, and our telephone number is (480)
595-6900. We purchased this property for $420,000 on February 1,
2019. The property encompasses approximately 2,860 square feet.
Approximately 1,907 square feet is designated as office space that
serves as the principal place of business for our management team
and support staff, as well as our sales and customer service teams.
The remaining 950 square feet is designated as our product
development and test facility, and our inventory storage and
fulfillment center. We currently believe that our existing facility
is suitable, but we may require additional space to accommodate the
growth that we are planning to occur. We believe that such space,
if required, will be available to us on commercially reasonable
terms.
Item
3. Legal Proceedings.
From
time to time, we are involved in various legal actions arising in
the normal course of business. We currently have no legal
proceeding to which we are a party to or to which our property is
subject and, to the best of our knowledge, no adverse legal
activity is anticipated or threatened.
Item 4. Mine Safety
Disclosures.
Not
applicable.
PART II
Item 5. Market for Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Recent
Sales of Unregistered Securities:
We issued the following shares of our Common Stock in Fiscal Year
2022:
On
October 22, 2021, the Company and a noteholder agreed to modify the
terms of the May 2021 note payable agreement. The maturity of the
note was extended from November 2021 to April 2022. In return, the
Company agreed to issue the noteholder (identified as Noteholder J
in the footnotes to our financial statements) a total of 2,562,500
shares of common stock as modification and commitment fees. We
issued the shares in reliance on the exemption from registration
pursuant to Section 4(a)(2) of the Securities Act (in that the
shares of the Company’s Common Stock were issued by the Company in
a transaction not involving any public offering).
On
October 25, 2021, the Company issued 6,211,180 shares of common
stock valued at $300,000 in connection with a services agreement.
We issued the shares in reliance on the exemption from registration
pursuant to Section 4(a)(2) of the Securities Act (in that the
shares of the Company’s Common Stock were issued by the Company in
a transaction not involving any public offering).
On
April 17, 2022, the Company issued 9,761,904 shares of common
stock, valued at $548,738 as default penalty to a certain
noteholder. We issued the shares in reliance on the exemption from
registration pursuant to Section 4(a)(2) of the Securities Act (in
that the shares of the Company’s Common Stock were issued by the
Company in a transaction not involving any public
offering).
On
April 20, 2022, the Company issued 4,111,111 shares of its common
stock to a certain noteholder, for debt and interest conversions by
the noteholder. The shares were valued at $220,000. We issued the
shares in reliance on the exemption from registration pursuant to
Section 4(a)(2) of the Securities Act (in that the shares of the
Company’s Common Stock were issued by the Company in a transaction
not involving any public offering).
On
May 19, 2022, the Company issued 8,928,571 shares of its common
stock to Noteholder J, valued at $294,643 in connection with a
financing agreement. We issued the shares in reliance on the
exemption from registration pursuant to Section 4(a)(2) of the
Securities Act (in that the shares of the Company’s Common Stock
were issued by the Company in a transaction not involving any
public offering).
Market
Information
Our
Common Stock is quoted on the OTCM’s Pink® Open Market,
under the symbol “EDXC.” The following table shows the high and low
closing bid prices of our Common Stock for periods indicated as
reported by OTCM. The market quotations reflect inter-dealer
prices, without retail mark-up, mark-down, or commission, and may
not necessarily represent actual transactions.
|
Quarter Ended |
|
High Closing Bid
Price Per Share
|
|
|
Low Closing Bid
Price Per Share
|
|
| Fiscal Year
2023 |
|
|
|
|
|
|
|
|
| Second Quarter (through January 12,
2023) |
|
$ |
0.0897 |
|
|
$
|
0.04
|
|
| First Quarter |
|
$ |
0.0897 |
|
|
$ |
0.0415 |
|
| |
|
|
|
|
|
|
|
|
| Fiscal Year
2022 |
|
|
|
|
|
|
|
|
| Fourth Quarter |
|
$ |
0.100 |
|
|
$ |
0.0245 |
|
| Third Quarter |
|
$ |
0.0713 |
|
|
$ |
0.0008 |
|
| Second Quarter |
|
$ |
0.049 |
|
|
$ |
0.029 |
|
| First Quarter |
|
$ |
0.0579 |
|
|
$ |
0.031 |
|
| |
|
|
|
|
|
|
|
|
| Fiscal Year
2021 |
|
|
|
|
|
|
|
|
| Fourth Quarter |
|
$ |
0.115 |
|
|
$ |
0.046 |
|
| Third Quarter |
|
$ |
0.189 |
|
|
$ |
0.093 |
|
| Second Quarter |
|
$ |
0.285 |
|
|
$ |
0.090 |
|
| First Quarter |
|
$ |
0.145 |
|
|
$ |
0.044 |
|
| |
|
|
|
|
|
|
|
|
| Fiscal Year
2020 |
|
|
|
|
|
|
|
|
| Fourth Quarter |
|
$ |
0.0829 |
|
|
$ |
0.044 |
|
| Third Quarter |
|
$ |
0.10 |
|
|
$ |
0.0605 |
|
| Second Quarter |
|
$ |
0.117 |
|
|
$ |
0.05 |
|
| First Quarter |
|
$ |
0.206 |
|
|
$ |
0.087 |
|
On
January 12, 2023, the closing bid price of our Common Stock as
reported by OTCM was $0.0448 per share.
Holders
As of
January 9, 2023, we had approximately 438 record holders of shares
our Common Stock. As of January 9, 2023, we had 505,157,952 shares
of our Common Stock issued and outstanding.
Securities Authorized for Issuance under Equity Compensation
Plans
We do
not have any equity compensation plans.
Dividends
We
currently intend to retain all available funds and any future
earnings to support our operations and finance the growth and
development of our business. We do not intend to pay cash dividends
on our Common Stock for the foreseeable future. Any future
determination related to dividend policy will made at the
discretion of our Board.
Securities Not Registered under the Securities Act; Rule 144
Eligibility
None
of our shares of Common Stock and preferred stock has been
registered under the Securities Act. Accordingly, the shares of
Common Stock and preferred stock issued and outstanding that are
not in the public markets through an exemption from such
registration may not be resold absent registration under the
Securities Act and applicable state securities laws or an available
exemption thereunder.
Rule
144
Shares
of our Common Stock that are restricted securities may be eligible
for resale in compliance with Rule 144 of the Securities Act,
subject to the requirements described below. “Restricted
securities,” as defined under Rule 144, were issued and sold by us
in reliance on exemptions from the registration requirements of the
Securities Act. These shares may be sold in the public market only
if registered or if they qualify for an exemption from
registration, such as Rule 144. Below is a summary of the
requirements for sales of our Common Stock pursuant to Rule 144
commencing 90 days after our class of Common Stock became
registered pursuant to Section 12(g) of the Exchange Act on May 3,
2021.
For a
person who has not been deemed to have been one of our affiliates
at any time during the 90 days preceding a sale, sales of our
shares of Common Stock held longer than six months, but less than
one year, will be subject only to the current public information
requirement. A person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who
has beneficially owned the shares proposed to be sold for at least
one year, is entitled to sell his or her shares without complying
with the manner of sale, public information, volume limitation, or
notice provisions of Rule 144.
A
person who is our affiliate or who was our affiliate at any time
during the preceding three months and who has beneficially owned
restricted securities for at least six months, will generally be
entitled to sell within any three-month period a number of shares
that does not exceed one percent of the number of shares of our
Common Stock then outstanding. Sales under Rule 144 by our
affiliates are also subject to manner of sale provisions and notice
requirements and to the availability of current public information
about us. Persons who may be deemed to be affiliates generally
include individuals or entities that control, or are controlled by,
or are under common control with, us and may include our directors
and officers, as well as our significant stockholders.
Item 6. Selected Financial
Data
Not
applicable.
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
The
following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the
financial statements and related notes thereto included elsewhere
in this Annual Report on Form 10-K. In addition to historical
financial information, the following discussion and analysis
contains forward-looking statements based upon current expectations
that involve risks, uncertainties, and assumptions, such as our
plans, objectives, expectations, and intentions. Forward-looking
statements are statements not based on historical information and
which relate to future operations, strategies, financial results,
or other developments. Forward-looking statements are based upon
estimates, forecasts, and assumptions that are inherently subject
to significant business, economic, and competitive uncertainties,
and contingencies, many of which are beyond our control and many of
which, with respect to future business decisions, are subject to
change. These uncertainties and contingencies can affect actual
results and could cause actual results to differ materially from
those expressed in any forward-looking statements made by us, or on
our behalf. We disclose any obligation to update forward-looking
statements. Our actual results and the timing of events could
differ materially from those anticipated in these forward-looking
statements as a result of a number of factors, including those
discussed under “Forward-Looking Statements,” “Item 1. Business,”
and “Item 1A. Risk Factors” sections in this Annual Report on Form
10-K. We use words such as “anticipate,” “estimate,” “plan,”
“project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,”
“may,” “will,” “should,” “could,” and similar expressions to
identify forward-looking statements.
Overview
We
develop hemp-derived, cannabidiol-based products, each formulated
to address key segments of the health and wellness market. Through
our subsidiaries, we sell high-end, full-spectrum hemp-derived
oils, extracts, topicals, and pet products, all with the shared
purpose of supporting the potential of relief of pain and
inflammation for humans and pets, through our e-commerce site
www.cbdunlimited.com, as well as other online and in-store
retailers. In addition to our consumer products, our Gorilla-Tek
division offers a state-of the art automated dispensing system
providing a secure method of distributing hemp-based products. The
proprietary system enables retailers to increase sales channels
without opening a physical storefront location. Complementing our
retail products and Gorilla-Tek divisions, we also own and operate
a number of wholly-owned subsidiaries that offer technology and
consulting solutions to the hemp and CBD industry, including an
easy to use “Seed-to-Shelf” compliance and inventory tracking and
process management system for regulated products in a front of
counter pharmacy support platform.
The
Company was incorporated in the State of Nevada on September 5,
1997 as Micron Solutions in order to complete a merger with
Shillelagh. In November 1997, Shillelagh merged with and into
Micron Solutions, with Micron Solutions as the surviving entity. In
2002, Micron Solutions entered into the Exchange Agreement with
PanaMed, Inc., and all of its shareholders, pursuant to which
PanaMed, Inc. became the Company’s wholly-owned subsidiary. In
connection with the Exchange Agreement, Micron also changed its
name to PanaMed Corporation.
In
June 2005, we filed a Certificate of Amendment to Articles of
Incorporation with the Secretary of State of the State of Nevada to
change our name to Endexx Corporation. At that time, we adopted our
current trading symbol, “EDXC.” In September 2005, PanaMed
Corporation acquired VBB, an SaaS provider, through a merger,
whereby VBB merged with and into us, and we were the surviving
entity. Subsequently, we operated as a diversified technology and
SaaS and compliance and tracking systems company, until we shifted
our focus to the hemp-derived product industry in August 2014. In
October 2018, we changed our name to CBD Unlimited, Inc., and in
May 2020, we changed our name back to Endexx Corporation, with CBD
Unlimited, Inc., becoming our wholly-owned subsidiary. On January
25, 2021, we filed our Amended and Restated Articles of
Incorporation.
Results
of Operations
Fiscal Year Ended September 30, 2022 Compared to Fiscal Year Ended
and September 30, 2021
Revenues
Revenues
for the fiscal year ended September 30, 2022 were $1,277,579, as
compared to $650,515 for the fiscal year ended September 30, 2021,
a $627,064 (or 96.4%) increase in revenues. The improvement in
revenue for fiscal 2022 is partly attributable to improved market
conditions, new sales channels and improved marketing efforts in
promoting the Company’s products.
We
expect an increase in commercial revenue over the next 12 months as
our business model is implemented and expanded and our commercial
and retail accounts continue to grow and expand the products being
sold in each of their retail locations. Additionally, we will
continue to focus on the development of both current and new
products while continuing to commercialize existing products
lines.
Gross Profit (Loss)
Gross profit (loss) for the fiscal year ended September 30, 2022
was a profit of $503,009, as compared to a loss of $344,078 for the
fiscal year ended September 30, 2021. The gross profit in 2022 was
attributable to increased revenues and decreased inventory
impairment.
Operating Expenses
Operating
expenses for the fiscal year ended September 30, 2022, were
$3,865,244, as compared to $5,027,251for the fiscal year ended
September 30, 2021, a decrease of $1,162,007. The decrease in
operating expenses over the prior period can be attributed to
significant decreases in advertising expenses.
We
expect that operating expenses will continue to decrease over the
next 12 months as our long-term growth strategy will require
significant changes in personnel and facilities, offset increased
research and development expenses to ensure that products nearing
commercialization are brought to market as quickly and as
effectively. We cannot provide any assurances that our strategy
will be effective.
Other Expense
Other
expense for the fiscal year ended September 30, 2022 was $766,711,
as compared to other expense of $1,436,825 for the year ended
September 30, 2020, a $670,114 year-over-year decrease. This is the
result of significantly lower interest expenses. Derivative
liabilities are associated with loans that are convertible and have
variable pricing on the equivalent shares of Common Stock. At the
end of each period, these derivative liabilities are valued, and
the net change is recorded as a gain or loss in other expense and
income.
Loss from Operations and Total Net Loss
Loss
from operations for the fiscal year ended September 30, 2022 was
$3,362,235, as compared to loss from operations of $5,371,329 for
the fiscal year ended September 30, 2021, an improvement in net
loss from operations of $2,009,094. The decrease in loss from
operations for 2022 was the result of (i) a increase in gross
revenues, (ii) a marginally lower increase in cost of revenues, and
(iii) a decrease in inventory impairment, and (iv) a decrease in
total operating expenses. Total net loss for the fiscal year ended
September 30, 2022 was $4,128,946, as compared to a total net loss
of $6,808,154 for the fiscal year ended September 30, 2021, a
decrease of $2,679,208 in total net loss. The decrease in total net
loss for 2022 was as a result of decreased operating expenses,
lower interest expenses and gains in default penalties. Derivative
liabilities are associated with loans that are convertible and have
variable pricing on the equivalent shares of Common Stock. At the
end of each period, these derivative liabilities are valued, and
the net change is recorded as a gain or loss in other expense and
income.
We do
not expect to realize net income in the near term as anticipated
operational expenses are expected to increase as a result of
increased research and development expenses, consulting fees,
payroll expenses, and administrative costs as staffing increases.
Despite management’s focus on ensuring operating efficiencies, we
expect to continue to operate at a loss through fiscal 2023 only in
part due to the COVID-19 pandemic. Nevertheless, we expect that,
during our current fiscal year, the adverse impact of COVID-19 on
our business will slowly abate, as the positivity rate in tests for
COVID-19 continues to decrease along with the new infection and
mortality rates and the number of people becoming vaccinated
continues to increase.
Liquidity and Capital Resources – Fiscal Year Ended September 30,
2022
Going
Concern
We
have incurred operating losses since inception and have negative
cash flow from operations. As of September 30, 2022, we had a
stockholders’ deficit of $8,154,808, a working capital deficit of
$8,333,828, and we incurred an accumulated deficit of $43,642,790
and incurred a net loss of $4,128,946 in fiscal year 2022.
Additionally, we utilized $2,953,681 in cash during the fiscal year
ended September 30, 2022, while we received $3,297,976 in cash from
financing activities. As a result, our continuation as a going
concern is dependent on our ability to obtain additional financing
until we can generate sufficient cash flow from operations to meet
our obligations. We intend to continue to seek additional debt or
equity financing to continue our operations, but there can be no
assurance that such financing will be available on terms acceptable
to us, if at all.
Our
consolidated financial statements have been prepared on a going
concern basis, which implies we may not continue to meet our
obligations and continue our operations for the next fiscal year.
The continuation of our Company as a going concern is dependent
upon our ability to obtain necessary debt or equity financing to
continue operations until we begin generating positive cash
flow.
As of
September 30, 2022, we had a cash position of $365,162. We estimate
our operating expenses for the near- and mid-term may continue to
exceed the revenues that we may generate, and we may need to raise
capital through either debt or equity offerings to continue
operations. We are in the early stages of our business. We are
required to fund growth from financing activities, and we intend to
rely on a combination of equity and debt financings. Due to market
conditions and the early stage of our operations, there is
considerable risk that we will not be able to raise such financings
at all, or on terms that are not overly dilutive to our existing
stockholders. We can offer no assurance that we will be able to
raise such funds. If we are unable to raise the funds we require
for all of our planned operations, we may be forced to reallocate
funds from other planned uses and may suffer a significant negative
effect on our business plan and operations, including our ability
to develop new products and continue our current operations. As a
result, our business may suffer, and we may be forced to reduce or
discontinue operations.
There
is no assurance that we will ever be profitable or that debt or
equity financing will be available to us in the amounts, on terms,
and at times deemed acceptable to us, if at all. The issuance of
additional equity securities by us would result in a significant
dilution in the equity interests of our current stockholders.
Obtaining commercial loans, assuming those loans would be
available, would increase our liabilities and future cash
commitments. If we are unable to obtain financing in the amounts
and on terms deemed acceptable to us, we may be unable to continue
our business, as planned, and as a result may be required to scale
back or cease operations for our business, the result of which
would be that our stockholders would lose some or all of their
investment. The consolidated financial statements do not include
any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and
classifications of liabilities that may result should we be unable
to continue as a going concern.
Cash
Flow – Operating Activities
For
the 12 months ended September 30, 2022, our cash used in operating
activities amounted to an outflow of $1,463,181, compared to cash
used during the 12 months ended September 30, 2021 of
$3,720,267.The decrease in cash used in our operating activities is
due to changes in our inventory value, prepaid expenses, accounts
receivable, and accrued interest on notes payable.
Cash
Flow – Financing Activities
For
the 12 months ended September 30, 2022, our cash provided by
financing activities amounted to $3,297,976, which includes $0 in
proceeds received from the issuances of our Common Stock and
$2,064,123 in proceeds from the issuance of convertible notes, and
$333,123 in proceeds from the issuance of notes payable.
For
the 12 months ended September 30, 2021, our cash provided by
financing activities amounted to $3,736,484, which includes
$328,000 in proceeds received from the issuances of our Common
Stock and $1,614,234 in proceeds from the issuance of convertible
notes, and $1,815,000 in proceeds from the issuance of notes
payable.
Cash
Flow – Investing Activities
Net
cash used in investing activities in the 12 months ended September
30, 2022 was $1,490,500, compared to net cash used in investing
activities in the 12 months ended September 30, 2021 of
$0.
Accounts Receivable and Allowance for Doubtful Account
Receivable
Accounts
receivable are recorded at net realizable value. We determine
provisions for uncollectible accounts, sales returns, and claims
based upon factors including the credit risk and activity of
specific distributors and resellers, historical trends, and other
information. If we become aware of a specific distributor’s or
reseller’s inability to meet its financial obligations, bad debt
charges are recorded based on an overall assessment of past due
accounts receivable outstanding. In the opinion of management, a
provision was deemed necessary for uncollectible
accounts.
Inventory
The cost of inventory using the standard cost method, which
approximates actual cost based on a first-in, first-out method. Our
inventories are valued at the lower of cost or net realizable
value. Our inventory consists almost entirely of finished and
unfinished goods, and freight, which include CBD creams, oils,
capsules, and sprays. We periodically evaluate and adjust
inventories for obsolescence. In the opinion of management, no
provision for obsolescence is deemed necessary. The shelf life of
all product inventory is two years, and as of September 30, 2022,
we had approximately $777,911 of product in inventory, which was a
decrease of approximately $142,901, compared to approximately
$920,812 at September 30, 2021. We expect the balance of inventory
to increase in direct relation to the increase in sales that we
expect.
Goodwill and Intangible Assets
Goodwill
arises from business combinations and is generally determined as
the excess of the fair value of the consideration transferred, plus
the fair value of any noncontrolling interests in the acquiree,
over the fair value of the net assets acquired and liabilities
assumed as of the acquisition date. Goodwill acquired in a purchase
business combination and determined to have an indefinite useful
life are not amortized, but tested for impairment at least annually
or more frequently if events and circumstances exists that indicate
that a goodwill impairment test should be performed. We have
selected December 31 as the date to perform the annual impairment
test.
Intangible
assets represent both indefinite lived and definite lived assets.
Trademarks are deemed to have definite useful lives of ten years,
are amortized, and are tested annually for impairment. Intangible
assets are reported on the balance sheet at cost less accumulated
amortization. We have selected September 30 as the date to perform
the annual impairment test.
Stock-Based Compensation
FASB’s
ASC Topic 718, Stock Compensation (formerly, FASB Statement 123R),
prescribes accounting and reporting standards for all stock-based
payment transactions in which employee and non-employee services
are acquired. We measure the cost of employee and non-employee
services received in exchange for an award of equity instruments
based on the grant-date fair value of the award. Fair value for
restricted stock awards is valued using the closing price of our
Common Stock on the date of grant. For our 2022 and 2021 fiscal
years, we recognized stock-based compensation expense of
approximately $455,800, and $721,021, respectively.
Off Balance Sheet Arrangements
As of
September 30, 2022 and on September 30, 2021, we had no off-balance
sheet arrangements that have or are reasonably likely to have a
current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures, or capital resources that is
material to stockholders.
Critical Accounting Policies
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America
requires us to make a number of estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements. Such estimates and assumptions affect the
reported amounts of revenues and expenses during the reporting
period. We base our estimates on historical experiences and on
various other assumptions that we believe to be reasonable under
the circumstances. Actual results may differ materially from these
estimates under different assumptions and conditions. We continue
to monitor significant estimates made during the preparation of our
financial statements. On an ongoing basis, we evaluate estimates
and assumptions based upon historical experience and various other
factors and circumstances. We believe our estimates and assumptions
are reasonable in the circumstances; however, actual results may
differ from these estimates under different future
conditions.
Item 7a. Quantitative And Qualitative
Disclosures About Market Risk.
Not
applicable.
Item
8. Financial Statements and Supplementary Data.
Table
of Contents
ENDEXX
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, |
|
|
September
30, |
|
|
|
|
2022 |
|
|
2021 |
|
| |
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
Current
assets |
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
365,162 |
|
|
$ |
20,867 |
|
|
Accounts
receivable, net of allowance of $58,257, respectively |
|
|
256,096 |
|
|
|
50,755 |
|
|
Inventory,
net of allowance of $1,071,469 and $1,001,542,
respectively |
|
|
777,911 |
|
|
|
920,812 |
|
|
Prepaid
expenses |
|
|
279,560 |
|
|
|
41,648 |
|
|
Total
current assets |
|
|
1,678,729 |
|
|
|
1,034,082 |
|
| |
|
|
|
|
|
|
|
|
|
Investment
in marketable securities |
|
|
420 |
|
|
|
9,920 |
|
|
Equity
method investment |
|
|
2,000,000 |
|
|
|
- |
|
|
Note
receivable |
|
|
1,500,000 |
|
|
|
- |
|
|
Property
and equipment, net of accumulated depreciation of $77,044 and
$75,388, respectively |
|
|
28,005 |
|
|
|
449,661 |
|
|
Prepaid
expenses |
|
|
- |
|
|
|
250,000 |
|
|
Intangible
- website domains |
|
|
16,250 |
|
|
|
16,250 |
|
|
Total
assets |
|
$ |
5,223,404 |
|
|
$ |
1,759,913 |
|
| |
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Deficit |
|
|
|
|
|
|
|
|
|
Current
liabilities |
|
|
|
|
|
|
|
|
|
Accounts
payable |
|
$ |
2,253,250 |
|
|
$ |
1,020,464 |
|
|
Customer
deposit |
|
|
15,182 |
|
|
|
36,705 |
|
|
Accrued
expenses |
|
|
19,756 |
|
|
|
43,469 |
|
|
Accrued
interest |
|
|
237,703 |
|
|
|
1,095,248 |
|
|
Payroll
and taxes payable, including related party |
|
|
915,230 |
|
|
|
849,919 |
|
|
Notes
payable, net of discount of $4,291 and $10,957,
respectively |
|
|
5,771,861 |
|
|
|
1,201,584 |
|
|
Convertible
notes payable, net of discount of $1,474,338 and $-0-,
respectively |
|
|
799,575 |
|
|
|
5,452,111 |
|
|
Derivative
liability |
|
|
- |
|
|
|
1,799,354 |
|
|
Total
current liabilities |
|
|
10,012,557 |
|
|
|
11,498,854 |
|
| |
|
|
|
|
|
|
|
|
|
Notes
payable, net of current portion |
|
|
3,365,655 |
|
|
|
248,200 |
|
| |
|
|
|
|
|
|
|
|
|
Total
liabilities |
|
|
13,378,212 |
|
|
|
11,747,054 |
|
| |
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 8) |
|
|
- |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Stockholders’
deficit |
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.0001 Par Value, 10,000,000 share authorized |
|
|
|
|
|
|
|
|
|
Series
A preferred stock, 1,824,000 issued and outstanding,
respectively |
|
|
182 |
|
|
|
182 |
|
|
Series
H preferred stock, 4,878,049 and -0- issued and outstanding,
respectively |
|
|
488 |
|
|
|
- |
|
|
Series
Z preferred stock, -0- and 719,571 issued and outstanding,
respectively |
|
|
- |
|
|
|
72 |
|
|
Preferred
stock, value |
|
|
- |
|
|
|
72 |
|
|
Common
stock, $0.0001 Par Value, 1,000,000,000 share authorized,
501,376,264 and 486,313,058 issued and outstanding,
respectively |
|
|
50,138 |
|
|
|
48,631 |
|
|
Additional
paid-in capital |
|
|
35,437,174 |
|
|
|
29,477,818 |
|
|
Accumulated
deficit |
|
|
(43,642,790 |
) |
|
|
(39,513,844 |
) |
|
Total
stockholders’ deficit |
|
|
(8,154,808 |
) |
|
|
(9,987,141 |
) |
|
Total
liabilities and stockholders’ deficit |
|
$ |
5,223,404 |
|
|
$ |
1,759,913 |
|
ENDEXX CORPORATION AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
|
For
the years ended |
|
|
|
|
September
30, |
|
|
|
|
2022 |
|
|
2021 |
|
| |
|
|
|
|
|
|
|
Revenues |
|
$ |
1,277,579 |
|
|
$ |
650,515 |
|
|
Cost
of revenues |
|
|
596,228 |
|
|
|
589,056 |
|
|
Inventory
impairment |
|
|
178,342 |
|
|
|
405,537 |
|
|
Gross
profit (loss) |
|
|
503,009 |
|
|
|
(344,078 |
) |
| |
|
|
|
|
|
|
|
|
|
Operating
expenses |
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
20,606 |
|
|
|
20,400 |
|
|
Advertising
and promotion |
|
|
564,075 |
|
|
|
1,778,073 |
|
|
Payroll
expenses |
|
|
609,288 |
|
|
|
637,493 |
|
|
Professional
fees |
|
|
1,773,680 |
|
|
|
1,721,236 |
|
|
Research
and development |
|
|
27,067 |
|
|
|
10,145 |
|
|
General
and administrative expenses |
|
|
870,528 |
|
|
|
859,904 |
|
|
Total
operating expenses |
|
|
3,865,244 |
|
|
|
5,027,251 |
|
| |
|
|
|
|
|
|
|
|
|
Loss
from operations |
|
|
(3,362,235 |
) |
|
|
(5,371,329 |
) |
| |
|
|
|
|
|
|
|
|
|
Other
(income) and expense |
|
|
|
|
|
|
|
|
|
Change
in fair value of derivative liability |
|
|
4,117,085 |
|
|
|
(28,724 |
) |
|
Financing
costs and discount amortization |
|
|
1,452,884 |
|
|
|
1,288,527 |
|
|
Interest
expenses |
|
|
1,241,493 |
|
|
|
950,549 |
|
|
Default
penalty |
|
|
584,738 |
|
|
|
91,576 |
|
|
Gain
from settlement of derivative liability |
|
|
(5,916,439 |
) |
|
|
(865,103 |
) |
|
Gain
on settlement of liabilities |
|
|
(289,100 |
) |
|
|
- |
|
|
Gain
on disposition of assets |
|
|
(423,950 |
) |
|
|
- |
|
|
Total
other (income) expense |
|
|
766,711 |
|
|
|
1,436,825 |
|
| |
|
|
|
|
|
|
|
|
|
Net
loss |
|
$ |
(4,128,946 |
) |
|
$ |
(6,808,154 |
) |
| |
|
|
|
|
|
|
|
|
|
Net
loss per share - basic |
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
| |
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic |
|
|
503,983,723 |
|
|
|
455,049,510 |
|
ENDEXX CORPORATION AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ DEFICIT
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Preferred
Stock - Series A |
|
|
Preferred
Stock - Series H |
|
|
Preferred
Stock - Series Z |
|
|
Common
Stock |
|
|
Additional
Paid-in |
|
|
Accumulated |
|
|
|
|
| |
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Total |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at September 30, 2020 |
|
|
7,296,000 |
|
|
$ |
730 |
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
- |
|
|
|
404,908,141 |
|
|
$ |
40,491 |
|
|
$ |
21,010,497 |
|
|
$ |
(32,705,690 |
) |
|
$ |
(11,653,972 |
) |
|
Shares
issued for private placements |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
7,031,111 |
|
|
|
703 |
|
|
|
327,297 |
|
|
|
- |
|
|
|
328,000 |
|
|
Shares
issued for services |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
7,332,496 |
|
|
|
733 |
|
|
|
720,288 |
|
|
|
- |
|
|
|
721,021 |
|
|
Shares
issued for debt settlement |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
41,621,310 |
|
|
|
4,162 |
|
|
|
1,406,683 |
|
|
|
- |
|
|
|
1,410,845 |
|
|
Shares
issued for conversion of related party liabilities |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
54,658,192 |
|
|
|
5,466 |
|
|
|
1,415,647 |
|
|
|
- |
|
|
|
1,421,113 |
|
|
Shares
issued for related party liability settlements |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
172,989 |
|
|
|
17 |
|
|
|
- |
|
|
|
- |
|
|
|
885,684 |
|
|
|
- |
|
|
|
885,701 |
|
|
Shares
issued for financing |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
16,420,000 |
|
|
|
1,642 |
|
|
|
1,834,318 |
|
|
|
- |
|
|
|
1,835,960 |
|
|
Shares
issued for settlement of preferred stock |
|
|
(5,472,000 |
) |
|
|
(548 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
9,000,000 |
|
|
|
900 |
|
|
|
(352 |
) |
|
|
- |
|
|
|
- |
|
|
Common
shares exchanged for preferred stock |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
546,582 |
|
|
|
55 |
|
|
|
(54,658,192 |
) |
|
|
(5,466 |
) |
|
|
5,411 |
|
|
|
- |
|
|
|
- |
|
|
Capital
contribution from related party |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
274,514 |
|
|
|
- |
|
|
|
274,514 |
|
|
Settlement
of derivative liability |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,597,831 |
|
|
|
- |
|
|
|
1,597,831 |
|
|
Net
loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(6,808,154 |
) |
|
|
(6,808,154 |
) |
| Balances
at September 30, 2021 |
|
|
1,824,000 |
|
|
$ |
182 |
|
|
|
- |
|
|
$ |
- |
|
|
|
719,571 |
|
|
$ |
72 |
|
|
|
486,313,058 |
|
|
$ |
48,631 |
|
|
$ |
29,477,818 |
|
|
$ |
(39,513,844 |
) |
|
$ |
(9,987,141 |
) |
|
Shares
issued for services |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
10,311,180 |
|
|
|
1,031 |
|
|
|
454,769 |
|
|
|
- |
|
|
|
455,800 |
|
|
Shares
issued for financing |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
11,491,071 |
|
|
|
1,150 |
|
|
|
429,306 |
|
|
|
- |
|
|
|
430,456 |
|
|
Warrants
issued for financing |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
523,238 |
|
|
|
- |
|
|
|
523,238 |
|
|
Shares
issued for conversion of interest |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,111,111 |
|
|
|
411 |
|
|
|
221,589 |
|
|
|
- |
|
|
|
222,000 |
|
|
Sharess
issued for default penalty |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
9,761,904 |
|
|
|
976 |
|
|
|
583,762 |
|
|
|
- |
|
|
|
584,738 |
|
|
Shares
and liabilities surrendered for equity in subsidiary |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(719,571 |
) |
|
|
(72 |
) |
|
|
(20,612,060 |
) |
|
|
(2,061 |
) |
|
|
236,133 |
|
|
|
- |
|
|
|
234,000 |
|
|
Shares
issued for investment |
|
|
- |
|
|
|
- |
|
|
|
4,878,049 |
|
|
|
488 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,999,512 |
|
|
|
- |
|
|
|
2,000,000 |
|
|
Warrants
and options issued in connection with debt |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,511,047 |
|
|
|
- |
|
|
|
1,511,047 |
|
|
Net
loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(4,128,946 |
) |
|
|
(4,128,946 |
) |
| Balances
at September 30, 2022 |
|
|
1,824,000 |
|
|
$ |
182 |
|
|
|
4,878,049 |
|
|
$ |
488 |
|
|
|
- |
|
|
$ |
- |
|
|
|
501,376,264 |
|
|
$ |
50,138 |
|
|
$ |
35,437,174 |
|
|
$ |
(43,642,790 |
) |
|
$ |
(8,154,808 |
) |
ENDEXX CORPORATION AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the years ended |
|
|
|
|
September
30, |
|
|
|
|
2022 |
|
|
2021 |
|
|
Operating
activities |
|
|
|
|
|
|
|
|
|
Net
loss |
|
$ |
(4,128,946 |
) |
|
$ |
(6,808,154 |
) |
|
Adjustments
to reconcile net loss to net cash used in operating
activities: |
|
|
|
|
|
|
|
|
|
Stock-based
compensation |
|
|
455,800 |
|
|
|
721,021 |
|
|
Shares
issued for financing costs |
|
|
430,456 |
|
|
|
477,560 |
|
|
Warrants
issued for financing costs |
|
|
523,238 |
|
|
|
- |
|
|
Depreciation
and amortization |
|
|
20,606 |
|
|
|
20,400 |
|
|
Amortization
of debt discount |
|
|
430,708 |
|
|
|
679,277 |
|
|
Change
in fair value of derivative liability |
|
|
4,117,085 |
|
|
|
(28,724 |
) |
|
Gain
from settlement of liabilities |
|
|
(289,100 |
) |
|
|
- |
|
|
Gain
from settlement of derivative liabilities |
|
|
(5,916,439 |
) |
|
|
(865,103 |
) |
|
Gain
on disposition of assets |
|
|
(423,950 |
) |
|
|
- |
|
|
Impairment
expense |
|
|
178,342 |
|
|
|
405,537 |
|
|
Financing
costs |
|
|
69,682 |
|
|
|
131,690 |
|
|
Default
penalty |
|
|
584,738 |
|
|
|
91,576 |
|
|
Changes
in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
Accounts
receivable |
|
|
(205,341 |
) |
|
|
(21,314 |
) |
|
Inventory |
|
|
(35,441 |
) |
|
|
(216,704 |
) |
|
Prepaid
expenses |
|
|
72,088 |
|
|
|
(42,088 |
) |
|
Accounts
payable |
|
|
1,232,786 |
|
|
|
599,982 |
|
|
Customer
deposit |
|
|
(21,523 |
) |
|
|
- |
|
|
Accrued
expenses |
|
|
(23,713 |
) |
|
|
(78,407 |
) |
|
Accrued
interest |
|
|
1,166,432 |
|
|
|
805,993 |
|
|
Accrued
interest, related party |
|
|
- |
|
|
|
85,776 |
|
|
Payroll
and taxes payable, primarily related party |
|
|
299,311 |
|
|
|
321,415 |
|
|
Net
cash used in operating activities |
|
|
(1,463,181 |
) |
|
|
(3,720,267 |
) |
| |
|
|
|
|
|
|
|
|
|
Investing
activities: |
|
|
|
|
|
|
|
|
|
Proceeds
from sale of investments in marketable securities |
|
|
9,500 |
|
|
|
- |
|
|
Issuance
of note receivable |
|
|
(1,500,000 |
) |
|
|
- |
|
|
Net
cash used in investing activities |
|
|
(1,490,500 |
) |
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
Financing
activities: |
|
|
|
|
|
|
|
|
|
Proceeds
from sale of common stock |
|
|
- |
|
|
|
328,000 |
|
|
Proceeds
from convertible notes payable |
|
|
2,964,853 |
|
|
|
1,614,234 |
|
|
Proceeds
from notes payable |
|
|
333,123 |
|
|
|
1,815,000 |
|
|
Repayment
of note payable |
|
|
- |
|
|
|
(20,750 |
) |
|
Net
cash provided by financing activities |
|
|
3,297,976 |
|
|
|
3,736,484 |
|
| |
|
|
|
|
|
|
|
|
|
Net
increase in cash |
|
$ |
344,295 |
|
|
$ |
16,217 |
|
| Cash,
beginning of period |
|
|
20,867 |
|
|
|
4,650 |
|
| Cash,
end of period |
|
$ |
365,162 |
|
|
$ |
20,867 |
|
| |
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes |
|
$ |
- |
|
|
$ |
- |
|
|
Cash
paid for interest |
|
$ |
75,061 |
|
|
$ |
58,780 |
|
| |
|
|
|
|
|
|
|
|
|
Supplemental
schedule of non-cash investing and financing
activities: |
|
|
|
|
|
|
|
|
|
Convertible
notes and interest converted to common stock |
|
$ |
222,000 |
|
|
$ |
1,410,845 |
|
|
Debt
discount at origination |
|
$ |
387,333 |
|
|
$ |
68,100 |
|
|
Prepaid
expenses from note payable |
|
$ |
60,000 |
|
|
$ |
- |
|
|
Convertible
notes, notes payable and interest settled through issuance of notes
payable |
|
$ |
7,371,487 |
|
|
$ |
- |
|
|
Preferred
stock issued for equity method investment |
|
$ |
2,000,000 |
|
|
$ |
- |
|
|
Preferred
stock surrendered for equity in subsidiary |
|
$ |
72 |
|
|
$ |
- |
|
|
Common
stock surrendered for equity in subsidiary |
|
$ |
2,061 |
|
|
$ |
- |
|
|
Related
party liabilities surrendered for equity in subsidiary |
|
$ |
234,000 |
|
|
$ |
- |
|
|
Discount
on convertible notes from warrants and options |
|
$ |
1,511,047 |
|
|
$ |
- |
|
|
Related
party note and interest converted to common stock |
|
$ |
- |
|
|
$ |
1,421,113 |
|
|
Derivative
liability settled through conversion of convertible
notes |
|
$ |
- |
|
|
$ |
1,597,831 |
|
|
Amortization
of right-of-use asset and lease liability |
|
$ |
- |
|
|
$ |
39,000 |
|
|
Notes
and interest payable settled through issuance of convertible
notes |
|
$ |
- |
|
|
$ |
1,057,976 |
|
|
Preferred
stock issued for related party liability settlements |
|
$ |
- |
|
|
$ |
885,701 |
|
|
Contributions
from related party through settlement of liabilities |
|
$ |
- |
|
|
$ |
274,514 |
|
ENDEXX
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
1.
Organization and Basis of Presentation
We
were incorporated under the laws of State of Nevada on September 5,
1997, as Micron Solutions. From 2002-2005, the Company operated as
Panamed Corporation, a biotech service and licensing company.
Panamed Corporation merged with Visual Board Books Inc. (VBB) in
February 2005 and changed the consolidated company name to Endexx
Corporation (the Company).
Our
primary business is the manufacturing and sale of hemp products for
personal use and pets. The Company has the following wholly owned
subsidiaries:
|
|
● |
Global
Solaris Group, LLC |
|
|
● |
Greenleaf
Consulting LLC |
|
|
● |
Cann
Can LLC |
|
|
● |
Together
One Step Closer, LLC |
|
|
● |
PhytoLabs
LLC |
|
|
● |
Go
Green Global Enterprises, Inc. |
|
|
● |
CBD
Health Solutions |
|
|
● |
Kush,
Inc. |
|
|
● |
CBD
Life Brands, Inc. |
|
|
● |
Retail
Pro Associates |
|
|
● |
CBD
Unlimited, Inc. |
|
|
● |
Dispense
Labs LLC |
|
|
● |
Khode,
LLC (70% owner) |
Basis
of Presentation and Going Concern
The
Company prepares its consolidated financial statements in
conformity with generally accepted accounting principles in the
United States of America. These principles require management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Management believes that these estimates are reasonable and
have been discussed with the Board of Directors; however, actual
results could differ from those estimates. The operating results of
the above listed wholly owned subsidiaries were consolidated with
the consolidated financial statements of the Company. All
significant intercompany accounts and transactions have been
eliminated in consolidation.
Our
consolidated financial statements have been presented on the basis
that we are a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of
business. We have sustained operating losses since inception, which
raises substantial doubt about the Company’s ability to continue as
a going concern.
As of
September 30, 2022, we have a working capital deficit of
$8,333,828, and an accumulated deficit of $43,642,790. During the
year ended September 30, 2022, we had a net loss of $4,128,946 and
cash used in operating activities of $1,463,181. The Company’s
ability to continue in existence is dependent on its ability to
develop additional sources of capital, and/or achieve profitable
operations and positive cash flows. Management’s plans with respect
to operations include the sustained and aggressive marketing of
hemp cannabidiol products and raising additional capital through
sales of equity or debt securities as may be necessary to pursue
its business plans and sustain operations until such time as the
Company can achieve profitability. Management believes that
aggressive marketing combined with additional financing as
necessary will result in improved operations and cash flow in 2023
and beyond. However, there can be no assurance that management will
be successful in obtaining additional funding or in attaining
profitable operations. The accompanying consolidated financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.
ENDEXX
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
2.
Summary of Significant Accounting Policies
Use
of Estimates
The
Company’s financial statement preparation requires that management
make estimates and assumptions which affect the reporting of assets
and liabilities and the related disclosure of contingent assets and
liabilities in order to report these financial statements in
conformity with GAAP. Actual results could differ from those
estimates.
Cash
Cash
includes all highly liquid investments that are readily convertible
to known amounts of cash and have original maturities at the date
of purchase of three months or less. There were no cash equivalents
as of September 30, 2022 and 2021.
Accounts
Receivable
Accounts
receivable consists of invoiced and unpaid product sales. The
Company records an allowance for doubtful accounts to allow for any
amounts that may not be recoverable, which is based on an analysis
of the Company’s prior collection experience, customer credit
worthiness, and current economic trends. Accounts are considered
delinquent when payments have not been received within the agreed
upon terms and are written off when management determines that
collection is not probable.
At
September 30, 2022 and September 30, 2021, we recorded $58,257,
respectively, for an allowance for doubtful accounts based upon
management’s review of accounts receivable.
Inventory
Inventory
is composed of finished goods, in-process, and raw goods inventory,
valued on a first in first out basis, and includes production cost,
product freight in, and packaging costs. Slow moving and obsolete
inventories are written down based on a comparison of on-hand
quantities to historical and projected usages.
The
Company has authorized a consignment inventory arrangement with one
of its mass retail customers. After consignment inventory has been
sold by this customer, the customer notifies the Company of the
sale and the Company records revenue in that accounting period. The
Company authorizes the replenishment of consignment inventory based
on orders placed by the customer. The Company is provided with
weekly reports of consignment sales activity and
balances.
Prepaid
Expenses
The
Company considers all items incurred for future services to be
prepaid expenses. As of September 30, 2022 and September 30, 2021,
the Company had $279,560 and $291,648, respectively, of future
professional and advertising services to be received through the
year ended September 30, 2023.
During
March 2020, the Company entered into a barter agreement whereby it
delivered $249,560 of its inventory in exchange for future
advertising credits. The credits, which expire in March 2023, are
valued at the lower of the Company’s cost of market value of the
inventory transferred. Under the terms of the barter agreement, the
Company is required to pay cash equal to a negotiated amount of the
bartered advertising and use the barter credits to pay the balance.
These credits are charged to expense as they are used. As of
September 30, 2022, none of the barter credits have been used and
have been recorded as current assets on the accompanying financial
statements.
The
Company assesses the recoverability of barter credits periodically.
Factors considered in evaluating the recoverability include
management’s plans with respect to advertising for which barter
credits can be used. Any impairment losses are charged to
operations as they are determinable. During the years ended
September 30, 2022 and 2021, the Company recorded no impairment
losses related to barter credits.
ENDEXX
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation and
amortization. Maintenance and repairs are charged to operations as
incurred. Depreciation and amortization are based on the
straight-line method over the estimated useful lives of the related
assets. When assets are retired or otherwise disposed of, the cost
and accumulated depreciation and amortization are removed from the
accounts, and any resulting gain or loss is reflected in operations
in the period realized.
Depreciation
is computed on the straight-line method net of salvage value with
useful lives as follows:
Schedule of Property and Equipment
Useful Lives
|
Computer
equipment and software |
|
5
years |
| Business
equipment and fixtures |
|
7 years |
| Property
and buildings |
|
39
years |
Recoverability
of Long-Lived Assets
The
Company reviews its long-lived assets on a periodic basis, whenever
events and changes in circumstances have occurred which may
indicate a possible impairment. The assessment for potential
impairment will be based primarily on the Company’s ability to
recover the carrying value of its long-lived assets from expected
future cash flows from its operations on an undiscounted basis. If
such assets are determined to be impaired, the impairment
recognized is the amount by which the carrying value of the assets
exceeds the fair value of the assets. Fixed assets to be disposed
of by sale will be carried at the lower of the then current
carrying value or fair value less estimated costs to
sell.
We
amortize the cost of other intangible assets over their estimated
useful lives, which range up to ten years, unless such lives are
deemed indefinite. During the years ended September 30, 2022 and
2021, we recorded no impairment charges related to other intangible
assets.
Customer
Deposits
From
time-to-time the Company receives payment from wholesale customers
in advance of delivering products to the customer. All such
deposits are short term in nature as the Company delivers the
product, unfulfilled portions, or engineering services to the
customer before the end of its next annual fiscal period. These
deposits are credited to the customer against product deliveries or
at the completion of the customer’s order.
Revenue
Recognition
Revenue
is recognized from the sale of hemp products when our performance
obligation is satisfied. Our primary performance obligation (the
distribution and sales of hemp products) is satisfied upon the
shipment or delivery of products to our customers, which is also
when control is transferred. The transfer of control of products to
our customers is typically based on written sales terms that do not
allow for a right of return after 30 days from the date of
purchase. Revenue is recognized net of allowances for returns and
any taxes collected from customers and subsequently remitted to
governmental authorities.
The
following table presents the Company’s revenues disaggregated by
type:
Schedule of Disaggregation of
Revenue
| |
|
For the
years ended |
|
| |
|
September
30, |
|
| |
|
2022 |
|
|
2021 |
|
|
Wholesale |
|
$ |
1,085,024 |
|
|
$ |
457,044 |
|
| Retail |
|
|
146,620 |
|
|
|
193,471 |
|
| Other |
|
|
45,935 |
|
|
|
- |
|
| Total |
|
$ |
1,277,579 |
|
|
$ |
650,515 |
|
ENDEXX
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Fair
Value of Financial Instruments
In
accordance with the reporting requirements of the Financial
Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) Topic 825, Financial Instruments, the Company
calculates the fair value of its assets and liabilities which
qualify as financial instruments under this standard and includes
this additional information in the notes to the financial
statements when the fair value is different than the carrying value
of those financial instruments. The Company does not have assets or
liabilities measured at fair value on a recurring basis except its
derivative liability.
Consequently,
the Company did not have any fair value adjustments for assets and
liabilities measured at fair value at the balance sheet dates, nor
gains or losses reported in the statements of operations that are
attributable to the change in unrealized gains or losses relating
to those assets and liabilities still held during the years ended
September 30, 2022 and 2021, except as disclosed.
Fair
Value Measurement
ASC
Topic 820, Fair Value Measurements, provides a comprehensive
framework for measuring fair value and expands disclosures which
are required about fair value measurements. Specifically, ASC 820
sets forth a definition of fair value and establishes a hierarchy
prioritizing the inputs to valuation techniques, giving the highest
priority to quoted prices in active markets for identical assets
and liabilities and the lowest priority to unobservable value
inputs. ASC 820 defines the hierarchy as follows:
Level
1 - Quoted prices are available in active markets for identical
assets or liabilities as of the reported date. The types of assets
and liabilities included in Level 1 are highly liquid and actively
traded instruments with quoted prices, such as equities listed on
the New York Stock Exchange.
Level
2 - Pricing inputs are other than quoted prices in active markets
but are either directly or indirectly observable as of the reported
date. The types of assets and liabilities in Level 2 are typically
either comparable to actively traded securities or contracts or
priced with models using highly observable inputs.
Level
3 - Significant inputs to pricing that are unobservable as of the
reporting date. The types of assets and liabilities included in
Level 3 are those with inputs requiring significant management
judgment or estimation, such as complex and subjective models and
forecasts used to determine the fair value.
The
following tables present the Company’s assets and liabilities that
were measured and recognized at fair value as of September 30,
2021:
Schedule of Assets and
Liabilities Fair Value Measured
| |
|
Level
1 |
|
|
Level
2 |
|
|
Level
3 |
|
|
Total |
|
|
September
30, 2021 |
| |
|
Level
1 |
|
|
Level
2 |
|
|
Level
3 |
|
|
Total |
|
|
Marketable
securities |
|
$ |
9,920 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
9,920 |
|
|
Derivative
liability |
|
|
- |
|
|
|
- |
|
|
|
1,799,354 |
|
|
|
1,799,354 |
|
| Total |
|
$ |
9,920 |
|
|
$ |
- |
|
|
$ |
1,799,354 |
|
|
$ |
1,809,274 |
|
A
reconciliation of the changes in the Company’s Level 3 derivative
liability at fair value is as follows:
Schedule of Reconciliation of Fair
Value Derivative Liability
|
Balance at
September 30, 2020 |
|
$ |
5,649,412 |
|
|
Conversions of debt to
equity |
|
|
(1,597,831 |
) |
|
Settlement
of derivative liability |
|
|
(2,223,503 |
) |
|
Change in
fair value |
|
|
(28,724 |
) |
| Balance at September
30, 2021 |
|
$ |
1,799,354 |
|
|
Change in
fair value |
|
|
4,117,085 |
|
|
Settlement
of derivative liability |
|
|
(5,916,439 |
) |
|
Balance at
September 30, 2022 |
|
$ |
- |
|
ENDEXX
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
From
time to time, the Company enters into convertible promissory note
agreements (Note 5). These notes are convertible at a fraction of
the stock closing price near the conversion date. Additionally, the
conversion price, as well as other terms including interest rates,
adjust if any future financings have more favorable terms. The
conversion features of these notes meet the definition of a
derivative which therefore requires bifurcation and are accounted
for as a derivative liability.
Beginning
on October 1, 2020, the Company began estimating the fair value of
the conversion feature derivatives embedded in the convertible
promissory notes based on assumptions used in the
Cox-Ross-Rubinstein binomial pricing model. The change in method
used to value the derivative resulted in a trivial difference in
valuation.
At
September 30, 2021, the Company estimated the fair value of the
conversion feature derivatives embedded in the convertible
promissory notes based on assumptions used in the
Cox-Ross-Rubinstein binomial pricing model using the following
weighted-average inputs: the price of the Company’s common stock of
$0.05164; a risk-free interest rate of 0.05%, and expected
volatility of the Company’s common stock of 95%, various estimated
exercise prices, and terms under one year.
Convertible
Instruments
The
Company evaluates and account for conversion options embedded in
convertible instruments in accordance with ASC Topic 815,
Derivatives and Hedging Activities.
Applicable
GAAP requires companies to bifurcate conversion options from their
host instruments and account for them as free-standing derivative
financial instruments according to certain criteria. The criteria
include circumstances in which (a) the economic characteristics and
risks of the embedded derivative instrument are not clearly and
closely related to the economic characteristics and risks of the
host contract, (b) the hybrid instrument that embodies both the
embedded derivative instrument and the host contract is not
re-measured at fair value under other GAAP with changes in fair
value reported in earnings as they occur and (c) a separate
instrument with the same terms as the embedded derivative
instrument would be considered a derivative instrument.
The
Company accounts for convertible instruments (when it has been
determined that the embedded conversion options should not be
bifurcated from their host instruments) as follows: The Company
records when necessary, discounts to convertible notes for the
intrinsic value of conversion options embedded in debt instruments
based upon the differences between the fair value of the underlying
common stock at the commitment date of the note transaction and the
effective conversion price embedded in the note. Debt discounts
under these arrangements are amortized over the term of the related
debt to their stated date of redemption.
Beneficial
Conversion Features
ASC
470-20 applies to convertible securities with beneficial conversion
features that must be settled in stock and to those that give the
issuer a choice in settling the obligation in either stock or cash.
ASC 470-20 requires that the beneficial conversion feature should
be valued at the commitment date as the difference between the
conversion price and the fair market value of the common stock into
which the security is convertible, multiplied by the number of
shares into which the security is convertible. This amount is
recorded as a debt discount and amortized over the life of the
debt. ASC 470-20 further limits this amount to the proceeds
allocated to the convertible instrument.
Research
and development costs
Research
and development costs are charged to expense as incurred and are
included in operating expenses. Total research and development
costs were $27,067 and $10,145 for the years ended September 30,
2022 and 2021, respectively.
Advertising
Costs
The
costs of advertising are expensed as incurred. Advertising expenses
are included in the Company’s operating expenses. Advertising
expense were $564,075 and $1,778,073 for the years ended September
30, 2022 and 2021, respectively.
ENDEXX
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Income
Taxes
The
Company accounts for income taxes utilizing the liability method of
accounting. Under the liability method, deferred taxes are
determined based on differences between financial statement and tax
bases of assets and liabilities at enacted tax rates in effect in
years in which differences are expected to reverse. Valuation
allowances are established, when necessary, to reduce deferred tax
assets to amounts that are expected to be realized.
The
Company follows ASC 740-10, Accounting for Uncertainty in Income
Taxes. This interpretation requires recognition and measurement of
uncertain income tax positions using a “more-likely-than-not”
approach. The Company evaluates its tax positions on an annual
basis, and as of September 30, 2022, no additional accrual for
income taxes is necessary. The Company’s policy is to recognize
both interest and penalties related to unrecognized tax benefits
expected to result in payment of cash within one year are
classified as accrued liabilities, while those expected beyond one
year are classified as other liabilities. The Company has not
recorded any interest or penalties since its inception. The Company
is required to file income tax returns in the U.S. federal tax
jurisdiction and in various state tax jurisdictions and the prior
three fiscal years remain open for examination by federal and/or
state tax jurisdictions. The Company is currently not under
examination by any other tax jurisdictions for any tax
year.
Share
Based Compensation
The
Company accounts for share-based compensation in accordance with
the fair value recognition provisions of the FASB ASC No. 718 and
No. 505. The Company issues restricted stock to employees for their
services. Cost for these transactions are measured at the fair
value of the equity instruments issued at the date of grant. These
shares are considered fully vested and the fair market value is
recognized as expense in the period granted. The Company also
issues restricted stock to consultants for various services. Costs
for these transactions are measured at the fair value of the
consideration received or the fair value of the equity instruments
issued, whichever is more reliably measurable. The value of the
common stock is measured at the earlier of (i) the date at which a
firm commitment only if there is sufficient disincentive to ensure
performance or (ii) the date at which the counterparty’s
performance is complete. The Company recognized consulting expenses
and a corresponding increase to additional paid-in-capital related
to stock issued for services. For agreements requiring future
services, the consulting expense is to be recognized ratably over
the requisite service period.
(Loss)
Income Per Share of Common Stock
Basic
net loss/income per common share is computed using the weighted
average number of common shares outstanding. Diluted earnings per
share (EPS) include additional dilution from common stock
equivalents, such as stock issuable pursuant to the exercise of
stock options, warrants and convertible notes. Common stock
equivalents are not included in the computation of diluted earnings
per share when the Company reports a loss because to do so would be
anti-dilutive for periods presented.
The
Company had total potential additional dilutive securities
outstanding at September 30, 2022 and 2021, as follows.
Schedule of Potential Additional
Dilutive Securities Outstanding
| |
|
September
30, |
|
|
September
30, |
|
| |
|
2022 |
|
|
2021 |
|
|
Warrants |
|
|
88,918,645 |
|
|
|
20,750,000 |
|
| Options |
|
|
22,500,000 |
|
|
|
- |
|
|
Convertible
debt |
|
|
90,426,058 |
|
|
|
139,000,018 |
|
|
Total |
|
|
201,844,703 |
|
|
|
159,750,018 |
|
All
convertible notes payable, by written agreement, provide for a
beneficial ownership limitation cap of 4.99% shares of the total
issued and outstanding common stock of the Company, at any given
time.
Recently
Issued Accounting Pronouncements
During
the years ended September 30, 2022 and 2021, there were several new
accounting pronouncements issued by the FASB. Each of the other
pronouncements, as applicable, has been or will be adopted by the
Company. Management does not believe the adoption of any of these
accounting pronouncements has had or will have a material impact on
the Company’s financial statements.
ENDEXX
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Contingencies
Certain
conditions may exist as of the date the financial statements are
issued, which may result in a loss to the Company, but which will
only be resolved when one or more future events occur or fail to
occur. The Company’s management and legal counsel assess such
contingent liabilities, and such assessment inherently involves
judgment. In assessing loss contingencies related to legal
proceedings that are pending against the Company or unasserted
claims that may result in such proceedings, the Company’s legal
counsel evaluates the perceived merits of any legal proceedings or
unasserted claims as well as the perceived merits of the amount of
relief sought or expected to be sought.
If
the assessment of a contingency indicates it is probable that a
material loss has been incurred and the amount of the liability can
be estimated, then the estimated liability would be accrued in the
Company’s financial statements.
If
the assessment indicates that a potential material loss contingency
is not probable but is reasonably possible, or is probable but
cannot be estimated, then the nature of the contingent liability,
together with an estimate of the range of possible loss if
determinable and material would be disclosed. Loss contingencies
considered to be remote by management are generally not disclosed
unless they involve guarantees, in which case the guarantee would
be disclosed.
3.
Inventory
The
Company’s inventory consisted of the following at the respective
balance sheet dates:
Schedule of
Inventory
| |
|
September
30, |
|
|
September
30, |
|
| |
|
2022 |
|
|
2021 |
|
|
Raw
materials and packaging components |
|
$ |
249,042 |
|
|
$ |
410,569 |
|
|
Finished
goods |
|
|
1,427,017 |
|
|
|
1,187,096 |
|
|
Consigned
goods |
|
|
77,135 |
|
|
|
224,147 |
|
| Apparel |
|
|
96,186 |
|
|
|
100,542 |
|
|
Less
obsolescence allowance |
|
|
(1,071,469 |
) |
|
|
(1,001,542 |
) |
| Inventory
net |
|
$ |
777,911 |
|
|
$ |
920,812 |
|
4.
Property and Equipment
The
Company’s property and equipment consisted of the following at the
respective balance sheet dates:
Summary of Property, Plant, and Equipment
| |
|
September
30, |
|
|
September
30, |
|
| |
|
2022 |
|
|
2021 |
|
|
Land |
|
$ |
- |
|
|
$ |
114,200 |
|
| Building |
|
|
- |
|
|
|
305,800 |
|
|
Machinery
and equipment |
|
|
66,264 |
|
|
|
66,264 |
|
|
Computer/office
equipment |
|
|
38,785 |
|
|
|
38,785 |
|
| Property and equipment,
gross |
|
|
105,049 |
|
|
|
525,049 |
|
|
Less
accumulated depreciation |
|
|
(77,044 |
) |
|
|
(75,388 |
) |
|
Property and equipment,
net |
|
$ |
28,005 |
|
|
$ |
449,661 |
|
On
April 1, 2022, the Company sold its land and building the
Noteholder C. The land and building were carried at cost of
$420,000 and accumulated depreciation of $18,950. The Company
received consideration totaling $825,000 with $645,000 allocated to
the October 2019 note payable (Note 5) and $180,000 to related
accrued interest. As a result of the sale, the Company recognized a
$423,950 gain on disposition of assets.
ENDEXX
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
5.
Debt
Notes
payable
The
Company’s notes payable as of September 30, 2022, are summarized as
follows:
Schedule
of Notes Payable
|
Noteholder |
|
Origination |
|
|
Maturity |
|
|
Interest |
|
|
Principal |
|
|
Discount |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances -
September 30, 2022 |
|
|
Noteholder |
|
Origination |
|
|
Maturity |
|
|
Interest |
|
|
Principal |
|
|
Discount |
|
|
Noteholder
A1 |
|
|
8/15/2022 |
|
|
|
2/15/2024 |
|
|
|
6.667 |
% |
|
$ |
540,758 |
|
|
$ |
- |
|
|
Noteholder
A2 |
|
|
8/15/2022 |
|
|
|
2/15/2024 |
|
|
|
6.667 |
% |
|
|
1,498,450 |
|
|
|
- |
|
|
Noteholder
A3 |
|
|
8/15/2022 |
|
|
|
2/15/2024 |
|
|
|
6.667 |
% |
|
|
2,336,858 |
|
|
|
- |
|
|
Noteholder
B |
|
|
9/2/2021 |
|
|
|
9/2/2022 |
|
|
|
12 |
% |
|
|
100,000 |
|
|
|
- |
|
|
Noteholder
B |
|
|
10/7/2021 |
|
|
|
10/7/2022 |
|
|
|
15 |
% |
|
|
50,000 |
|
|
|
- |
|
|
Noteholder
C |
|
|
4/1/2022 |
|
|
|
4/1/2023 |
|
|
|
10 |
% |
|
|
85,594 |
|
|
|
4,291 |
|
|
Noteholder
C |
|
|
8/15/2022 |
|
|
|
2/15/2024 |
|
|
|
6.667 |
% |
|
|
1,876,191 |
|
|
|
- |
|
|
Noteholder
G |
|
|
6/20/2017 |
|
|
|
8/5/2017 |
|
|
|
18 |
% |
|
|
55,353 |
|
|
|
- |
|
|
Noteholder
F |
|
|
8/15/2022 |
|
|
|
2/15/2024 |
|
|
|
6.667 |
% |
|
|
288,720 |
|
|
|
- |
|
|
Noteholder
D |
|
|
8/15/2022 |
|
|
|
2/15/2024 |
|
|
|
6.667 |
% |
|
|
1,263,164 |
|
|
|
- |
|
|
Noteholder
I |
|
|
6/17/2020 |
|
|
|
6/17/2050 |
|
|
|
4 |
% |
|
|
160,000 |
|
|
|
- |
|
|
Noteholder
J |
|
|
8/15/2022 |
|
|
|
2/15/2024 |
|
|
|
6.667 |
% |
|
|
640,239 |
|
|
|
- |