UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2022

 

OR

 

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

 

For the transition period from __________ to __________.

 

Commission File Number: 033-33263

 

Jacksam Corporation

(Exact name of registrant as specified in its charter)

 

Nevada

 

46-3566284

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

 

3100 Airway Avenue Suite 138

Costa Mesa, CA

 

92626

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (800) 605-3580

 

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

 

Title of Each Class

 

Trading Symbol

 

Name of Each Exchange on Which Registered

Common Stock, par value $0.001 per share

 

JKSM

 

 

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 pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

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

 

Large accelerated filer

Accelerated filer

Non-accelerated Filer

Smaller reporting company

Emerging Growth Company

 

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

 

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

 

As of May 11, 2022, the registrant had 76,490,147 shares of common stock, $0.001 par value per share, outstanding.

 

 

 

 

TABLE OF CONTENTS

 

 

Page

 

PART I — FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets

 

4

 

Condensed Consolidated Statements of Operations and Comprehensive Loss

 

5

 

 

Condensed Consolidated Statements of Stockholders’ Deficit

 

6

 

 

Condensed Consolidated Statements of Cash Flows

 

7

 

Notes to Condensed Consolidated Financial Statements

 

8

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

23

 

Item 4.

Controls and Procedures

23

 

PART II — OTHER INFORMATION

 

Item 1.

Legal Proceedings

24

 

Item 1A.

Risk Factors

24

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

24

 

Item 3.

Defaults Upon Senior Securities

24

 

 

Item 4.

Mine Safety Disclosures

24

 

 

Item 5.

Other Information

24

 

 

Item 6.

Exhibits

25

 

 

Signatures

26

 

 
2

Table of Contents

 

Forward-Looking Statements

 

For purposes of this report, unless otherwise indicated or the context otherwise requires, all references herein to “Jacksam Corporation”, “the Company”, “we”, “us”, and “our”, refer to Jacksam Corporation, a Nevada corporation.

 

This Quarterly Report on Form 10-Q, or this Report, contains forward-looking statements. Any and all statements contained in this Report that are not statements of historical fact may be deemed forward-looking statements. Terms such as “may”, “might”, “would”, “should”, “could”, “project”, “estimate”, “pro-forma”, “predict”, “potential”, “strategy”, “anticipate”, “attempt”, “develop”, “plan”, “help”, “believe”, “continue”, “intend”, “expect”, “future” and terms of similar import (including the negative of any of the foregoing) may be intended to identify forward-looking statements. However, not all forward-looking statements may contain one or more of these identifying terms. Forward-looking statements in this Report may include, without limitation, statements regarding (i) the plans and objectives of management for future operations, including plans or objectives relating to the development of our cartridge filling machines, cartridge capping machines and cartridges, (ii) a projection of income (including income/loss), earnings (including earnings/loss) per share, capital expenditures, dividends, capital structure or other financial items, (iii) our future financial performance, including any such statement contained in a discussion and analysis of financial condition by management or in the results of operations included pursuant to the rules and regulations of the Securities and Exchange Commission, or the SEC, and (iv) the assumptions underlying or relating to any statement described in points (i), (ii) or (iii) above.

 

The forward-looking statements are not meant to predict or guarantee actual results, performance, events or circumstances and may not be realized because they are based upon our current projections, plans, objectives, beliefs, expectations, estimates and assumptions and are subject to a number of risks and uncertainties and other influences, many of which we have no control over. Actual results and the timing of certain events and circumstances may differ materially from those described by the forward-looking statements as a result of these risks and uncertainties.

 

 
3

Table of Contents

  

Jacksam Corporation

Condensed Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

March 31,

 

 

December 31,

 

 

 

2022

 

 

2021

 

 

 

(Unaudited)

 

 

 (Audited)

 

Assets

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

Cash

 

$ 807,014

 

 

$ 344,811

 

Accounts receivable, net

 

 

890,996

 

 

 

591,169

 

Inventory, net

 

 

215,251

 

 

 

196,712

 

Prepaid expenses

 

 

10,620

 

 

 

8,600

 

Total Current Assets

 

 

1,923,881

 

 

 

1,141,292

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

1,108

 

 

 

1,472

 

Right of-use asset - operating lease

 

 

100,877

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$ 2,025,866

 

 

$ 1,142,764

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders Deficit

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$ 950,558

 

 

$ 641,690

 

Deferred revenue

 

 

173,886

 

 

 

171,771

 

Convertible notes payable, current portion (net of discount $0 and $$43,269, respectively)

 

 

444,444

 

 

 

701,175

 

Notes payable, current portion

 

 

184,819

 

 

 

87,774

 

Right of use liability - operating lease, current portion

 

 

30,431

 

 

 

-

 

Derivative liability

 

 

179,730

 

 

 

325,808

 

Accrued liabilities - other

 

 

2,220,175

 

 

 

2,264,390

 

Subscription payable

 

 

499,999

 

 

 

499,999

 

Total Current Liabilities

 

 

4,684,042

 

 

 

4,692,607

 

 

 

 

 

 

 

 

 

 

Notes payable, net of current portion (net of discount $114,599 and $121,310 respectively)

 

 

624,798

 

 

 

705,038

 

Right of use liability - operating lease

 

 

72,249

 

 

 

-

 

Total Liabilities

 

 

5,381,089

 

 

 

5,397,645

 

 

 

 

 

 

 

 

 

 

Commitment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mezzanine equity

 

 

 

 

 

 

 

 

Series A Preferred stock - 2,800,000 authorized, $0.001 par value, 2,800,000 and 0 shares issued and outstanding as of March 31, 2022 and December 31, 2021

 

 

262,529

 

 

 

259,422

 

 

 

 

 

 

 

 

 

 

Stockholders' Deficit:

 

 

 

 

 

 

 

 

Preferred stock - 30,000,000 authorized, $0.001 par value, 0 shares issued and outstanding

 

 

-

 

 

 

-

 

Series B Preferred Stock - 1,000,000 authorized, $0.001 par value, $1 stated value, 1,000,000 and 0 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively

 

 

100

 

 

 

-

 

Common stock - 200,000,000 authorized, $0.001 par value, 74,490,147 and 74,490,147 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively

 

 

76,490

 

 

 

74,490

 

Additional paid-in capital

 

 

7,075,481

 

 

 

6,210,414

 

Shares payable, consisting of 2,222,223 shares of common shares as of March 31, 2022 and December 31, 2021

 

 

331,600

 

 

 

331,600

 

Accumulated deficit

 

 

(11,101,423 )

 

 

(11,130,807 )
Total Stockholders' Deficit

 

 

(3,617,752 )

 

 

(4,514,303 )

 

 

 

 

 

 

 

 

 

Total Liabilities and Stockholders' Deficit

 

$ 2,025,866

 

 

$ 1,142,764

 

 

 

 

 

 

 

 

 

 

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

  

 
4

Table of Contents

  

Jacksam Corporation

Condensed Consolidated Statements of Operations

For the Three Months Ended March 31, 2022 and 2021

(Unaudited)

 

 

 

 

 

 

 

March 31,

2022

 

 

March 31,

2021

 

 

 

 

 

 

 

 

Revenue

 

$ 1,777,075

 

 

$ 1,770,966

 

 

 

 

 

 

 

 

 

 

Cost of Revenue

 

 

1,358,438

 

 

 

1,256,973

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

 

418,637

 

 

 

513,993

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

Salaries and wages

 

 

267,644

 

 

 

329,083

 

Other selling, general and administrative expenses

 

 

149,613

 

 

 

181,160

 

Total Operating Expenses

 

 

417,257

 

 

 

510,243

 

 

 

 

 

 

 

 

 

 

Income (Loss) from Operations

 

 

1,380

 

 

 

3,750

 

 

 

 

 

 

 

 

 

 

Other Income (Expense)

 

 

 

 

 

 

 

 

Derivative gain (loss)

 

 

287,098

 

 

 

532,367

 

Interest expense

 

 

(259,094 )

 

 

(348,651 )

Loss on conversion of notes payable

 

 

-

 

 

 

(58,642 )

Loss on settlement of notes payable

 

 

-

 

 

 

(137,506 )

Total Other Income (Expense)

 

 

28,004

 

 

 

(12,432 )

 

 

 

 

 

 

 

 

 

Net Income (Loss)

 

 

29,384

 

 

 

(8,682 )

 

 

 

 

 

 

 

 

 

Preferred stock dividends

 

 

(22,833 )

 

 

-

 

 

 

 

 

 

 

 

 

 

Net Income (Loss) Available to Common Shareholders

 

$ 6,551

 

 

$ (8,682 )

 

 

 

 

 

 

 

 

 

Net loss per share

 

 

 

 

 

 

 

 

Basic

 

$ 0.00

 

 

$ (0.00 )

Diluted

 

$ 0.00

 

$ (0.00 )

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

Basic

 

 

75,090,147

 

 

 

69,346,528

 

Diluted

 

 

103,955,268

 

 

 

69,346,528

 

 

 

 

 

 

 

 

 

 

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

  

 
5

Table of Contents

  

Jacksam Corporation

Condensed Consolidated Statements of Stockholders' Deficit

For the Three Months Ended March 31, 2022 and 2021

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A

Preferred Stock,

 

 

Series B

Preferred Stock,

 

 

Common Stock,

$0.001 Par Value

 

 

 Paid-In

 

 

Share

 

 

 Accumulated

 

 

Stockholders'

 

 

 

 Shares

 

 

Amount

 

 

 Shares

 

 

Amount

 

 

 Shares

 

 

Amount

 

 

 Capital

 

 

 Payable

 

 

 Deficit

 

 

Deficit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2020

 

 

-

 

 

$ -

 

 

 

-

 

 

$ -

 

 

 

66,366,419

 

 

$ 66,366

 

 

$ 4,708,323

 

 

$ 645,192

 

 

$ (11,125,333 )

 

$ (5,705,452 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued for debt conversion

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,086,420

 

 

 

3,087

 

 

 

611,111

 

 

 

-

 

 

 

-

 

 

 

614,198

 

Common stock issued for deferred finance cost

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

200,000

 

 

 

200

 

 

 

71,800

 

 

 

-

 

 

 

-

 

 

 

72,000

 

Sale of common stock units

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,479,994

 

 

 

2,480

 

 

 

322,195

 

 

 

(136,875 )

 

 

-

 

 

 

187,800

 

Common stock and warrants issued for settlement of notes payable

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

414,930

 

 

 

415

 

 

 

140,703

 

 

 

-

 

 

 

-

 

 

 

141,118

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(8,682 )

 

 

(8,682 )

Balance, March 31, 2021

 

 

-

 

 

$ -

 

 

 

-

 

 

$ -

 

 

 

72,547,763

 

 

$ 72,548

 

 

$ 5,854,132

 

 

$ 508,317

 

 

$ (11,134,015 )

 

$ (4,699,018 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2021

 

 

2,800,000

 

 

$ 259,422

 

 

 

-

 

 

$ -

 

 

 

74,490,147

 

 

$ 74,490

 

 

$ 6,210,414

 

 

$ 331,600

 

 

$ (11,130,807 )

 

$ (4,514,303 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of Series B Preferred Stock, net of fees

 

 

-

 

 

 

-

 

 

 

1,000,000

 

 

 

100

 

 

 

-

 

 

 

-

 

 

 

889,900

 

 

 

-

 

 

 

-

 

 

 

890,000

 

Common Stock and Warrants issued in connection with preferred stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

2,000,000

 

 

 

2,000

 

 

 

(2,000 )

 

 

 

 

 

 

-

 

 

 

-

 

Dividends on Series A Preferred Stock

 

 

-

 

 

 

3,107

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(22,833 )

 

 

-

 

 

 

-

 

 

 

(22,833 )

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

29,384

 

 

 

29,384

 

Balance, March 31, 2022

 

 

2,800,000

 

 

$ 262,529

 

 

 

1,000,000

 

 

$ 100

 

 

 

76,490,147

 

 

$ 76,490

 

 

$ 7,075,481

 

 

$ 331,600

 

 

$ (11,101,423 )

 

$ (3,617,752 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

  

 
6

Table of Contents

 

Jacksam Corporation

Condensed Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2022 and 2021

(Unaudited)

 

 

 

March 31,

2022

 

 

March 31,

2021

 

Cash Flows from Operating Activities

 

 

 

 

 

 

Net loss

 

$ 29,384

 

 

$ (8,682 )

Adjustments to reconcile net income (loss) to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation expense

 

 

364

 

 

 

504

 

Loss on settlement of notes payable

 

 

-

 

 

 

137,506

 

Loss on conversion of notes payable

 

 

 

 

 

 

58,642

 

Amortization of debt discount

 

 

49,980

 

 

 

292,549

 

Amortization of right-of-use assets

 

 

4,945

 

 

 

-

 

Interest expense from derivative issuance

 

 

141,020

 

 

 

-

 

Derivative (gain) loss

 

 

(287,098 )

 

 

(532,367 )

Inventory impairment

 

 

18,000

 

 

 

-

 

Net change in:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(299,827 )

 

 

(18,910 )

Inventory

 

 

(36,539 )

 

 

16,182

 

Prepaid expenses

 

 

(2,020 )

 

 

116,859

 

Right-of-use liabilities

 

 

(3,142 )

 

 

-

 

Accounts payable and accrued expenses

 

 

244,926

 

 

 

(168,775 )

Deferred revenue

 

 

2,115

 

 

 

(15,678 )

 

 

 

 

 

 

 

 

 

Net cash used in operating activities

 

 

(137,892 )

 

 

(122,170 )

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Proceeds from convertible notes payable

 

 

-

 

 

 

570,000

 

Payments on convertible notes payable

 

 

(300,000 )

 

 

(526,058 )

Proceeds from notes payable

 

 

81,671

 

 

 

296,524

 

Payments on notes payable

 

 

(71,576 )

 

 

(16,443 )

Proceeds from sale of common stock units

 

 

-

 

 

 

250,000

 

Proceeds from issuance of Series A preferred stock

 

 

890,000

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Net cash provided by financing activities

 

 

600,095

 

 

 

574,023

 

 

 

 

 

 

 

 

 

 

Net Change in Cash

 

 

462,203

 

 

 

451,853

 

 

 

 

 

 

 

 

 

 

Cash, Beginning of Period

 

 

344,811

 

 

 

489,560

 

 

 

 

 

 

 

 

 

 

Cash, End of Period

 

$ 807,014

 

 

$ 941,413

 

 

 

 

 

 

 

 

 

 

Cash Paid For:

 

 

 

 

 

 

 

 

Income Taxes

 

$ -

 

 

$ -

 

Interest

 

$ 3,049

 

 

$ 48,444

 

 

 

 

 

 

 

 

 

 

Non-cash transactions:

 

 

 

 

 

 

 

 

Right of use asset and liability recognized, operating leases

 

$ 105,822

 

 

$ -

 

Common stock issued to settle convertible notes payable

 

$ -

 

 

$ 614,198

 

Derivative liability recognized at issuance of warrants and conversion option

 

$ -

 

 

$ 493,670

 

Common stock issued for deferred finance costs

 

$ -

 

 

$ 72,000

 

 

 

 

 

 

 

 

 

 

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

    

 
7

Table of Contents

 

 Jacksam Corporation

 

 Notes to Condensed Consolidated Financial Statements

 

Note 1: Organization and Nature of Operations

 

Jacksam Corporation dba Convectium is a technology company focused on developing and commercializing products of vaporizer cartridge filling & capping, pre-roll filling, and other automation systems. The Company’s product line primarily consisted of the 710 Shark cartridge filling machine, the 710 Captain cartridge capping machine, the “PreRoll-ER” pre-roll & cone filling machine, customizable and C-Cell cartridges, and accessories. The Company’s customers are primarily businesses operating in jurisdictions that have some form of cannabis legalization. These businesses include medical and recreational dispensaries, large and small-scale processors and growers, multi-state operators, and distributors. The Company utilizes its direct sales force, website, strategic partners’ sales force, independent sales representatives, and a wide range of referral network to sell its products.

 

The Company was originally organized under the laws of the State of Nevada on September 21, 1989 under the name of Fulton Ventures, Inc. Effective November 16, 2009, management at that time changed the name of Fulton Ventures, Inc. to China Grand Resorts, Inc. After the September 30, 2014 10-Q filing, the management of China Grand Resorts, Inc. abandoned the Company and its subsidiaries were taken back by Chinese national companies in China who owned them. The remaining parent company, China Grand Resorts, Inc., became a dormant company until 2016 when a new shareholder Bryan Glass became the majority shareholder and owner of the Company.

 

On September 14, 2018 (the “Merger”), the Company’s wholly owned subsidiary, Jacksam Acquisition Corp., a corporation formed in the State of Nevada on September 11, 2018, or the Acquisition Sub, merged with and into Jacksam, a corporation incorporated in the State of Delaware in August 2013.

 

On November 5, 2018, current management merged Jacksam into the parent Company, China Grand Resorts, Inc. In connection with the transaction, current management amended our articles of incorporation to change the Company’s name from China Grand Resorts, Inc. to Jacksam Corporation dba Convectium.

 

Since the Merger, the Company has been operated under the control of current management and continued to operate the business of Jacksam Corporation, described herein, as our sole business.

 

Note 2: Significant Accounting Policies

 

Basis of Preparation

 

The accompanying financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) under the accrual basis of accounting. These financial statements are presented in U.S. dollars and are prepared on a historical cost basis, except for certain financial instruments which are carried at fair value. The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America and should be read in conjunction with the audited consolidated financial statements and notes thereto for the years ended December 31, 2021 in the Form 10-K filed on March 31, 2022. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the consolidated financial statements which would substantially duplicate the disclosures contained in the Form 10-K have been omitted.

 

 
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Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of Jacksam Corporation and its wholly owned subsidiary. All intercompany transactions and balances are eliminated in consolidation.

 

Use of Estimates

 

The preparation of financial statements is in conformity with U.S. GAAP and requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Such estimates and assumptions impact both assets and liabilities, including but not limited to net realizable value of accounts receivable and inventory, estimated useful lives and potential impairment of property and equipment, estimate of fair value of share based payments and derivative liabilities, estimates of fair value of warrants issued and recorded as debt discount and estimates of the probability and potential magnitude of contingent liabilities. Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate could change in the near term due to one or more future nonconforming events. Accordingly, actual results could differ significantly from estimates.

 

Risks and Uncertainties

 

The Company’s operations are subject to risk and uncertainties including financial, operational, regulatory and other risks including the potential risk of business failure. The Company has experienced, and in the future, expects to continue to experience, variability in its sales and earnings. The factors expected to contribute to this variability include, among others, (i) the uncertainty associated with the commercialization and ultimate success of the product, (ii) competition inherent at large national retail chains where product is expected to be sold, (iii) general economic conditions, and (iv) the related volatility of prices pertaining to the cost of sales.

 

Cash and Cash Equivalents

 

Cash and cash equivalents are carried at cost and consist of cash on hand and demand deposits placed with banks or other financial institutions, and all highly liquid investments with an original maturity of three months or less. Federal Deposit Insurance Corporation (“FDIC”) deposit insurance covers $250,000 per depositor, per FDIC-insured bank, per ownership category.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company extends unsecured credit to its customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts. The Company recognizes an allowance for losses on accounts receivable in an amount equal to the estimated probable losses net of recoveries. The allowance is based on an analysis of historical bad debt experience, current receivables aging, and expected future bad debts, as well as an assessment of specific identifiable customer accounts considered at risk or uncollectible. As of March 31, 2022 and December 31, 2021, the Company had recorded an allowance for doubtful accounts of $74,000.

 

Inventory

 

Inventories are stated at the lower of cost, determined on the average cost basis or net realizable value. Cost principally consists of the purchase price (adjusted for lower of cost or market), customs, duties, and freight. The Company periodically reviews historical sales activity to determine potentially obsolete items and evaluates the impact of any anticipated changes in future demand.

 

The March 31, 2022 and December 31, 2021 inventory consisted entirely of finished goods. The Company will maintain an allowance based on specific inventory items that have shown no activity over a 60-month period. The Company tracks inventory as it is disposed, scrapped or sold at below cost to determine whether additional items on hand should be reduced in value through an allowance method. As of March 31, 2022 and December 31, 2021, the Company has determined that an inventory allowance of $18,800 is required.

 

 
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Property and Equipment

 

Property and equipment are measured at cost, less accumulated depreciation, and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Depreciation of property and equipment is provided utilizing the straight-line method over the estimated useful lives, ranging from 5 to 7 years of the respective assets. Expenditures for maintenance and repairs are charged to expense as incurred. Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the statements of operations.

 

Fair Value of Financial Instruments

 

The Company measures assets and liabilities at fair value based on an expected exit price as defined by the authoritative guidance on fair value measurements, which represents the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level.

 

The following are the hierarchical levels of inputs to measure fair value:

 

·

Level 1 – Observable inputs that reflect quoted market prices in active markets for identical assets or liabilities.

 

 

·

Level 2 - Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; Quoted prices for similar assets or liabilities in active markets; Inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

 

 

·

Level 3 – Unobservable inputs reflecting the Company’s assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

 

The carrying amounts of the Company’s financial assets and liabilities, such as cash, prepaid expenses, other current assets, accounts payable & accrued expenses, certain notes payable and an approximate of their fair values because of the short maturity of these instruments.

 

Binomial Calculation Model

 

The Company uses a binomial calculator model to determine fair market value of derivative liabilities, warrants and options issued.

 

Revenue Recognition

 

The Company derives revenues from the sale of machines and non-machine products (customizable and C-Cell cartridges and accessories). The Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) 606. Revenues are recognized when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled to in exchange for transferring those goods or services.

 

 
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Revenue is recognized based on the following five step model:

 

 

-

Identification of the contract with a customer

 

-

Identification of the performance obligations in the contract

 

-

Determination of the transaction price

 

-

Allocation of the transaction price to the performance obligations in the contract

 

-

Recognition of revenue when, or as, the Company satisfies a performance obligation

 

Performance Obligations

 

Sales of machines and non-machine products are recognized when all the following criteria are satisfied: (i) a contract with an end user exists which has commercial substance; (ii) it is probable the Company will collect the amount charged to the end user; and (iii) the Company has completed its performance obligation whereby the end user has obtained control of the product. A contract with commercial substance exists once the Company receives and accepts a purchase order or once it enters into a contract with an end user. If collectability is not probable, the sale is deferred and not recognized until collection is probable or payment is received. Control of products typically transfers when title and risk of ownership of the product has transferred to the customer. The customer has a 10-day period to inspect the equipment and may return the product if it does not meet the agreed-upon specifications. For contracts with multiple performance obligations, the Company allocates the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. The Company uses an observable price to determine the stand-alone selling price for separate performance obligations or a cost plus margin approach when one is not available. Historically, the Company’s contracts have not had multiple performance obligations. The large majority of the Company’s performance obligations are recognized at a point in time related to the sale of machines and non-machine products.

 

Sales, value add, and other taxes collected concurrent with revenue-producing activities are excluded from revenue. Incidental items that are immaterial in the context of the contract are recognized as expense. Payment terms between invoicing and when payment is due is less than one year. As of March 31, 2022, none of the Company’s contracts contained a significant financing component.

 

The Company elected the practical expedient to not adjust the amount of revenue to be recognized under a contract with an end user for the effects of time value of money when the timing difference between receipt of payment and recognition of revenue is less than one year.

 

The majority of the Company’s contracts offer an assurance-type warranty of the products at no additional cost for a period of 3 years. Assurance-type warranties provide a customer with assurance that the related product will function as the parties intended because it complies with agreed-upon specifications. Such warranties do not represent a separate performance obligation. At the time a sale is recognized, the Company estimated future warranty costs, which were trivial.

 

Transaction Price Allocated to the Remaining Performance Obligations

 

At a given point in time, the Company may have collected payment for future sales of product to begin production. These transactions are deferred until the product transfers to the customer and the performance obligation is considered complete. As of March 31, 2022, $173,886 in revenue is expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period. The Company expects to recognize all of our unsatisfied (or partially unsatisfied) performance obligations as revenue in the next twelve months.

 

Contract Costs

 

Costs incurred to obtain a customer contract are not material to the Company. The Company elected to apply the practical expedient to not capitalize contract costs to obtain contracts with a duration of one year or less, which are expensed and included within cost of goods and services.

 

 
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Critical Accounting Estimates

 

Estimates are used to determine the amount of variable consideration in contracts, the standalone selling price among separate performance obligations and the measure of progress for contracts where revenue is recognized over time. The Company reviews and updates these estimates regularly.

 

Disaggregation of Revenue

 

All machine sales and most non-machine sales are completed in North America.

 

 

 

Three Months

Ended

March 31,

2022

 

 

Three Months

Ended

March 31, 2021

 

Machine sales

 

$ 1,033,123

 

 

$ 1,658,668

 

Non-machine sales

 

 

743,952

 

 

 

112,298

 

Total sales

 

$ 1,777,075

 

 

$ 1,770,966

 

 

Net Loss Per Common Share

 

Basic net loss per common share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Potential common stock equivalents are determined using the treasury stock method. For diluted net loss per share purposes, the Company excludes stock options and other stock-based awards, including shares issued as a result of option exercises that are subject to repurchase by the Company, whose effect would be anti-dilutive from the calculation.

 

The following table presents the effect of potential dilutive issuances for the three months ended March 31, 2022 and 2021:

 

 

 

Three Months Ended

 

 

 

March 31,

2022

 

 

March 31,

2021

 

 

 

 

 

 

 

 

Net income (loss) attributable to common stockholders

 

$ 6,551

 

 

$ (8,682 )

Preferred stock dividends

 

 

22,833

 

 

 

-

 

Derivative gain

 

 

(287,098 )

 

 

-

 

Interest expense associated with convertible debt

 

 

43,270

 

 

 

-

 

Net income (loss) for dilutive calculation

 

$ (214,444 )

 

$ (8,682 )

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

75,090,147

 

 

 

69,346,528

 

Dilutive effect of preferred stock

 

 

18,066,667

 

 

 

-

 

Dilutive effect of convertible debt

 

 

10,798,454

 

 

 

-

 

Dilutive effect of common stock warrants

 

 

-

 

 

 

-

 

Weighted average shares outstanding for diluted net income (loss) per share

 

 

103,955,268

 

 

 

69,346,528

 

 

During the three months ended March 31, 2022, the impact of 15,189,056 warrants to purchase common stock were excluded from the calculation above as their impact would be dilutive. During the three months ended March 31, 2021, the impact of 7,565,499 warrants to purchase common stock and 5,868,827 shares issuable under convertible debt were excluded from the calculation above as their impact would be dilutive.

 

Additionally, 2,222,223 and 3,611,112 shares to be issued as part of the share payable equity balance as of March 31, 2022 and March 31, 2021, respectively, are excluded from the calculation of weighted-average shares outstanding.

 

 
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Going Concern

 

The Company’s financial statements are prepared using U.S. GAAP to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, the Company has negative working capital, recurring losses, and does not have a source of revenues sufficient to cover its operating costs. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

The ability of the Company to continue as a going concern is dependent upon its ability to successfully execute the business plan and attain profitable operations. The accompanying financial statements do not include any adjustments that may be necessary if the Company is unable to continue as a going concern.

 

In the coming year, the Company’s foreseeable cash requirements will relate to continual development of the operations of its business, maintaining its good standing and making the requisite filings with the SEC, and the payment of expenses associated with operations and business developments. The Company may experience a cash shortfall and be required to raise additional capital.

 

Historically, it has mostly relied upon convertible notes payable and cash flows from operations to finance its operations and growth. Management may raise additional capital by retaining net earnings or through future private offerings of the Company’s stock or through loans from private investors, although there can be no assurance that it will be able to obtain such financing. The Company’s failure to do so could have a material and adverse effect upon it and its shareholders.

 

Recently Issued Accounting Pronouncements

 

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the effect of recently issued standards that are not yet effective and will not have a material effect on its consolidated financial position or results of operations upon adoption.

 

In August 2020, the FASB issued ASU 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40)” (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The ASU is part of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in U.S. GAAP. The ASU’s amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The Company is currently evaluating the impact of ASU 2020-06 on its financial statements.

 

Note 3: Property and Equipment

 

Property and equipment consist of the following:

 

 

 

March 31,

2022

 

 

December 31,

2021

 

 

 

 

 

 

 

 

Furniture and fixtures

 

$ 10,425

 

 

$ 10,425

 

Equipment

 

 

7,579

 

 

 

7,579

 

Trade show display

 

 

2,640

 

 

 

2,640

 

Total

 

 

20,644

 

 

 

20,644

 

Less: Accumulated depreciation

 

 

(19,536 )

 

 

(19,172 )

Property and equipment, net

 

$ 1,108

 

 

$ 1,472

 

 

Depreciation expense amounted to $364 and $504 for the three months ended March 31, 2022 and 2021, respectively.

 

 
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Note 4: Accounts Payable and Accrued Expenses

 

Accounts payable and accrued expenses consist of the following:

 

 

 

March 31,

2022

 

 

December 31,

2021

 

 

 

 

 

 

 

 

Accounts payable

 

$ 674,523

 

 

$ 382,925

 

Accrued dividends on preferred stock

 

 

19,726

 

 

 

-

 

Accrued interest

 

 

69,533

 

 

 

4,338

 

Sales tax payable

 

 

144,553

 

 

 

144,541

 

Accrued officer consulting cost

 

 

-

 

 

 

13,750

 

Other

 

 

42,223

 

 

 

42,221

 

Total Accounts payable and Accrued expenses

 

$ 950,558

 

 

$ 641,690

 

 

Note 5: Notes Payable

 

A summary of Notes Payable are as follows:

 

 

 

March 31,

2022

 

 

December 31,

2021

 

 

 

 

 

 

 

 

Note payable April 2020

 

 

14,508

 

 

 

35,245

 

SBA loan May 2020

 

 

147,133

 

 

 

148,093

 

Note payable September 2021

 

 

697,987

 

 

 

730,783

 

Note payable March 2022

 

 

64,588

 

 

 

-

 

Total notes payable

 

 

924,216

 

 

 

914,121

 

Less: discount and deferred finance costs

 

 

(114,599 )

 

 

(121,309 )

Less: current portion

 

 

(184,819 )

 

 

(87,774 )

Long-term portion of notes payable

 

$ 624,798

 

 

 

705,038

 

 

On December 31, 2019, the Company entered into an inventory financing arrangement with a single lender, whereby $150,000 was paid by the lender directly to a vendor to secure inventory for the sales to customers in January 2020. The Company will repay $164,835 of principal and interest by February 29, 2020. The interest and fees of $14,835 were recorded as debt discount and were amortized through the maturity date. The Company also paid a deferred finance cost of $5,000 which was amortized through the maturity date. The Company entered into a second agreement on February 6, 2020 with the same lander for an additional $43,000 of funding. The Company will repay $47,253 at maturity on April 6, 2020. On April 22, 2020, these two notes payable were refinanced with the lender into a single agreement whereby the Company will make an initial repayment of $74,231 and 24 monthly payments of $7,467, for total payments of $253,439. This amendment was accounted for as a modification of the debt. The note payable matures on April 22, 2022.

 

On June 2, 2020, the Company received $150,000 under the Small Business Administration’s Economic Injury Disaster Loan. The loan bears interest at a fixed rate of 3.75%, and matures on May 26, 2050, payable monthly with payments of $731 beginning twelve months after issuance. The loan gives the Small Business Administration a security interest in all assets of the Company.

 

On September 29, 2021, the Company entered into a Revenue Loan and Security Agreement with an investor for up to a total amount of $1,000,000. Upon drawing from the facility and continuing thereafter until maturity or earlier prepayment in full, the Company shall pay monthly to the lender an amount equal to the product of (i) all revenue of the Company for the immediately preceding month multiplied by (ii) an applicable revenue percentage. On September 29, 2021, the Company borrowed $750,000 under the agreement and received initial cash proceeds of $727,500. The Company also paid an additional $5,000 in fees to the investor to secure the loan for total deferred financing fees of $27,500. On November 12, 2021, the Company issued a total of 843,750 shares of common stock to a lender in connection with the note payable issued. These shares had a fair value of $100,744 and were recorded as deferred finance costs. As of March 31, 2022 and December 31, 2021, the Company owed a principal amount of $697,987 and $730,783 under this loan, with remaining unamortized discount of $114,599 and $121,309, respectively.

 

 
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In March 2022, the Company received cash proceeds of $81,671 under an unsecured short term financing agreement. The Company repays $5,694 per week until paid in full. This note was paid in full subsequent to March 31, 2022.

 

The Company amortized $6,710 and $0 of debt discount and deferred finance costs to interest expense related to notes payable during the three months ended March 31, 2022 and 2021, respectively.

 

Note 6: Convertible Notes Payable and Derivative Liabilities

 

Convertible Notes Payable

 

The following table summarizes outstanding convertible notes as of March 31, 2022 and December 31, 2021:

 

 

 

March 31,

2022

 

 

December 31,

2021

 

 

 

 

 

 

 

 

June 2019 Notes, due December 21, 2022

 

$ 444,444

 

 

$ 444,444

 

February 2021 Note, maturing February 15, 2022

 

 

-

 

 

 

300,000

 

Total

 

 

444,444

 

 

 

7,444,444

 

Less: Debt discount and deferred finance costs on short-term convertible notes

 

 

-

 

 

 

(43,269 )

Less: Current convertible notes payable, net of discount

 

 

(444,444 )

 

 

(701,175 )

 

 

 

 

 

 

 

 

 

Total long-term convertible notes payable, net

 

$ -

 

 

$ -

 

 

In June and July 2019, the Company issued convertible notes to 10 investors with an original principal amount of $2,388,889, receiving $1,583,333 in net cash proceeds (the “June 2019 Notes”). The June 2019 Notes matured on March 25, 2020 and are convertible into the Company’s common stock at a per share price of $0.35 at any time subsequent to the issuance date. The June 2019 Notes contain a down round feature, whereby any sale of common stock or common stock equivalent at a price per share lower than the conversion price of the June 2019 Notes will result in the conversion price being lowered to the new price. The warrants contain the same down round feature as the notes. As a result of a dilutive issuance during the year ended December 31, 2020, the exercise price of the remaining notes payable and the warrants is currently $0.18 per share.

 

During the year ended December 31, 2020, $1,500,000 of the principal on the June 2019 Notes was converted into the right to receive 7,883,599 shares of common stock, of which 5,105,821 were issued by December 31, 2021 and 2,777,778 were part of subscriptions payable liability balance of $499,999. See Note 7.

 

Following two previous extensions and on July 9, 2021, the holder of $444,444 of the notes agreed to extend the repayment period to December 31, 2021. There were no other changes to terms of the convertible notes payable, and the amendments were accounted for as a debt modification.

 

On February 15, 2021, the Company entered into a convertible note agreement with an institutional investor for a principal amount of $675,000 (the “February 2021 Note”) bearing interest at 10% with an original issue discount of $67,500 and a maturity date of February 15, 2022. The Company paid $37,500 of deferred finance costs and issued 200,000 shares of common stock to the lender of the February 2021 Note as deferred finance costs, valued at $72,000 based on the closing price of the stock at the date of borrowing. This lender also received 767,045 common stock warrants with an exercise price of $0.44 and a term of 3 years valued at $179,699. If the note is in default, the holder has the right to convert the outstanding principal and accrued interest balance into shares of common stock at the closing bid price of the Company’s common stock immediately prior to conversion. As a result of the variable conversion price on the Company’s outstanding notes payable and reset provisions, the conversion option and the warrants were accounted for as a derivative liability. The original balance of this note was $675,000. The Company used proceeds from this note payable to pay in full the June 2020 Notes and the November 2020 Note. The Company repaid the remaining $300,000 of principal on this note during the three months ended March 31, 2022.

 

 
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The Company amortized $0 and $43,269 of debt discount and deferred finance costs to interest expense related to convertible notes payable during the three months ended March 31, 2022 and 2021, respectively. Accrued interest on notes payable and convertible notes payable was $69,533 and $4,338 as of March 31, 2022 and December 31, 2021, respectively.

 

Derivative Liabilities

 

The fair values of the conversion option of outstanding convertible notes payable and common stock warrants with reset provisions were estimated using a binomial model with the following assumptions:

 

 

 

As of March 31, 2022

 

 

 

Conversion

Option

 

 

Warrants

 

 

 

 

 

 

 

 

Volatility

 

 

67.36 %

 

67.36-109.92

Dividend Yield

 

 

0 %

 

 

0 %

Risk-free rate

 

 

1.40 %

 

1.40-2.33

%

Expected term

 

1 year

 

 

1-5 years

 

Stock price

 

$ 0.0488

 

 

$ 0.0488

 

Exercise price

 

$ 0.18

 

 

$

0.18-0.30

 

Derivative liability fair value

 

$ 594

 

 

$ 179,136

 

 

All fair value measurements related to the derivative liabilities are considered significant unobservable inputs (Level 3) under the fair value hierarchy of ASC 820.

 

The table below presents the change in the fair value of the derivative liability during the three months ended March 31, 2022:

 

Fair value as of December 31, 2021

 

$ 325,808

 

Fair value on the date of issuance of new derivatives

 

 

141,020

 

Extinguishment due to repayment of debt

 

 

(7,655 )

Gain on change in fair value of derivatives

 

 

(279,443 )

Fair value as of March 31, 2022

 

$ 179,730

 

 

The total impact of derivative liabilities recognized in the Company’s consolidated statements of operations includes extinguishments due to repayments and the change in fair value of derivatives, with the Company recognizing a total gain of $287,098 and $532,367 during the three months ended March 31, 2022 and 2021, respectively. The increase of $141,020 was due to the 4 million warrants granted as part of Series B subscription.

 

Note 7: Equity

 

Common Stock

 

On December 31, 2021, the Board of Directors of the Company and shareholders holding a majority of the voting power of the Company both approved an amendment to the Company’s Article of Incorporation to increase the total number of authorized shares that the Company shall have authority to issue from 100,000,000 shares to 230,000,000 shares, consisting of two classes to be designated respectively, “Common Stock” and “Preferred Stock”, with all such shares having a par value of $0.001 per share, of which 200,000,000 shall be designated as Common stock and 30,000,000 designated as Preferred stock.

 

 
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During the years ended December 31, 2021 and 2020, the Company sold common stock units at $0.18 per unit. Each $0.18 unit consists of a share of common stock and a warrant to purchase half a share of common stock at an exercise price of $0.27, for a period of three years from issuance. As of March 31, 2022 and December 31, 2021 there were 2,222,223 shares remaining to be issued related to common stock units.

 

As of March 31, 2022 and December 31, 2021, there are 2,777,778 shares remaining to be issued related to 2020 debt conversions of $499,999, which is included in Subscription Payable on the consolidated balance sheets, with 2,160,494 of those shares remaining to be issued to Mark Adams, CEO, and David Hall, EVP of Sales. See Note 6.

 

Series A Redeemable Preferred Stock

 

The Company created the 2,800,000 shares of Series A Preferred Stock out of the 10,000,000 shares of preferred stock authorized by the Company’s articles of incorporation by filing a certificate of designation as authorized by the Company’s board of directors (the “Certificate of Designation”). 

The Series A Preferred Stock bears a cumulative dividend of 5.0% per annum on the original purchase price and is redeemable by the Company or upon a class vote by the holders of the Series A Preferred Stock at the original purchase price, plus any unpaid dividends then owing, payable in 4 equal quarterly payments. The Series A Preferred Stock converts into the Company’s common stock at a ratio of 2:1, subject to revision on the basis of standard weighted average anti-dilution protective provisions, at the option of the holders of the Series A Preferred Stock or automatically upon the occurrence of a merger, sale of the Company’s assets, or upon another Deemed Liquidation Event as defined in the Certificate of Designation. In the absence of an anti-dilution adjustment, the 2,800,000 shares of Series A Preferred Stock will convert into 1,400,000 shares of the Company’s common stock.

 

The Series A Preferred Stock votes with the Company’s common stock, as a single class, at a rate of 20 votes for each share of Series A Preferred Stock. The Series A Preferred Stock carries a liquidation preference and is participating. The Series A Preferred Stock carries standard protective provisions that preclude the Company from amending its articles of incorporation, bylaws or the terms of the Certificate of Designation adversely to the holders of the Series A Preferred Stock without their prior approval.

 

Due to the redemption feature, the Company accounts for the Series A Preferred Stock as temporary equity in accordance with ASC 480. The Series A Preferred Stock is accounted for at redemption value.

 

On May 26, 2021, the Company, entered into a subscription agreement (the “Preferred Stock Agreement”) with Mark Adams, Chief Executive Officer, President, and a member of Board of Directors of the Company. Mark Adams paid $126,000 to purchase 1,400,000 shares of the Series A Preferred Stock, at a price per share of $0.09.

 

Scott Wessler, Chairman of Board of Directors of the Company, paid $126,000 to purchase 1,400,000 shares of the Series A Preferred Stock, at a price per share of $0.09.

 

The Company accrued $3,107 in dividends on the Series A Preferred Stock for the three months ended March 31, 2022. The redemption value of the Series A Preferred Stock as of March 31, 2022 and December 31, 2021 was $262,529 and $259,422, reflected as temporary equity on the Company’s consolidated balance sheet.

 

Series B Convertible Preferred Stock

 

In February 2022, the Company designated 1,000,000 shares of Series B Convertible Preferred Stock (“Series B”). The Series B has a par value of $0.0001 per share, a stated value of $1 per share and carries a dividend of 8%. The Series B are convertible into shares of common stock at a price of $0.06 per share, and contains an exercise price reset provision in the event of dilutive issuances of common stock or any common stock equivalent by the Company with a price below the exercise price.

 

The Series B holders do not have voting rights on matters other than those related to amending the certificate of incorporation of the Series B, altering voting or other powers of the Series B, or redemption or acquisition of outstanding Series B. For a period of one year following closing of the Series B funding, the Company may not authorize or create any class of stock that is senior to the Series B with respect to dividends, redemption or distribution of assets upon Liquidation. In the event of liquidation of the Company, the Series B holders shall be paid 125% of the Stated value plus 125% of any unpaid dividends.

 

 
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During the three months ended March 31, 2022, the Company sold a total of 1,000,000 shares of Series B to two investors for net cash proceeds of $890,000 after closing costs of $110,000 and issued warrants to purchase 4,000,000 shares of common stock at $0.20 per share for a period of five years. The Company also issued 2,000,000 shares of common stock with a fair value of $69,990 to the investors, which were recorded as a cost of capital. The Company granted to the investors the piggy-back registration rights.

 

Stock Warrants

 

A summary of stock warrant information is as follows:

 

 

 

Aggregate

Number

 

 

Aggregate

Exercise

Value

 

 

Weighted

Average

Exercise

Price

 

 

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2021

 

 

11,189,056

 

 

$ 2,646,044

 

 

$ 0.24

 

Granted

 

 

4,000,000

 

 

 

800,000

 

 

 

0.20

 

Exercised

 

 

-

 

 

 

-

 

 

 

-

 

Forfeited and cancelled

 

 

-

 

 

 

-

 

 

 

-

 

Outstanding at March 31, 2022

 

 

15,189,056

 

 

$ 3,446,044

 

 

$ 0.23

 

 

The weighted average remaining contractual life is approximately 2.67 years for stock warrants outstanding with no intrinsic value of as of March 31, 2022. All of the above warrants were fully vested.

 

Note 8: Related Party

 

Mark Adams, CEO, and David Hall, EVP of Sales invested in the June 2019 Notes. Mark Adams and David Hall contributed $250,000 and $100,000 respectively, and converted their debt during the year ended December 31, 2020 into shares of common stock of 1,388,885 and 555,555, respectively, that have not yet to be issued. Mark Adams and David Hall will also receive an additional 154,321 and 61,728 shares of common stock once the shares are issued. Those shares were in subscriptions payable and presented on the balance sheet. See note 6 and 7.

 

Mark Adams and Scott Wessler each contributed $126,000 to purchase the Series A Preferred Stock as discussed in Note 7.

 

Note 9: Commitments

 

Employment Agreement

 

On May 31, 2019, the Company entered into a consulting agreement with its founder Daniel Davis related to his departure from employment with the Company. The agreement requires Daniel Davis to provide limited consulting services to the Company for a period of up to three years beginning May 1, 2019 in exchange for $165,000 per year. As of March 31, 2022, the Company has paid off the amount due to Daniel Davis.

 

Leases

 

The Company entered into a lease agreement for office space on February 2, 2022, for a term beginning February 15, 2022 through February 28, 2025. The lease requires payments of $3,267 per month through the lease term, increasing by 4% each year, with an option to renew. The Company recognized an initial right of use asset and lease liability of $105,822, based on the present value of the minimum lease payments. For purposes of calculating operating lease liabilities, lease terms may be deemed to include options to extend the lease when it is reasonably certain that the Company will exercise those options. Some leasing arrangements require variable payments that are dependent on usage, output, or may vary for other reasons, such as insurance and tax payments. The variable lease payments are not presented as part of the initial right-of-use (“ROU”) asset or lease liability. The Company’s lease agreements do not contain any material restrictive covenants.

 

 
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The components of lease cost for operating leases for the three months ended March 31, 2022 and 2021 were as follows:

 

 

 

Three months ended

 

 

 

March 31, 

2022

 

 

March 31, 

2021

 

Operating lease cost

 

$ 6,703

 

 

$ -

 

Short-term lease cost

 

 

28,655

 

 

 

20,629

 

Variable lease cost

 

 

 

 

 

 

Sublease income

 

 

 

 

 

 

Total lease cost

 

$ 35,358

 

 

$ 20,629

 

  

The following table summarizes the lease-related assets and liabilities recorded in the consolidated balance sheets at March 31, 2022 and December 31, 2021:

 

Lease Position

 

March 31,

2022

 

 

December 31,

2021

 

Operating Leases

 

 

 

 

 

 

Operating lease right-of-use assets

 

$ 100,877

 

 

$ -

 

Right of use liability operating lease current portion

 

$ 30,431

 

 

$ -

 

Right of use liability operating lease long term

 

 

72,249

 

 

 

-

 

Total operating lease liabilities

 

$ 102,680

 

 

$ -

 

  

The Company utilizes the incremental borrowing rate in determining the present value of lease payments unless the implicit rate is readily determinable. The Company estimated its incremental borrowing rate to be 10%. The lease has a remaining term of 2.9 years.

 

The following table provides the maturities of lease liabilities at March 31, 2022:

 

 

 

 Operating

 

 

 

 Leases

 

2022 (Nine months remaining)

 

$

29,403

 

2023

 

 

40,511

 

2024

 

 

42,123

 

2025

 

 

7,065

 

2026 and thereafter

 

 

-

 

Total future undiscounted lease payments

 

 

119,102

 

Less: Interest

 

 

(16,422

)

Present value of lease liabilities

 

$

102,680

 

 

Lawsuit

 

The Company has a pending lawsuit with one of its previous suppliers regarding defected cartridges. The Company is still evaluating the case and determining the impact of the case on the Company and as of the date of this Report the amount or range of possible losses is not reasonably estimable.

 

Note 10: Accrued Liabilities – Other

 

Prior to the Merger, China Grand Resorts, Inc. recorded various liabilities that were incurred by former related parties. The current management team is not aware of any written agreements in place governing the terms of the loans nor have they been in contact with the debt holders however recognizes that China Grand Resorts, Inc. previously reported these amounts as liabilities of the Company. In accordance with ASC 405-20-40, the liabilities may only be removed from the Company’s financial statements if they are paid, formally settled or judicially released. Management believes the relevant statute of limitations has passed and that no enforceable legal claim exists in relation to these liabilities of $1,696,374, but does not believe that is sufficient to remove the liability from the financial statements. Management does not intend to remove these liabilities of $1,696,374 from the Company’s financial statements until such time that the liability is formally settled or judicially released in accordance with ASC 405-20-40. Due to the lack of written agreements and other factors noted above, management concluded to no longer accrue interest on these loans. The balance of Accrued Liabilities, Other includes $577,906 and $622,121 of liabilities related to unfulfilled performance obligations that the Company does not expect to complete within the foreseeable future.

 

Note 11: Subsequent Events

 

The Company has evaluated subsequent events through the filing of this Quarterly Report on Form 10-Q and determined that there have been no events that have occurred that would require adjustments to our disclosures in the financial statements.

 

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

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations include several forward-looking statements that reflect management’s current views with respect to future events and financial performance. You can identify these statements by forward-looking words such as “may”, “will”, “expect”, “anticipate”, “believe”, “estimate” and “continue”, or similar words. Those statements include statements regarding the intent, belief or current expectations of us and members of management team as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements.

 

Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the SEC. Important factors currently known to management could cause actual results to differ materially from those in forward-looking statements. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time. We believe that our assumptions are based upon reasonable data derived from and known about our business and operations. No assurances are made that actual results of operations or the results of our future activities will not differ materially from our assumptions. Factors that could cause differences include, but are not limited to, expected market demand for our products, fluctuations in pricing of our products, and competition.

 

The following discussion provides information that management believes is relevant to an assessment and understanding of our past financial condition and plan of operations. The discussion below should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this report.

 

Overview

 

The Company was originally incorporated in the State of Nevada on September 21, 1989 under the name of Fulton Ventures, Inc. Since incorporated, the Company has engaged in a variety of businesses, but has been inactive since late 2014 through the Merger that closed on September 14, 2018. Since the Merger, the Company has been operated under the control of current management and continued to operate the business of Jacksam Corporation, described herein, as our sole business. Our sole business has been the design, manufacturing and sale of vaporizer cartridge filling machines, capping machines, pre-roll & cone filling machines, and cartridges to customers in the medical and recreational cannabis, hemp, and CBD industries.

 

Components of Statements of Operations

 

Revenue

 

Product revenue consists of sales of 710 Shark filling machines, 710 Captain capping machines, “PreRoll-ER” pre-roll & cone filling machines, cartridges, accessories, warranty, service and freight charges, net of returns, discounts and allowances. Once a sales order is negotiated and received by a sales representative, we generally collect a 50% deposit from the customer. When the product is ready to be shipped, the customer will generally pay the remaining balance. We recognize the revenue when the product leaves the warehouse on the way to the customer.

 

For the filling and capping machines, training is coordinated with the customers in accordance with their availability but generally completed within a week or two of the shipment. Standard warranties are offered at no cost to customers to cover parts for three years, and labor and maintenance are offered for one year for product defects.

 

 
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Table of Contents

 

Cost of Revenue

 

Cost of goods sold represents costs directly related to supplies and materials, machines, freight and delivery, commissions, printing, packaging and other costs.

 

We expect our cost of goods sold per unit to decrease as we continue to scale our operations, improve product designs and work with our third-party suppliers to lower costs.

 

Operating Expenses

 

Sales and Marketing. Sales and marketing expenses include costs associated with our business development efforts with our distributors and partners and costs related to trade shows and other marketing programs. We expense sales and marketing costs as incurred. We expect sales and marketing expenses to increase in future periods as we expand our sales and marketing teams and increase our participation in global trade shows and other marketing programs.

 

General and Administrative. Our general and administrative expenses consist primarily of compensation, benefits, travel and other costs for employees. In addition, general and administrative expenses include third-party consulting, legal, audit, accounting services, and allocations of overhead costs, such as rent, facilities and information technology. We expect general and administrative expenses to increase as our revenue increases.

 

Results of Operations

 

Comparison for the three-month periods ended March 31, 2022 and 2021: 

 

Revenue

 

Total revenue during the three months ended March 31, 2022 increased to $1,777,075 (comprised of machine sales of $1,033,123 and non-machine sales of $743,952), compared to the three months ended March 31, 2021 that generated sales of $1,770,966 (comprised of machine sales of $1,658,668 and non-machine sales of $112,298). The lockdown of major cities in China due to Covid-19 during the first quarter of 2022 caused shipping issues of machines from China to the U.S. and adversely impacted our ability to fulfill customers’ orders. However, lower machine sales were offset by record quarterly cartridge sales driven by our strong execution of strategic partnership and customer development.

 

Cost of Revenue

 

Total cost of revenue increased to $1,358,438 during the three months ended March 31, 2022, compared to the three months ended March 31, 2021 that had a cost of revenue of $1,256,973. The increase in cost of revenue was due to a higher mix of non-machine sales. Thus, our gross margin percentage decreased from 29% for the three months ended March 31, 2021 to 24% for the three months ended March 31, 2022.

 

Operating Expenses

 

Operating expenses during the three months ended March 31, 2022 increased to $417,257 (comprised of Salaries of $267,644 and Other Sales, Marketing and General and Administrative (“SG&A”) expenses of $149,613), compared to the three months ended March 31, 2021 that produced $510,243 (comprised of Salaries of $329,083 and Other SG&A expenses of $181,160). The decrease in operating expenses was driven by our continued operation optimization.

 

 
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Table of Contents

 

Income from Operations

 

Total income from operations was $1,380 during the three months ended March 31, 2022, compared to $3,750 for the three months ended March 31, 2021.

 

Derivative Gain / (Loss)

 

Derivative gain, a non-cash item, was $287,098 during the three months ended March 31, 2022, due to the fair value change of the debt and warrants driven by the stock price change between December 31, 2021 and March 31, 2022, compared to $532,367 during the three months ended March 31, 2021.

 

Interest Expense

 

Interest expense decreased to $259,094 during the three months ended March 31, 2022, compared to $348,651 during the three months ended March 31, 2021, primarily due to the amortization of debt discount of the Notes, a non-cash item.

 

Loss on Settlement of Notes Payable

 

Loss on settlement of notes payable, a non-cash item, was $0 during the three months ended March 31, 2022, compared to $137,506 during the three months ended March 31, 2021.

 

Loss on Conversion of Notes Payable

 

Loss on conversion of notes payable, a non-cash item, was $0 during the three months ended March 31, 2022, compared to $58,642 during the three months ended March 31, 2021.

 

Net Income / (Loss)

 

Net income was $29,384 during the three months ended March 31, 2022, compared to a net loss of $8,682 during the three months ended March 31, 2021.

 

Liquidity and Capital Resources

 

At March 31, 2022, we had cash and cash equivalents of $807,014. During the three months ended March 31, 2022, we have financed our operations principally through receipts of customer payments, debt of $81,671, and issuance of preferred stock of $890,000.

 

We anticipate that we will need additional financing to continue as an ongoing entity over the next 12 months. Our future capital requirements and the adequacy of available funds will depend on many factors. There can be no assurance we will be able to obtain additional financing on favorable terms, or at all. If we are unable to obtain additional financing, our financial results and business prospects may be materially adversely affected.

 

Operating Activities

 

We have historically experienced negative cash outflows. Our net cash used in operating activities primarily results from our operating losses combined with changes in working capital components as we have grown our business and is influenced by the timing of cash payments for inventory purchases and cash receipts from our customers. Our primary source of cash flow from operating activities is cash down payments and final payments for our machines. Our primary uses of cash from operating activities are employee-related expenditures and amounts due to vendors for purchased components. Our cash flows from operating activities will continue to be affected principally by our working capital requirements and the extent to which we build up our inventory balances and increase spending on personnel and other operating activities as our business grows.

 

During the three months ended March 31, 2022, net cash used in operating activities was $137,892, compared to $122,170 during the three months ended March 31, 2021.

 

 
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Investing Activities

 

The Company had no investing activities in either period.

 

Financing Activities

 

During the three months ended March 31, 2022, the Company received $890,000 in proceeds from issuance of Series B Preferred Stock and $81,671 in proceeds from short-term debt and made payments of $300,000 of convertible notes payable and $71,576 of short-term debt.

 

During the three months ended March 31, 2021, the Company received $570,000 in proceeds from convertible debt, $296,524 in proceeds from non-convertible debt, and $250,000 in proceeds from sale of common stock units, and made payments of $526,058 of convertible notes payable and $16,443 of non-convertible notes payable.

 

Off-Balance Sheet Arrangements

 

During the three months ended March 31, 2022 and the year ended December 31, 2021, we did not have any off-balance sheet arrangements as defined by applicable SEC regulations.

 

COVID-19 Impact

 

Our business and operating results for 2020 and first quarter of 2022 were impacted by the COVID-19 pandemic. We expect improvements throughout 2022.

 

Item 3. Quantitative and Qualitative Disclosure About Market Risk

 

We do not use derivative financial instruments in our investment portfolio and have no foreign exchange contracts. Our financial instruments consist of cash and cash equivalents. We consider investments that, when purchased, have a remaining maturity of ninety (90) days or less to be cash equivalents. We do not believe that a notional or hypothetical 10% change in interest rates would have a material impact on our interest income.

 

Item 4. Controls and Procedures

 

Management’s Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Form 10-Q, we have concluded that, based on such evaluation, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

 
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Table of Contents

 

PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings

 

The Company has a pending lawsuit with one of its previous suppliers regarding defected cartridges. The Company is still evaluating the case and determining the impact of the case on the Company and as of the date of this Report the amount or range of possible losses is not reasonably estimable. From time to time, we may become involved in various lawsuits and legal proceedings that arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time and harm our business.

 

Item 1A. Risk Factors

 

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.

 

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

 

None.

 

Item 3. Defaults Upon Senior Securities

 

Not applicable.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

 
24

Table of Contents

 

Item 6. Exhibits

 

Exhibit

Number

 

Exhibit Description

 

31.1

 

Certification of the Company’s Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to the registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022

 

31.2

 

Certification of the Company’s Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to the registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022

 

32.1

 

Certification of the Company’s Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002

 

101.INS

 

Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Labels Linkbase Document

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

104

 

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

 
25

Table of Contents

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

JACKSAM CORPORATION

 

 

Dated: May 16, 2022

By:

/s/ Mark Adams

 

Mark Adams

 

Chief Executive Officer

 

 

Dated: May 16, 2022

By:

/s/ Steven Duo

 

Steven Duo

 

Chief Financial Officer

  

 

26

 

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