Item
1. Financial Statements (unaudited)
MALACHITE
INNOVATIONS, INC.
CONSOLIDATED
FINANCIAL STATEMENTS
THREE
MONTHS ENDED MARCH 31, 2023 AND 2022
(Unaudited)
MALACHITE
INNOVATIONS, INC.
CONSOLIDATED
BALANCE SHEETS
See
accompanying notes to the consolidated financial statements.
MALACHITE
INNOVATIONS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
See
accompanying notes to the consolidated financial statements.
MALACHITE
INNOVATIONS, INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
THREE
MONTHS ENDED MARCH 31, 2023 AND 2022
| |
Three months ended March 31, 2022 (Unaudited) | |
| |
Common Stock | | |
Additional | | |
| | |
| |
| |
Number of shares | | |
Amount | | |
Paid-in Capital | | |
Accumulated Deficit | | |
Total | |
Balance – December 31, 2021 | |
51,450,147 | | |
$51,250 | | |
$48,707,787 | | |
$(49,140,678) | | |
$(381,641) | |
Balance | |
51,450,147 | | |
$51,250 | | |
$48,707,787 | | |
$(49,140,678) | | |
$(381,641) | |
Net loss | |
| - | | |
| - | | |
| - | | |
| (447,974 | ) | |
| (447,974 | ) |
Balance as of March 31, 2022 (Unaudited) | |
| 51,450,147 | | |
$ | 51,250 | | |
$ | 48,707,787 | | |
$ | (49,588,652 | ) | |
$ | (829,615 | ) |
Balance | |
| 51,450,147 | | |
$ | 51,250 | | |
$ | 48,707,787 | | |
$ | (49,588,652 | ) | |
$ | (829,615 | ) |
See
accompanying notes to the consolidated financial statements.
MALACHITE
INNOVATIONS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
See
accompanying notes to the consolidated financial statements.
MALACHITE
INNOVATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
THREE
MONTHS ENDED MARCH 31, 2023 AND 2022
(Unaudited)
1.
BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Malachite
Innovations, Inc. (the “Company”, “we”, “us”, “our” or “Malachite”),
was incorporated in the State of Nevada on June 29, 2007. Malachite is a public holding company dedicated to improving the health and
wellness of people and the planet through a novel and innovative approach to impact investing. Malachite owns and operates a balanced
portfolio of operating businesses focused on developing long-term solutions to environmental, social and health challenges, with a particular
focus on economically disadvantaged communities. Malachite takes an opportunistic approach to impact investing by leveraging its competitive
advantages and looking at solving old problems in new ways. Malachite seeks to thoughtfully allocate its capital into ventures that are
expected to make a positive impact on the people-planet ecosystem and generate strong investment returns for our shareholders.
Originally
founded in 2007 as Legend Mining Inc., the Company began operations as a mineral extraction exploration business. In 2011, the Company
changed its name to Stevia First Corp and pursued a new strategy focused on developing stevia-based additives for the food and beverage
industry. In 2015, the Company changed its name to Vitality Biopharma, Inc. and pursued a new strategy focused on developing cannabinoid-based
prodrugs anticipated to treat inflammatory conditions of the gastrointestinal tract by unlocking the therapeutic properties of cannabinoids
but without their unwanted psychoactive side effects.
In
October 2021, the Company changed its name to Malachite Innovations, Inc. and reorganized its corporate structure and created the following
two wholly-owned operating subsidiaries: (i) Graphium Biosciences, Inc., a Nevada corporation (“Graphium”), into which the
Company contributed all of its drug development assets; and (ii) Daedalus Ecosciences, Inc., a Nevada corporation (“Daedalus”)
which was formed to serve as a holding company for the Company’s future impact investing operating businesses.
In
May 2022, Daedalus acquired Range Environmental Resources, Inc., a West Virginia corporation (“Range Environmental”) and
Range Natural Resources, Inc., a West Virginia corporation (“Range Natural” and together with Range Environmental, the “Range
Reclamation Entities”). The Range Reclamation Entities provide land reclamation, water restoration and environmental consulting
services to mining and non-mining customers throughout the Appalachian region with the goal of returning land to pre-mining conditions
or repurposing the land for natural, commercial, agricultural or recreational use. The Range Reclamation Entities’ water restoration
services seek to improve rivers, streams and discharges through novel and innovative treatment applications to help customers meet their
various regulatory standards and requirements. The Range Reclamation Entities also provide environmental consulting services to customers
typically in connection with land reclamation and water restoration projects and as an additional value-add service, sells water treatment
chemicals manufactured by third parties to their customers. Range Natural also provides resource mining services for customers incidental
to the reclamation and repurposing of mine sites.
On
December 31, 2022, Daedalus was merged into Malachite Innovations, Inc., leaving Malachite Innovations, Inc., as the parent company
with full ownership of all of its wholly-owned operating subsidiaries, including the Range Reclamation Entities, Terra Preta, Inc.,
Pristine Stream Ventures, Inc., Range Security Resources, Inc. and Graphium.
Going
Concern
The
accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of business. As reflected in the accompanying financial statements, during the three
months ended March 31, 2023, the Company incurred a net loss of $226,860 and $675,796 of cash was provided by the Company’s operating
activities. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year of
the date that the financial statements are issued. The financial statements do not include any adjustments that might be necessary should
the Company be unable to continue as a going concern.
The
ability to continue as a going concern is dependent on the Company attaining and maintaining profitable operations in the future and/or
raising additional capital to meet its obligations and repay its liabilities arising from normal business operations when they come due.
The Company estimates, as of March 31, 2023, that it has sufficient funds to operate the business for 12 months given its cash balance
of $229,018, line of credit availability of $900,000, and revenues being generated by the Range Reclamation Entities. Although the Company’s
existing cash balances are estimated to be sufficient to fund its currently planned level of operations, the Company is actively seeking
additional financing and other sources of capital to accelerate the funding and execution of its growth strategy and value creation plan.
However, these estimates could differ if the Company encounters unanticipated difficulties, or if its estimates of the amount of cash
necessary to operate its business prove to be wrong, and the Company uses its available financial resources faster than it currently
expects. No assurance can be given that any future financing or capital, if needed, will be available or, if available, that it will
be on terms that are satisfactory to the Company.
Basis
of Presentation
The
consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Graphium Biosciences, Inc.,
Range Environmental Resources, Inc., Range Natural Resources, Inc., Terra Preta, Inc., Pristine Stream Ventures, Inc., Range Security
Resources, Inc., Aether Credit Ventures, Inc., NextGen AgriTech, Inc., and Daedalus Ecosciences, Inc. (merged into Malachite Innovations,
Inc. on December 31, 2022), and have been prepared in accordance with accounting principles generally accepted in the United States of
America. Intercompany balances and transactions have been eliminated in consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual
results could differ from those estimates.
Revenue
Recognition
The Company recognizes revenue
under ASC 606, “Revenue from Contracts with Customers”. The core principle of the revenue standard is that a company should
recognize revenue by analyzing the following five steps: (1) identify the contract with the customer; (2) identify the performance obligations
in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations; and (5) recognize
revenue when (or as) each performance obligation is satisfied. The Company primarily invoices customers and recognizes revenue on a periodic
basis for equipment and labor hours provided to a customer on a particular job based on an agreed-upon hourly rate sheet or a fixed amount
for a project. The Company also invoices customers and recognizes revenue for equipment mobilization fees and materials and supplies required
to complete a project. The Company invoices for the sales of chemicals and recognizes revenue when the products are delivered to the customer’s
designated site. Costs for equipment, labor and chemicals are generally expensed as incurred since the projects are generally short-term
and not subject to a contract. The Company also invoices customers for the provision of environmental security services on an agreed-upon
hourly rate for each project. All revenue is recognized at a point in time.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with an original maturity of three months or less at the date of acquisition to be cash
equivalents. From time to time, the Company’s cash account balances exceed the balances covered by the Federal Deposit Insurance
System. The Company has never suffered a loss due to such excess balances.
Accounts
Receivable
Trade
accounts receivable are stated at the amount management expects to collect from the balances outstanding at the end of each fiscal period
reflected in the consolidated balance sheets. Based on management’s assessment, it has concluded that losses on balances outstanding
as of those dates will be immaterial and, therefore, no allowances were recorded for the three months ended March 31, 2023 or the three
months ended March 31, 2022. Accounts receivable were $1,233,532 and $981,385 at March 31, 2023 and December 31, 2022, respectively.
No bad debt expense was accrued in either the three months ended March 31, 2023 or the three months ended March 31, 2022 and there is
no allowance for doubtful accounts as of March 31, 2023 or December 31, 2022.
Equipment
Equipment
is carried at cost. Expenditures for maintenance and repairs are charged to cost of services. Additions and betterments are capitalized.
The cost and related accumulated depreciation of equipment sold or otherwise disposed of are removed from the accounts and any gain or
loss is reflected in the current year’s earnings.
SCHEDULE OF EQUIPMENT
| |
March 31, 2023 | | |
December 31, 2022 | |
| |
| | |
| |
Equipment | |
$ | 7,384,039 | | |
$ | 6,637,814 | |
Accumulated depreciation | |
| 946,483 | | |
| 592,300 | |
Net book value | |
| 6,437,556 | | |
| 6,045,514 | |
Depreciation expense | |
$ | 354,184 | | |
$ | 395,543 | |
The
Company provides for depreciation of equipment using the straight-line method for both financial reporting and federal income tax purposes
over the estimated six-year useful lives of the equipment.
The
Company assesses the recoverability of its equipment by determining whether the depreciation of the assets over their remaining lives
can be recovered through projected future cash flows generated by the assets. There were no assets identified for impairment.
Delivery
Costs
Delivery
costs are classified as cost of sales.
Goodwill
Goodwill
is tested for impairment annually and more frequently if events or changes in circumstances indicate that it is more likely than not
(i.e., a likelihood greater than 50%) that the intangible asset is impaired.
Income
Taxes
The
Company follows the asset and liability method of accounting for income taxes. Under this method, deferred income tax assets and liabilities
are recognized for the estimated tax consequences attributable to differences between the financial statement carrying values and their
respective income tax basis (temporary differences). The effect on deferred income tax assets and liabilities of a change in tax rates
is recognized as income (loss) in the period that includes the enactment date.
Leases
The
Company determines whether a contract is, or contains, a lease at inception. Right-of-use assets represent the Company’s right
to use an underlying asset during the lease term, and lease liabilities represent the Company’s obligation to make lease payments
arising from the lease. Right-of-use assets and lease liabilities are recognized at lease commencement based upon the estimated present
value of unpaid lease payments over the lease term. The Company uses its incremental borrowing rate based on the information available
at lease commencement in determining the present value of unpaid lease payments. The Company had no lease commitments for longer than
one year as of March 31, 2023. The laboratory space lease in Rocklin, California was renewed in March 2023 and ends on March 31, 2024.
Stock-Based
Compensation
The
Company periodically issues stock options and restricted stock awards to employees and non-employees in non-capital raising transactions
for services. The Company accounts for such grants issued and vesting based on ASC 718, Compensation-Stock Compensation whereby the value
of the award is measured on the date of grant and recognized for employees as compensation expense on the straight-line basis over the
vesting period. Recognition of compensation expense for non-employees is in the same period and manner as if the Company had paid cash
for the services. The Company recognizes the fair value of stock-based compensation within its Consolidated Statements of Operations
with classification depending on the nature of the services rendered.
The
fair value of the Company’s stock options is estimated using the Black-Scholes-Merton Option Pricing model, which uses certain
assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or restricted stock, and future
dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes-Merton Option Pricing model and based
on actual experience. The assumptions used in the Black-Scholes-Merton Option Pricing model could materially affect compensation expense
recorded in future periods.
Basic
and Diluted Loss Per Share
Basic
loss per share is computed by dividing the net loss applicable to common stockholders by the weighted average number of outstanding common
shares during the period. Shares of restricted stock are included in the basic weighted average number of common shares outstanding from
the time they vest. Diluted loss per share is computed by dividing net loss applicable to common stockholders by the weighted average
number of common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential
common shares had been issued. Shares of restricted stock are included in the diluted weighted average number of common shares outstanding
from the date they are granted unless they are antidilutive. Diluted loss per share excludes all potential common shares if their effect
is anti-dilutive. The following potentially dilutive shares were excluded from the shares used to calculate diluted earnings per share
as their inclusion would be anti-dilutive:
SCHEDULE OF ANTI-DILUTIVE SECURITIES EXCLUDED FROM COMPUTATION OF EARNINGS PER SHARE
| |
March 31, 2023 | | |
December 31, 2022 | |
Options | |
| 9,392,544 | | |
| 9,392,544 | |
Warrants | |
| 22,313,335 | | |
| 22,313,335 | |
Total | |
| 31,705,879 | | |
| 31,705,879 | |
Anti-dilutive loss per
shares | |
| 31,705,879 | | |
| 31,705,879 | |
Patents
and Patent Application Costs
Although
the Company believes that its patents and underlying technology have continuing value, the amount of future benefits to be derived from
the patents is uncertain. Accordingly, patent costs are expensed as incurred.
Research
and Development
Research
and development costs consist primarily of fees paid to consultants and outside service providers, patent fees and costs, and other expenses
relating to the acquisition, design, development and testing of the Company’s treatments and product candidates. Research and development
costs are expensed as incurred.
Fair
Value of Financial Instruments
FASB
ASC 825, “Financial Instruments” requires that the Company disclose estimated fair values of financial instruments. Financial
instruments held by the Company include, among others, accounts receivable, accounts payable and long-term debt. The carrying amounts
reported in the balance sheets for assets and liabilities qualifying as financial instruments are a reasonable estimate of fair value.
Segments
As
of March 31, 2023, the Company has five
operating business segments: (i) Environmental Services, (ii) Biochar Products and Solutions,
(iii) Stream Mitigation Banking, (iv) Environmental Security Services, and (v) Cannabinoid Drug Development. In October 2021, the Company began operating under two segments: (i) Graphium Biosciences, Inc., a
wholly-owned subsidiary of the Company, reports the operating results of our cannabinoid drug development segment, which is
advancing a broad portfolio of glycosylated cannabinoid prodrugs that have been developed to unlock the rebalancing effects of the
endocannabinoid system to address numerous chronic conditions, and (ii) the Range Reclamation Entities, which
are wholly-owned subsidiaries of the Company, report the operating results of the Environmental Services segment, which provides
land reclamation, water restoration and environmental consulting services to mining and non-mining customers. The Biochar Products and Solutions, Stream Mitigation Banking, and Environmental Security
Services business segments began operations in the first quarter of 2023.
In
accordance with the “Segment Reporting” Topic of the ASC, the Company’s chief operating decision maker has been identified
as the Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance
for the entire Company. Existing guidance, which is based on a management approach to segment reporting, establishes requirements to
report selected segment information quarterly and to report annually entity-wide disclosures about products and services, major customers,
and the countries in which the entity holds material assets and reports revenue. All material operating units qualify for aggregation
under “Segment Reporting” due to their similar customer base and similarities in: economic characteristics; nature of products
and services; and procurement, manufacturing, and distribution processes.
Recent
Accounting Pronouncements
In
June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires entities to
use a forward-looking approach based on current expected credit losses to estimate credit losses on certain types of financial instruments,
including trade receivables. This may result in the earlier recognition of allowances for losses. ASU 2016-13 is effective for the Company
beginning January 1, 2023, and early adoption is permitted. This did not have a material effect on the Company’s financial position,
results of operations, or cash flows.
Other
recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public
Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s
present or future financial statements.
2.
ACQUISITION OF RANGE ENVIRONMENTAL RESOURCES AND RANGE NATURAL RESOURCES
In
May 2022, the Company and its wholly-owned subsidiary, Daedalus Ecosciences, Inc., entered into a share purchase agreement with Range
Environmental Resources, Inc. (“Range Environmental”), and Range Natural Resources, Inc. (“Range Natural”, and
collectively with Range Environmental, the “Range Reclamation Entities”), and the two (2) shareholders of the Range Reclamation
Entities (the “Range Shareholders”) (the “Share Purchase Agreement”), under which the Company issued a total
of 10,000,000 shares of the Company’s common stock to the Range Shareholders and Daedalus Ecosciences paid cash consideration of
$1,000,000 to the Range Shareholders for 80% of the outstanding common stock of each of the Range Reclamation Entities.
Subsequent
to entering into the Share Purchase Agreement, the Company discovered that Joshua Justice, one of the Range Shareholders (“Justice”),
made certain misrepresentations in the Share Purchase Agreement. On July 12, 2022, the Company entered into a Separation Agreement, by
and among the Company, Daedalus Ecosciences, the Range Reclamation Entities, and Justice and his spouse (the “Separation Agreement”)
pursuant to which Justice: a) acknowledged that his employment with the Range Reclamation Entities was terminated for cause effective
June 30, 2022; b) returned the 5,000,000 shares of the Company’s common stock that had been issued to him under the terms of the
Share Purchase Agreement; c) transferred his 10% interest in each of the Range Reclamation Entities to Daedalus Ecosciences; and d) paid
Daedalus Ecosciences cash in an amount of $250,000. As a result, only 5,000,000 of the Company’s common stock issued to the Range
Shareholders is considered to have been issued in exchange for 90% of the outstanding common stock of each of the Range Reclamation Entities.
Subsequently,
on October 11, 2022, Daedalus Ecosciences and Jeremy Starks, the remaining Range Shareholder (“Starks”), entered into a share
purchase agreement, effective as of May 11, 2022 (the “Starks Agreement”), pursuant to which Starks exchanged his 10% common
stock ownership of the Range Reclamation Entities for 10% of the Cash Dividends and Sale Proceeds (as both terms are defined in the Starks
Agreement) of the Range Reclamation Entities, as a result of which, the Range Reclamation Entities are now wholly-owned subsidiaries
of Daedalus Ecosciences and the Range Reclamation Entities are reported as wholly-owned indirect subsidiaries of the Company in the financial
statements made part of this Form 10-Q. No other changes were made to the consideration received by Starks as part of the Share Purchase
Agreement and he remains as President of each of the Range Reclamation Entities.
The
Company accounted for the transaction as a business combination in accordance ASC 805 “Business Combinations”. The Company
has performed an allocation of the purchase price paid for the assets acquired and the liabilities assumed. The fair values of the assets
acquired are set forth below. The allocation of the purchase price is based on management’s estimates.
SCHEDULE OF BUSINESS ACQUISITION ALLOCATION OF PURCHASE PRICE
| |
| | |
Fair value of assets acquired: | |
| | |
Cash | |
$ | 15,827 | |
Accounts receivables | |
| 889,919 | |
Property and equipment | |
| 628,000 | |
Goodwill | |
| 751,421 | |
Total assets acquired | |
| 2,285,167 | |
Fair value of liabilities assumed | |
| (785,167 | ) |
Purchase price | |
$ | 1,500,000 | |
Cash consideration | |
| 750,000 | |
Common stock consideration | |
| 750,000 | |
Total purchase price | |
$ | 1,500,000 | |
Acquisition transaction costs incurred | |
$ | 20,592 | |
Goodwill
has an assigned value of $751,421 and represents the value of the Range Reclamation Entities’
brand reputation, customer base and employee relations.
3.
GOODWILL
Goodwill
is $751,421 at March 31, 2023 and at December 31, 2022. The goodwill as of both dates represents the value
of the Range Reclamation Entities’ employee relations. Goodwill by reportable segment is as follows:
SCHEDULE OF GOODWILL
| |
March 31, 2023 | | |
December 31, 2022 | |
Environmental Services: | |
| | | |
| | |
Beginning Balance | |
$ | 751,421 | | |
$ | - | |
Acquisitions | |
| - | | |
| 751,421 | |
Adjustments | |
| - | | |
| - | |
Ending Balance | |
$ | 751,421 | | |
$ | 751,421 | |
4.
STOCK OPTIONS
Stock
options issued during the three months ended March 31, 2023 and the three months ended March 31, 2022
No
stock options were granted to directors, advisors, and employees during the three months ended March 31, 2023 or the three months ended
March 31, 2022.
During
the three months ended March 31, 2023 and the three months ended March 31, 2022, the Company recorded no stock-based compensation expense
related to vested stock options. At March 31, 2023, there was no remaining unamortized cost of the outstanding stock-based awards.
A
summary of the Company’s stock option activity during the three months ended March 31, 2023 is as follows:
SUMMARY OF STOCK OPTION ACTIVITY
| |
Shares | | |
Weighted Average Exercise Price | |
Balance outstanding at December 31, 2022 | |
| 9,392,544 | | |
$ | 0.54 | |
Granted | |
| - | | |
| - | |
Exchanged | |
| - | | |
| - | |
Exercised | |
| - | | |
| - | |
Expired | |
| - | | |
| - | |
Forfeited | |
| - | | |
| - | |
Balance outstanding at March 31, 2023 | |
| 9,392,544 | | |
$ | 0.54 | |
Balance exercisable at March 31, 2023 | |
| 9,392,544 | | |
$ | 0.54 | |
At
March 31, 2023, the 9,392,544 outstanding stock options had no intrinsic value.
A
summary of the Company’s stock options outstanding and exercisable as of March 31, 2023 is as follows:
SCHEDULE OF STOCK OPTIONS OUTSTANDING AND EXERCISABLE
| |
Number of Options | | |
Weighted Average Exercise Price | | |
Weighted Average Grant- date Stock Price | |
Options Outstanding and exercisable, March 31, 2023 | |
| 2,650,000 | | |
$ | 0.18 | | |
$ | 0.18 | |
| |
| 1,150,000 | | |
$ | 0.277 | | |
$ | 0.277 | |
| |
| 750,000 | | |
$ | 0.30 | | |
$ | 0.30 | |
| |
| 2,000,000 | | |
$ | 0.35 | | |
$ | 0.35 | |
| |
| 1,664,542 | | |
$ | 0.50 | | |
$ | 0.50 | |
| |
| 128,000 | | |
$ | 0.96 | | |
$ | 0.96 | |
| |
| 350,834 | | |
$ | 1.50 - 1.95 | | |
$ | 1.50 - 1.95 | |
| |
| 597,500 | | |
$ | 2.00 - 2.79 | | |
$ | 2.00 - 2.79 | |
| |
| 83,334 | | |
$ | 3.10 - 3.80 | | |
$ | 3.10 - 3.80 | |
| |
| 18,334 | | |
$ | 4.00 - 4.70 | | |
$ | 4.00 - 4.70 | |
| |
| 9,392,544 | | |
| | | |
| | |
5.
WARRANTS
A
summary of warrants to purchase common stock issued during the three months ended March 31, 2023 is as follows:
SCHEDULE OF WARRANTS ACTIVITY
| |
Shares | | |
Weighted Average Exercise Price | |
Balance outstanding at December 31, 2022 | |
| 22,313,335 | | |
$ | 0.61 | |
Granted | |
| - | | |
| - | |
Exercised | |
| - | | |
| - | |
Expired | |
| - | | |
| - | |
Balance outstanding and exercisable at March 31, 2023 | |
| 22,313,335 | | |
$ | 0.61 | |
At
March 31, 2023, the 22,313,335 outstanding stock warrants had no intrinsic value.
6.
NOTES PAYABLE
The
Company had no notes payable outstanding as of March 31, 2023.
7.
LINE OF CREDIT
In
November 2022, the Company secured a line of credit with a bank with a limit of $1,000,000. The line of credit has a maturity date of
November 30, 2023, and bears interest at one percent (1%) above the prime rate. As of March 31, 2023, the balance due under the line
of credit was $100,000.
8.
LONG-TERM DEBT OBLIGATIONS
Long-term
debt consists of debt on vehicles and equipment, which serves as the collateral. Interest rates range from 3.69% to 9.95% for 2023. The
debt matures from 2023 through 2028.
A
summary of payments due under the long-term debt by year is as follows:
SCHEDULE
OF MATURITIES OF LONG TERM DEBT
| |
| | |
2023 – due between April 1, 2023 and March 31, 2024 | |
$ | 1,025,362 | |
2024 – due between April 1, 2024 and March 31, 2025 | |
| 1,136,102 | |
2025 – due between April 1, 2025 and March 31, 2026 | |
| 835,671 | |
2026 – due between April 1, 2026 and March 31, 2027 | |
| 754,233 | |
2027 – due between April 1, 2027 and March 31, 2028 | |
| 679,880 | |
2028 and later – due between April 1, 2028 and thereafter | |
| 383,045 | |
Total long-term debt | |
$ | 4,814,293 | |
9.
MAJOR CUSTOMER AND CONCENTRATION OF CREDIT RISK
Sales
to the Company’s largest customer were 89% of total sales for the three months ended March 31, 2023.
Accounts
receivable from the same customer were 95% of total accounts receivable as of March 31, 2023.
10.
COMMITMENTS AND CONTINGENCIES
The
Company received a letter in February 2021 from counsel for the Company’s director’s and officer’s insurance carrier
(the “insurer”) demanding that the Company reimburse the insurer for sums advanced by the insurer to a former director of
the Company as defense costs in connection with a claim purportedly arising under a previous directors and officers insurance policy.
The Company believes it has no liability for this claim on the basis of, among other things, Nevada law, the Company’s governing
documents and the language of the policy. Accordingly, as of March 31, 2023, no contingent liability has been recorded in the Company’s
consolidated statements of financial condition for this matter.
11.
SEGMENT INFORMATION
ASC
280, “Segment Reporting” establishes standards for reporting information about operating segments on a basis consistent with
the Company’s internal organization structure as well as information about services, categories, business segments and major customers
in financial statements. The Company has five
reportable segments that are based on the following
business units: (i) Environmental Services, (ii) Biochar Products and Solutions, (iii) Stream Mitigation Banking, (iv) Environmental
Security Services, and (v) Cannabinoid Drug Development. In accordance with the “Segment Reporting” Topic of the ASC, the
Company’s chief operating decision maker has been identified as the Chief Executive Officer, who reviews operating results to make
decisions about allocating resources and assessing performance for the entire Company. Existing guidance, which is based on a management
approach to segment reporting, establishes requirements to report selected segment information quarterly and to report annually entity-wide
disclosures about products and services, major customers and the countries in which the entity holds material assets and reports revenue.
All material operating units qualify for aggregation under “Segment Reporting” due to their similar customer base and similarities
in: economic characteristics; nature of products and services; and procurement, manufacturing and distribution processes.
The five reportable segments that result from applying the aggregation
criteria are as follows:
● |
Environmental
Services – land reclamation, water restoration and environmental consulting services |
|
|
● |
Biochar
Products and Solutions - biochar product development and environmental solutions business |
|
|
● |
Stream
Mitigation Banking – mitigation banks to restore waterways and support economic development |
|
|
● |
Environmental
Security Services – security services on mines transitioning to next generation industries |
|
|
● |
Cannabinoid Drug Development – glycosylated cannabinoid drug development
program |
The Company operated two reportable
business segments during the three months ended March 31, 2022, the Cannabinoid Drug Development and Environmental Services segments.
The other business segments began operating in 2023.
The
Company had no inter-segment sales for the periods presented.
Summarized
financial information concerning the Company’s reportable segments is shown as below:
SCHEDULE
OF FINANCIAL INFORMATION OF REPORTABLE SEGMENT
By
Categories
| |
|
|
|
| | | |
|
|
| | | |
| | |
|
| | | |
| | |
| |
For the three months ended March 31, 2023 | |
| |
Environmental Services |
|
|
Biochar Products and Solutions | | |
Stream Mitigation Banking |
|
|
Environmental Security Services | | |
Cannabinoid Drug Development | |
|
Corporate | | |
Total | |
| |
|
|
|
| | |
|
|
|
| | |
| |
|
| | |
| |
Sales | |
$ |
2,988,487 |
|
|
$ | - | | |
|
- |
|
|
$ | 26,400 | | |
$ | - | |
|
$ | - | | |
$ | 3,014,887 | |
Gross profit | |
|
638,579 |
|
|
| - | | |
|
- |
|
|
| 10,423 | | |
| - | |
|
| - | | |
| 649,002 | |
Net income (loss) | |
|
186,643 |
|
|
| (19,164 | ) | |
|
- |
|
|
| (17,105 | ) | |
| (106,177 | ) |
|
| (271,057 | ) | |
| (226,860 | ) |
| |
|
|
|
|
| | | |
|
|
|
|
| | | |
| | |
|
| | | |
| | |
Total assets | |
| 8,550,781 |
|
|
| 15,564 | | |
|
- |
|
|
| 77,962 | | |
| 8,584 | |
|
| 8,412 | | |
| 8,661,303 | |
Depreciation | |
|
352,756 |
|
|
| - | | |
|
- |
|
|
| 1,428 | | |
| - | |
|
| - | | |
| 354,184 | |
Interest expense | |
|
42,750 |
|
|
| - | | |
|
- |
|
|
| - | | |
| - | |
|
| 887 | | |
| 43,637 | |
Tax expense | |
|
- |
|
|
| - | | |
|
- |
|
|
| - | | |
| - | |
|
| - | | |
| - | |
Capital expenditures for long-lived assets | |
$ |
678,202 |
|
|
$ | 15,350 | | |
|
- |
|
|
$ | 52,674 | | |
$ | - | |
|
$ | - | | |
$ | 746,226 | |
| |
|
|
|
| | |
|
| | | |
| | |
| |
For the three months ended March 31, 2022 | |
| |
Environmental Services |
|
|
Cannabinoid Drug Development | |
|
Corporate | | |
Total | |
| |
|
|
|
| |
|
| | |
| |
Sales | |
- |
|
|
- | |
|
- | | |
- | |
Gross Profit | |
- |
|
|
- | |
|
- | | |
- | |
Net Loss | |
$ |
(20,717 |
) |
|
$ | (125,730 | ) |
|
$ | (301,527 | ) | |
$ | (447,974 | ) |
| |
|
|
|
|
| | |
|
| | | |
| | |
Total assets | |
| - | |
|
| 8,334 | |
|
| 45,604 | | |
| 53,938 | |
Depreciation | |
|
- |
|
|
| - | |
|
| - | | |
| - | |
Interest expense | |
|
- |
|
|
| - | |
|
| 4,303 | | |
| 4,303 | |
Tax expense | |
|
- |
|
|
| - | |
|
| - | | |
| - | |
Capital expenditures for long-lived assets | |
$ |
- |
|
|
$ | - | |
|
$ | - | | |
$ | - | |
12.
SUBSEQUENT EVENTS
In
April 2023, the Company entered into securities purchase agreements providing for the issuance and sale of (i) 2,733,334
shares of the Company’s common stock (the “Shares”) at a price of $0.15
per share and (ii) warrants to purchase up to an additional 2,733,334
shares of the Company’s common stock, at a price of $0.60
per share (“Warrants”). After deducting for fees and expenses, the aggregate net proceeds from the sale of the Shares and Warrants was
approximately $400,000.
In May 2023, the Company issued options to purchase 300,000 shares of the
Company’s common stock to a consultant.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
As
used in this discussion and analysis and elsewhere in this Quarterly Report, the “Company”, “we”, “us”
or “our” refer to Malachite Innovations, Inc., a Nevada corporation.
Cautionary
Statement
The
following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Unaudited
Condensed Financial Statements and the related notes thereto contained in Part I, Item 1 of this Quarterly Report. The information contained
in this Quarterly Report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our
common stock. We urge you to carefully review and consider the various disclosures made by us in this Quarterly Report and in our other
reports filed with the Securities and Exchange Commission (the “SEC”), including our Annual Report on Form 10-K for the year
ended December 31, 2022 filed on March 31, 2023, and the related audited financial statements and notes included therein.
Certain
statements made in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Forward-looking
statements are projections in respect of future events or our future financial performance. In some cases, you can identify forward-looking
statements by terminology such as “may,” “will,” “should,” “intend,” “expect,”
“plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,”
or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and involve
known and unknown risks, uncertainties and other factors, which may cause our or our industry’s actual results, levels of activity
or performance to be materially different from any future results, levels of activity or performance expressed or implied by these forward-looking
statements. These risks and uncertainties include: general economic and financial market conditions; our ability to obtain additional
financing as necessary; our ability to continue operating as a going concern; any adverse occurrence with respect to our business or;
results of our research and development activities that are less positive than we expect; our ability to bring our intended products
to market; market demand for our intended products; shifts in industry capacity; product development or other initiatives by our competitors;
fluctuations in the availability and costs of raw materials required in our drug development process; other factors beyond our control;
and the other risks described under the heading “Risk Factors” in our Annual Report on Form 10-K filed with the SEC on March
31, 2023.
Although
we believe that the expectations and assumptions reflected in the forward-looking statements we make are reasonable, we cannot guarantee
future results, levels of activity or performance. In addition, we cannot assess the impact of each factor on our business or the extent
to which any factor, or combination of factors, may cause actual results to differ materially from those expressed by any forward-looking
statements. As a result, readers should not place undue reliance on any of the forward-looking statements we make in this report. Forward-looking
statements speak only as of the date on which they are made. Except as required by law, we undertake no obligation to revise or update
publicly any forward-looking statements for any reason.
Company
Overview
Unless
otherwise provided in this Quarterly Report, references to the “Company,” “we,” “us”, and “our”
refer to Malachite Innovations, Inc., a Nevada corporation formed on June 29, 2007 as Legend Mining Inc., and its consolidated subsidiaries.
On October 10, 2011, we completed a merger with our wholly-owned subsidiary, Stevia First Corp., whereby we changed our name from “Legend
Mining Inc.” to “Stevia First Corp.” On July 15, 2016, our Board of Directors and shareholders approved a name change
to “Vitality Biopharma, Inc.” On October 1, 2021, we completed a merger with our wholly-owned subsidiary, Malachite Innovations,
Inc., whereby we changed our name from “Vitality Biopharma, Inc.” to “Malachite Innovations, Inc.”
Malachite
Innovations, Inc. (“Malachite”) is a public holding company dedicated to improving the health and wellness of people and
the planet through a novel and innovative approach to impact investing. Malachite owns and operates a balanced portfolio of operating
businesses focused on developing long-term solutions to environmental, social and health challenges, with a particular focus on economically
disadvantaged communities. Malachite takes an opportunistic approach to impact investing by leveraging its competitive advantages and
looking at solving old problems in new ways. Malachite seeks to thoughtfully allocate its capital into ventures that are expected to
make a positive impact on the people-planet ecosystem and generate strong investment returns for our shareholders.
Our
corporate headquarters is located in Cleveland, Ohio, with additional office locations in Rocklin, California and Fola, West Virginia.
As of March 30, 2023, we employed 40 full-time employees and engaged various consultants and professional service firms to provide us
with flexible and experienced resources to advance our corporate objectives while maintaining a cost-effective overhead structure. We
strive to instill a corporate culture of honesty, integrity and respect while advancing our mission of doing well by doing good.
Operating
Business Segments
Our
five operating business segments are: (i) Environmental Services, (ii) Biochar Products and Solutions, (iii) Stream Mitigation Banking,
(iv) Environmental Security Services, and (v) Cannabinoid Drug Development. The Stream Mitigation Banking segment did not have significant
operations in the three months ended March 31, 2023.
Information
about our business segments should be read together with “Part II. Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”
Environmental
Services
In
May 2022, the Company acquired Range Environmental Resources, Inc., a West Virginia corporation (“Range Environmental”) and
Range Natural Resources, Inc., a West Virginia corporation (“Range Natural” and together with Range Environmental, the “Range
Reclamation Entities”). The Range Reclamation Entities provide land reclamation, water restoration and environmental consulting
services to mining and non-mining customers throughout the Appalachian region with the goal of returning land to pre-mining conditions
or repurposing the land for natural, commercial, agricultural or recreational use. The Range Reclamation Entities’ water restoration
services seek to improve rivers, streams and discharges through novel and innovative treatment applications to help customers meet their
various regulatory standards and requirements. The Range Reclamation Entities also provide environmental consulting services to customers,
typically in connection with land reclamation and water restoration projects, and, as an additional value-add service, sell water treatment
chemicals manufactured by third parties to their customers. Range Natural also mines natural resources, including coal, for customers
incidental to the reclamation and repurposing of mine sites.
According
to the U.S. Energy Information Administration (“EIA”), the United States had 551 coal mines in 2020, comprised of 370 active
mines, 141 idled or closed mines, and 40 new or activated mines. Approximately 82% of those coal mines were located in Appalachia (which
comprises the Appalachian Mountains and is commonly known as the cultural region in the Eastern United States stretching from the southern
part of New York to the northern parts of Alabama and Georgia). According to the EIA, there were approximately three times as many coal
mines in the United States in 2008 (compared to 2020) with approximately 89% located in Appalachia. The precipitous decline in the number
of operating coal mines since 2008 is due to various supply, demand and regulatory factors, including a reduction in demand for coal
as a source of electricity due to the increased use of natural gas and renewable energy, an increase in coal production costs due to
inflation and the dearth of cost-effective locations remaining for mining, and a more stringent and costly regulatory environment, all
of which have resulted in an increasingly difficult market for coal producers.
In
2000, coal was responsible for 1,966 billion kWh of electricity generation, which represented 52% of the total electricity generation
in the United States. However, in 2022, coal was responsible for only 828 billion kWh of electricity generation, which represented 20%
of the total electricity generation in the United States. According to the EIA, 23% of the 200,568 megawatts of coal-fired capacity currently
operating in the United States is scheduled to retire by the end of 2029 due to the high cost of operations, continued competition from
natural gas and renewable energy resources, and sustainable initiatives of energy producers.
However,
the reclamation of closed and inactive mine sites has not kept pace with the increase in closed and idled mine sites, thus creating a
substantial backlog of reclamation work that needs to be completed on former mine sites. According to the U.S. Office of Surfacing Mining
Reclamation and Enforcement (“OSMRE”), there are approximately 50,000 high-priority abandoned mine land locations in the
United States resulting from legacy coal mining operations that failed to adequately reclaim the land and waterways back to their natural
state. Additionally, there are tens of thousands of active mine sites in the United States that require contemporaneous reclamation of
land and waterways during the active mining process, and an estimated equally large number of idled mine locations that also require
significant land reclamation and water restoration services.
Under
the Surface Mining Control and Reclamation Act of 1977 (“SMRCA”), OSMRE was established for two basic purposes: (i) to ensure
coal mines in the United States operate in a manner that protects citizens and the environment during mining operations and to restore
the land to beneficial use following mining, and (ii) to implement an Abandoned Mine Land (“AML”) reclamation program to
address the hazards and environmental degradation resulting from two centuries of coal mining activities that occurred before SMRCA was
passed in 1977. The AML reclamation program is funded through fees levied against coal producers based on tons of coal produced. As of
September 2020, the AML reclamation fund had collected a total of $11.7 billion in coal mining fees over the life of the program, with
$9.5 billion (81%) appropriated and distributed in accordance with SMCRA, and $2.2 billion (19%) unappropriated and available for future
disbursement. In November 2021, the Infrastructure Investment and Jobs Act was enacted, which, among other things, authorized $11.3 billion
in new funding to be appropriated for deposit into the AML reclamation fund. Importantly, the AML reclamation fund is only available
to help fund the reclamation of mines abandoned before SMCRA was enacted in 1977; therefore, all mines abandoned after the year 1977
cannot access funding from the AML reclamation fund and must obtain funding from other sources.
Additionally,
each state in Appalachia has a Department of Environmental Protection (“DEP”) or an equivalent agency that oversees coal
mining permitting, operations, and reclamation. Under DEP rules and regulations, coal mining companies are required to develop a mining
and reclamation plan that is approved by the applicable state agency, obtain a mining permit from the state, and secure a reclamation
surety bond from a qualified third-party insurance company or provide a comparable financial guarantee. The reclamation surety bond provides
the state with financial assurances that land reclamation and waterway restoration will be performed in accordance with the original
reclamation plan once mining is complete if the coal mining company, as primary obligor, fails to perform. Therefore, there are at least
three groups who may need land reclamation, water restoration and environmental auditing services: (i) mining companies when permits
are active and reclamation bonds are not in default, (ii) surety bond insurers when reclamation bonds are in default, and (iii) states
through their AML reclamation funds for mine lands abandoned before 1977 and for mine lands with defaulted coal mining companies and
surety bond insurers after 1977.
At
the time of acquisition in May 2022, the Range Reclamation Entities had one reclamation customer, 15 pieces of owned and financed
equipment, eight pieces of rented equipment, and 12 employees, all located and operating in West Virginia. As of March 30, 2023,
less than one year later, the businesses had three reclamation customers, more than 40 pieces of owned and financed equipment, and
27 employees in West Virginia. For the full year 2021, the Range Reclamation Entities had revenues of approximately $2.5 million.
For the partial year period from May 11, 2022 to December 31, 2022, the Range Reclamation Entities had revenues of approximately
$4.8 million. For the first quarter of 2023, the Range Reclamation Entities had revenues of approximately $3.0 million. The Range
Reclamation Entities have also made a significant investment in recruiting, retaining and rewarding employees, including providing
new benefits such as health insurance, paid time off, vacation days, 401K retirement plan, and job advancement training. The Range
Reclamation Entities’ employees are their most valuable asset, and therefore we are committed to building a best-in-class
culture and financially rewarding our talented, hard-working employees so that we can maximize the good we can do for our people and
their families.
The
Range Reclamation Entities are planning for continued growth in their land reclamation, water restoration and consulting businesses by
expanding their market share with existing coal mining customers and reclamation bond insurers, adding new coal mining and non-coal mining
customers, and collaborating with the Company’s other operating businesses to generate incremental sales opportunities. We will
seek to add additional people, equipment and technologies to support these ambitious growth goals to ensure we successfully execute our
value creation plans for the Company and our shareholders.
Biochar
Products and Solutions
Terra
Preta, Inc., an Ohio corporation (“Terra Preta”), is a biochar product development and environmental solutions business started
by the Company in December 2022. Terra Preta is developing a novel and innovative combination of biochar, proprietary materials and structural
designs intended to create several first-of-its-kind agricultural and water filtration products and solutions.
Biochar
is a solid, lightweight carbon-rich material produced by the thermal decomposition of organic material (such as cellulosic feedstock,
including wood and plants) using a chemical-conversion process known as pyrolysis. Carbonization pyrolysis is a chemical degradation
process that heats organic materials to produce carbon-rich biochar, liquid bio-oils, and syngas products. Since organic material is
thermally decomposed without oxygen during the pyrolysis process, combustion does not occur, so the process allows for the permanent
capture of carbon in the biochar end-product and eliminates the release of climate-damaging carbon dioxide into the atmosphere. The specific
yield of biochar during the carbonization pyrolysis process depends on several variables such as temperature, heating time and heating
rate. Lower temperatures, longer heating times and lower heating rates typically yield more biochar and less bio-oil and syngas.
Terra
Preta has been launched to build a full-cycle, carbon-negative business that reduces greenhouse gases from the atmosphere, passively
filters contaminated water without the use of harsh chemicals, and provides a fortified, nutrient-rich soil amendment to improve the
growth of agricultural products.
Greenhouse
gases, comprised of carbon dioxide, methane, nitrous oxide and fluorinated gases, are gases that trap heat in the atmosphere, and are
generally believed to result in warmer temperatures and climate change, including changing weather patterns, rising sea levels, and more
extreme weather events. Carbon dioxide enters the atmosphere through, among other things, the burning of fossil fuels, solid waste and
other biomass materials, and is removed from the atmosphere when absorbed by plants during the photosynthesis process. Terra Preta is
in discussions with a large affiliated landowner to enter into a long-term lease or purchase of at least 100 acres of former mine land
in West Virginia for the planting, growth and harvesting of crops to serve as the primary feedstock for our biochar production operations.
The newly planted crops would then act as a “carbon sink”, drawing substantial amounts of carbon dioxide from the atmosphere
into the plants through the photosynthesis process. When the plants are harvested, biochar is produced through the carbonization pyrolysis
process and the captured carbon dioxide is permanently preserved as carbon in the biochar product for use in water treatment and agricultural
end uses.
Pursuant
to rules adopted under the Clean Water Act of 1972 (“Clean Water Act”), the U.S. Environmental Protection Agency (“EPA”)
has implemented various pollution control programs such as wastewater standards for industry and recommendations for pollutants in surface
waters. The Clean Water Act prohibits any party from discharging pollutants into a water of the United States unless they have a permit
issued under the National Pollutant Discharge Elimination System (“NPDES”), which contains limits on what a party can discharge
and establishes monitoring and reporting requirements. On mining sites, coal operators are required to sample and test their water discharges
on a regular basis to ensure compliance with the Clean Water Act and applicable NPDES permits. Currently, most mining operators treat
non-compliant water with temporary holding ponds and expensive chemicals such as pH adjusters, coagulants and flocculants that require
constant reapplication to ensure compliance. Terra Preta will focus on developing a proprietary, biochar-based passive treatment system
that treats non-compliant mine site discharges to ensure compliance with the Clean Water Act and NPDES permits without the need for holding
ponds or expensive chemicals.
Sustainable
agriculture plays a critical role in the stability, growth, and diversification of our future food supply chain and the growth of plants
intended to serve as a carbon sink to reduce greenhouse gases. High-quality soil, a key condition for sustainable agriculture, requires
organic matter, microorganisms, nutrients, and optimal compaction. Subsoils with a sufficient number of air-filled pores have little
restriction to drainage and aeration, and typically are able to decompose and cycle organic matter and nutrients more efficiently. Alternatively,
soil with poor aeration leads to the build-up of carbon dioxide, reduces the ability of plants to absorb water and nutrients, and leads
to increased plant stress and root disease. To help address the ill effects of soil compaction, Terra Preta is developing a proprietary,
fortified biochar soil amendment that provides unique soil structuring characteristics that will allow plants to grow strong roots that
optimize the absorption of water and nutrients, thereby reducing root stress and disease.
In
December 2022, Terra Preta filed trademarks for biochar goods and services related to agricultural and water treatment applications.
In March 2023, Terra Preta filed provisional patents related to novel and innovative agricultural and water treatment solutions and designs.
Additionally, in March 2023, Terra Preta purchased two pyrolysis ovens that each produce one ton of biochar per day to advance our research
and development activities. We anticipate that several biochar-based water filtration and soil amendment products will be available for
production and sale by the end of 2023.
Stream
Mitigation Banking
In
December 2022, the Company formed Pristine Stream Ventures, Inc., an Ohio corporation (“Pristine Stream”) to engage in the
business of establishing “mitigation banks” throughout the Appalachian region in order to restore and preserve environmentally
degraded streams and waterways and support new economic development, with a particular focus on coal mine sites in economically disadvantaged
areas that are being repositioned for next generation industries and job creation.
A
mitigation bank is a stream, wetland or other aquatic resource that has been restored or preserved for the purpose of providing compensation
for environmental impacts to other aquatic resources. A mitigation bank is created to ensure that ecological loss resulting from new
development is offset by the restoration and preservation of other nearby natural habitats so there is no net loss to the environment.
Regulatory agencies determine the number of mitigation credits that a mitigation bank may earn and sell upon the completion of each specific
restoration project, and likewise, the number of mitigation credits that a developer is required to purchase to offset the environmental
impact of the new development project.
Under
Section 404 of the Clean Water Act, a permit from the U.S. Army Corps of Engineers (“Army Corps”) is required to begin a
new development that impacts a wetland, stream or other aquatic resource. The Army Corps, following the guidance set forth by the EPA,
will grant a permit if the applicant: (i) takes all practicable steps to avoid an adverse impact to a wetland, stream, or other aquatic
resource, (ii) minimizes unavoidable damage to a wetland, stream, or other aquatic resource, and (iii) compensates for permanent destruction
of a wetland, stream, or other aquatic resource by creating a new comparable aquatic resource, or by restoring a degraded one.
When
a wetland, stream or aquatic resource is permanently destroyed as part of a project, the developer must either restore or preserve a
new wetland, stream or aquatic resource, or purchase available credits from a qualified and approved mitigation bank that has already
restored or preserved a wetland, stream or aquatic resource in a qualifying hydrological unit code (“HUC”) zone. The United
States Geological Survey created HUC zones based on a hierarchical land area classification system incorporating surface hydrological
features in a standard, uniform graphical framework. HUC zone requirements are used to ensure a restored waterway is proximally located
to an impacted waterway so that the no net-loss principle incorporates a geographic factor.
Compensatory
mitigation can be accomplished through three options approved by the Army Corps: (i) the developer purchases appropriate credits from
an approved mitigation bank, (ii) the developer pays into an approved in-lieu fee fund, or (iii) the developer performs the requisite
amount of aquatic restoration. The Army Corps determines, on a case-by-case basis, the appropriate compensation option and amount of
compensation mitigation required by a developer to off-set unavoidable adverse effects to the aquatic environment. In determining the
amount of compensation mitigation, the Army Corps will consider the functional loss at the development site, the expected functional
gain at the mitigation site, the net loss of aquatic resource surface area, risk and uncertainty of the mitigation project, and loss
of natural habitat.
Pristine
Stream is planning to establish mitigation banks throughout the Appalachian region to earn mitigation credits which Pristine Stream would
later sell to developers to allow them to offset the impact of development activities in similar geographical areas. Pristine Stream
plans to identify and select qualifying aquatic sites, work closely with applicable federal and state regulatory agencies, and use the
Range Reclamation Entities to repair and restore damaged waterways to earn mitigation credits that can be sold by Pristine Stream. Pristine
Stream is currently analyzing the supply and demand dynamics of many HUC zones throughout the Appalachian region to determine the optimal
areas of focus for its new mitigation banks, and anticipates initiating its first mitigation banking project in Appalachia by the end
of 2023.
Environmental
Security Services
Range
Security Resources, Inc., an Ohio corporation (“Range Security”), is an environmental security services business started
by the Company in November 2022. Range Security is focused on providing eco-friendly, technology-driven security services to active and
former mine sites, with a particular focus on locations transitioning from coal mining to next generation industries. Range Security
is intended to serve as a complementary business to the Range Reclamation Entities.
Mine
sites in the Appalachian region frequently comprise thousands of acres of natural habitat with valuable infrastructure and operating
assets disbursed across large tracts of land. However, many of these mine sites lack adequate broadband access or cellular service, and
therefore traditional technology-based security solutions are not available. Also, due to the large land areas and often challenging
access roads and mountainous terrain, consistent visual confirmation of the safety and security of high value assets is problematic,
and unnecessary amounts of carbon dioxide are emitted from heavy-duty trucks used to perform frequent visual security checks. Furthermore,
due to the remoteness and lack of technological options, most security services in the market fail to provide an independent verification
of the security status of a mine site and confirmation of visual security checks, resulting in a customer’s uncertainty regarding
the actual security services being provided.
Valuable
assets commonly found on mine sites requiring high-levels of security services include office buildings, coal operation facilities such
as preparation plants and loadout facilities, power stations and electrical lines, vehicles and heavy equipment, supplies and chemicals,
and spare parts and components. These high-value assets are frequently the target of theft since all or parts of these assets can be
easily removed from the mine site and sold for cash. Unfortunately, the actual damage to the operation resulting from this type of destructive
theft is frequently many times the market value of the stolen item, primarily due to the losses resulting from the down-time of operations,
the cost of repairs and replacement components, and the long-term damage to critical infrastructure that can be repurposed and used to
attract next generation industries once the mining is complete.
In
March 2023, Range Security was engaged by its first customer for environmental security services covering a 13,000-acre coal mine site
in West Virginia. Range Security has hired seven new security professionals, and is focusing its recruitment efforts on military veterans,
police officers, and other professionals with security experience. Range Security has purchased two fuel-efficient utility task vehicles
for ground surveillance and a thermal-imaging drone for aerial surveillance, all of which use significantly less fuel and electricity
to operate than traditional security vehicles and provide a much broader coverage range with a substantially lower carbon footprint.
Range Security is also in the process of establishing satellite-based wireless service to support video surveillance and enable a mobile
technology solution used by our security professionals to provide real-time evidence of visual security checks. Range Security plans
to expand its security service business onto several additional mine sites prior to the end of 2023, with a particular focus on locations
with valuable infrastructure being repurposed into non-coal multi-use complexes with attractive job growth prospects and next generation
industry opportunities.
Cannabinoid
Drug Development
Graphium
Biosciences, Inc., a Nevada corporation (“Graphium”), is a cannabinoid-based drug development company tracing its history
of technological innovation and drug advancement back to October 2011 through two predecessor entities, Stevia First Corp. and Vitality
Biopharma, Inc. In October 2021, the Company formed Graphium as a wholly-owned subsidiary and transferred all of its drug development
assets to this newly-formed entity.
Graphium
is advancing a broad portfolio of glycosylated cannabinoid prodrugs that have been developed to unlock the rebalancing effects of the
endocannabinoid system to address numerous chronic conditions with inadequate pharmaceutical options. Graphium’s leading drug candidate,
VBX-100, is a glycosylated tetrahydrocannabinol (“THC”) cannabinoid that targets inflammatory conditions of the gastrointestinal
tract but without unwanted psychoactive or intoxicating side effects.
Cannabinoids,
including THC and cannabidiol (“CBD”), have well-known therapeutic benefits through their interaction with the human endocannabinoid
system, which serves a regulating and rebalancing function in the body. For decades, patients have used cannabinoids to activate the
endocannabinoid system to provide relief for numerous chronic and debilitating ailments, including inflammation, pain, anxiety, depression,
and cancer. However, THC, a commonly-used cannabinoid with significant therapeutic benefit, is psychoactive and intoxicating, and therefore
its use has many practical, and in some cases legal, limitations. Nevertheless, many patients with chronic health conditions, including
gastrointestinal inflammation, continue to use cannabinoids because current pharmaceutical offerings do not provide adequate therapeutic
relief or result in unwanted side effects.
Our
novel scientific discovery was the development of a proprietary enzymatic bioprocessing technology that adds one or more glucose molecules
to a cannabinoid, resulting in our proprietary glycosylated cannabinoid compounds. Our glycosylated cannabinoids act as prodrugs that
achieve targeted delivery of the bioactive cannabinoids within the body once they are activated. Prodrugs are compounds that, after administration,
are metabolized into a pharmacologically active drug and are often designed to improve drug properties and reduce known or expected toxicities
and adverse side effects. The advantages of our glycosylated cannabinoid prodrugs may include: (i) administration in a convenient oral
formulation, (ii) targeted delivery with release in the colon or large intestine, (iii) improved stability with limited degradation or
drug metabolism, and (iv) delayed release enabling longer-lasting effects and fewer administrations by patients.
We
have learned through our animal studies that glucose bound to cannabinoid molecules are inactive and poorly absorbed from the intestines,
allowing the combined molecule to reach the large intestine where glycoside hydrolase enzymes cleave the glucose and the cannabinoid
is released in a targeted and restricted manner. Further, we have learned through our animal studies that a targeted release of THC,
which could be provided in very low doses to achieve physiologically beneficial results, serves as an anti-inflammatory agent in the
lower gastrointestinal tract and minimizes the amount of THC absorbed into the blood stream. Therefore, we anticipate our glycosylated
cannabinoid prodrug will provide the anti-inflammatory benefits of low-dose THC while avoiding the psychoactive and intoxicating properties
that hinder the broader pharmaceutical use of THC. Initially, we are targeting the $20 billion inflammatory bowel disease (“IBD”)
market in the United States, which is composed of patients suffering from ulcerative colitis and Crohn’s disease, both chronic
and debilitating conditions with no cure. We also believe our glycosylated cannabinoids could also be used to treat other indications,
including, among others, irritable bowel syndrome (“IBS”), anxiety, depression, autism and cancer.
By
using our proprietary enzymatic bioprocessing technologies, our research team has developed a novel family of over 100 glycosylated cannabinoid
prodrugs. These glycosylated cannabinoids have unique commercial applications and patentable compositions of matter, which are separate
and distinct from ordinary cannabinoids. Currently, our intellectual property is comprised of the following patents: (i) Cannabinoid
Glycoside Prodrugs and Methods of Synthesis: Patent filed in 2016 and granted in 2021 for the invention of novel glycosylated cannabinoids
and methods of targeted delivery for the treatment of gastrointestinal disorders, including IBD and IBS, (ii) Antimicrobial Compositions
Comprising Cannabinoids and Methods of Using the Same: Patent filed in 2018 and granted in 2021 for the use of cannabinoids as antibiotics
for the treatment of Clostridioides difficile, (iii) Novel Cannabinoid Glycosides and Uses Thereof: Patent filed in 2020 and in
prosecution for additional novel cannabinoid glycosides and includes research data supporting the improved characteristics and commercial
production strategies for these new molecules, and (iv) Continuous Enzymatic Perfusion Reactor System: Patent filed in 2021 and in prosecution
for our improved reactor system for the efficient enzymatic glycosylation of hydrophobic small molecules, including cannabinoids. We
believe our intellectual property portfolio of glycosylated cannabinoids possess significant value and, as a result, we have allocated
substantial resources to ensure that our U.S. and international patents are properly filed and successfully prosecuted. As our research
efforts involving glycosylated cannabinoids continue to progress, we plan to file additional patents to further expand our growing family
of intellectual property assets and create long-term value for our shareholders.
Our
research team has performed 23 animal studies to test the safety, efficacy and dosing levels of our glycosylated cannabinoids, which
have provided us with favorable scientific data and the opportunity to further refine our drug development plan. We have performed two
industry standard colitis disease mouse models: (i) TNBS model in 2017 and 2018 that generated favorable colitis prevention data, and
(ii) DSS model in 2021 that generated favorable colitis treatment data. In 2021, we received a letter from the Food and Drug Administration’s
(“FDA”) Office of Orphan Products Development stating that we have been granted Orphan Drug Designation for our glycosylated
cannabinoid VBX-100 for the treatment of pediatric ulcerative colitis. An Orphan Drug Designation provides several benefits, including
fee waivers, tax credits, fast tracking of regulatory processes, and seven years of market exclusivity.
Due
to our development of pharmaceutical products, we are subject to extensive regulation by the FDA and other federal, state, and local
agencies. Also, since we are researching and developing cannabinoid-based products, we are subject to regulation by the U.S. Drug Enforcement
Administration (“DEA”). Our research and development activities focus on cannabinoids, particularly THC and CBD derived from
the cannabis plant, which the DEA has classified as Schedule I substances. Schedule I substances are defined as drugs with no currently
accepted medical use and a high potential for abuse. In May 2019, the DEA informed us that it had determined that they consider our VBX-100
prodrug a Schedule I substance. As a result, any developing, testing, manufacturing, or clinical studies involving our VBX-100 prodrug,
and by inference potentially all of our THC-glycoside molecules, are required to be properly licensed by the DEA and adhere to strict
diversion control standards.
We
are working closely with a third-party contract research organization to develop a detailed drug development plan to advance our leading
drug candidate, VBX-100, through Phase II clinical trials by the end of 2025, subject to receipt of sufficient funding, which is currently
estimated to be approximately $10.5 million. If we are successful in advancing VBX-100 through Phase II clinical studies, then we would
seek to maximize shareholder value by either selling our drug development assets to a strategic purchaser or raising additional capital
to advance VBX-100 through Phase III clinical trials.
Impact
Investing Strategy
Our
impact investing strategy aims to improve the health and wellness of people and the planet, while also generating long-term sustainable
financial returns for our shareholders. We believe that doing well and doing good are not mutually exclusive, and that an impact investing
strategy can balance the environmental, social and economic needs of people and the planet while also generating attractive risk-adjusted
financial returns for shareholders.
Our
impact investing strategy provides an opportunity for our dedicated team to address pressing environmental, social and economic challenges,
such as climate change, air and water pollution, educational inequality and economic disparity, through the development of technology-based
solutions. By actively directing investment capital towards businesses that are working to create positive environmental, social and
economic outcomes, our impact investing strategy can meaningfully contribute to an improved people-planet ecosystem and a healthier and
happier way of life.
We
have a particular interest in providing environmental and social solutions in economically-disadvantaged regions of the United States.
Initially, the Company is targeting the Appalachian region, which is home to communities with some of the most disadvantaged income,
education and employment demographics in the United States. Our ambitious strategy is to allocate investment capital and build operating
businesses that provide positive environmental and social impact in the disadvantaged coal communities of Appalachia to maximize the
good we can do for people and the planet.
Impact
Investing Process
Our
Company maintains a rigorous investment process comprised of sourcing, underwriting, acquiring or originating, growing, and exiting impact
investing opportunities. Our executive management team is responsible for the construction, execution, and continued refinement of our
impact investing process, which relies upon the decades of experience of our executive management team and a periodic review, evaluation
and adoption of best practices employed in the direct investment and private equity industry.
Our
impact investing process starts with identifying and evaluating potential investment opportunities. We use a variety of sources to identify
potential impact investments, including our extensive network of industry contacts, third party intermediaries and proprietary research
performed by our executive management team. Each potential impact investment is evaluated based on its fit with our corporate strategy,
the individual risks and opportunities of each potential investment, and any synergies with our other impact investments (“Portfolio
Companies”). This detailed due diligence review is aimed at identifying and addressing material investment risks and opportunities
to create long-term sustainable value for our shareholders. Furthermore, our evaluation of each potential impact investment incorporates,
to the extent appropriate, consideration of environmental, social and governance (“ESG”) and diversity, equity and inclusion
(“DEI”) factors in the investment decision-making process.
Our
impact investments are commonly structured as stock or asset acquisitions with transaction consideration in the form of cash and the
Company’s common stock so the former owners of impact investment acquisitions are properly aligned with our public shareholders
in the creation of future value. Additionally, the Company has developed innovative business projects that fit within our corporate strategy
and have been allocated capital and resources to grow and increase shareholder value. Each such organic innovation has been developed
within a newly-created, wholly-owned Portfolio Company (e.g., Terra Preta, Pristine Stream and Range Security) so the executive management
team can properly monitor the performance of each organic innovation and optimize the allocation of capital and management resources
to maximize the positive overall impact to the Company and its shareholders.
After
a potential impact investment is acquired, or an organic innovation is launched, our executive management team is responsible for closely
monitoring on a regular basis the performance of each investment. Each Portfolio Company has an experienced management team that is responsible
for executing a value creation plan with active support, collaboration and input from the Company’s executive management team.
Our complementary hybrid approach to investment management enables the management teams of each Portfolio Company to manage the daily
operations of the business in a decentralized manner, while the executive management team of the Company serves as an active collaborator
to the management team of each Portfolio Company to ensure the value creation plan is being successfully executed and cross-pollination
of ideas, capabilities and synergies are achieved across each Portfolio Company. We believe a balanced approach to individual management
and corporate governance provides Portfolio Company management teams with the freedom and autonomy to preserve their ownership mindset
while also providing the Company’s executive team with the optimal level of involvement in order to maximize the overall benefits
to the Company’s shareholders.
As
the value creation plan is executed for each Portfolio Company, the Company’s executive team, in consultation with the management
team of each Portfolio Company, will regularly evaluate the strategic options for the business, which could include additional investment
to fund strategic growth and expansion, maximizing current cash flow without further investments, or a potential exit to a strategic
or financial buyer. This process of evaluating strategic options is dynamic and involves many considerations, including an evaluation
of the current and future market conditions, the Portfolio Company’s current and future financial performance, changes in the Portfolio
Company’s competitive advantages, macro and micro market conditions, and exit valuations. Since the Company is structured as a
perpetual investment vehicle without predetermined hold periods, our executive management team possesses the flexibility to regularly
evaluate the risk-return profile of each Portfolio Company and make strategic decisions that maximize the investment returns and value
creation for the Company’s shareholders.
Structure
and Operation
The
Company is organized as a public holding company. Currently, all Portfolio Companies are wholly-owned subsidiaries of the Company and
are consolidated in our financial reporting.
The
Company’s executive management team works closely with the management team of each Portfolio Company on strategy, operations and
financial matters. The Company allocates the time and resources of several executives to support the operations of Portfolio Companies,
including accounting, insurance and human resources, to recognize operational efficiencies and cost savings resulting from the Company’s
larger scale.
Environmental,
Social and Governance
ESG
principles are central to our mission of improving the health and wellness of people and the planet. Our impact investing strategy is
dedicated to pursuing opportunities that improve the long-term sustainability of our people-planet ecosystem, reverse the damaging effects
of climate change, and revitalize disadvantaged communities into next generation cities. We believe that considering ESG principles,
along with the profit potential of an investment, enables our team to take a broader, more holistic approach to capital deployment by
considering a wide range of stakeholders, including shareholders, the environment and local communities.
We
believe our genuine commitment to ESG principles, which is at the heart of our impact investing strategy, truly differentiates our Company
from other businesses whose dedication to ESG principles is more peripheral. We believe our strong commitment to ESG principles will
allow us to attract similarly-committed customers, suppliers, employees, financial partners, and federal, state and local partnerships
who are motivated by our shared sense of purpose and commitment to doing well by doing good.
Diversity,
Equity and Inclusion
Our
employees are integral to fostering a culture of honesty, integrity and respect. We believe hiring, training, motivating and retaining
talented individuals is critical to the successful execution of our impact investing strategy. Our employees are our single most important
asset.
We
seek to attract employees with different backgrounds and unique perspectives, and provide a safe environment for them to collaborate
in a respectful manner so our Company can benefit from their best collective thinking. We believe a diverse, equitable and inclusive
workforce increases innovation and creativity, improves decision making, increases adaptability and flexibility, and improves stakeholder
engagement. Additionally, we believe these benefits will ultimately result in greater profits and an increase in long-term shareholder
value.
Competition
Our
Company is focused on a large and growing marketplace for impact investing and ESG business initiatives, and therefore, is anticipated
to face competition from a variety of operating businesses and investment funds who are developing business plans and operating strategies
to satisfy the increasing demands of these types of investments in the marketplace. In almost all cases, these competitors are larger
and better capitalized operating businesses and investment funds.
Our
Company competes on the basis of a number of factors, including access to capital, access to impact investing opportunities, recruitment
and retention of key personnel, market share with key customers, and supply relationships with critical vendors. Our ability to continue
to compete effectively in our businesses will depend upon our ability to attract new employees and retain and motivate our existing employees.
Information
Systems
Since
inception, the Company and its subsidiaries have used QuickBooks as its general ledger accounting software. However, given the significant
current and anticipated growth of its Portfolio Companies and the need for more robust information for management analysis and decision-making,
the Company has decided to transition all of its accounting software services from QuickBooks to Foundation Software.
Foundation
Software, founded in Cleveland, Ohio in 1985, is specifically designed for service companies, particularly those in the construction,
contracting and reclamation industries. Foundation Software offers the Company several enhanced features critical to the successful execution
of its value creation plan, including (i) general ledger accounting, including accounts payable, accounts receivable, inventory and customer
billing, (ii) equipment tracking on job sites, maintenance, utilization and depreciation, (iii) employee tracking on job sites, time
and materials, utilization, and billing, (iv) job costing and profitability reporting segmented by customers, job types and location,
and (v) numerous real-time management dashboard and key performance indicator reports that will allow management to closely monitor the
performance of each Portfolio Company and quickly react to business opportunities and issues. Furthermore, Foundation Software will allow
the Company and its Portfolio Companies to quickly scale operations and efficiently and cost-effectively support the anticipated growth
of each business, thereby preventing our accounting and management systems from becoming a limiting factor to our growth initiatives.
The
Company has officially engaged Foundation Software as its new accounting software provider and is in the process of converting all of
the Company accounting system operations from QuickBooks to Foundation Software, which is expected to be completed during the second
quarter of 2023.
Results
of Operations
Three
Months Ended March 31, 2023 and March 31, 2022
The Company’s revenue
during the three months ended March 31, 2023 was $3,014,887 and its gross profit was $649,002. The Company had no revenue or gross
profit during the three months ended March 31, 2022 as all of the Company’s revenue was generated by the Range Reclamation
Entities acquired in May 2022 and Range Security, which began operating during the first quarter of 2023. Our net loss during the
three months ended March 31, 2023 was $226,860 compared to a net loss of $447,974 for the three months ended March 31, 2022 (a
decrease of $221,114).
During
the three months ended March 31, 2023, we incurred general and administrative expenses in the aggregate amount of $726,048, compared
to $317,941 incurred during the three months ended March 31, 2022 (an increase of $408,107). General and administrative expenses generally
include corporate overhead, salaries and other compensation costs, financial and administrative contracted services, marketing, consulting
costs and travel expenses. The largest increase related to the general and administrative expenses incurred by our Environmental
Services segment of $409,485 during the three months ended March 31, 2023.
In
addition, during the three months ended March 31, 2023, we incurred research and development costs of $106,177, compared to $125,730
during the three months ended March 31, 2022 (a decrease of $19,553). This decrease resulted from a decrease in legal fees, which decreased
to $11,291 during the three months ended March 31, 2023, from $31,617 during the three months ended March 31, 2022.
During the three months ended
March 31, 2023, we recorded total net other expense in the amount of $43,637, compared to total net other expense of $4,303 recorded during
the three months ended March 31, 2022 (an increase of $39,334). All of this difference was attributable to higher interest expense during
the three months ended March 31, 2023.
Liquidity
and Capital Resources
We
have incurred losses since inception resulting in an accumulated deficit of $50,439,714.
As of March 31, 2023, we had total
current assets of $1,463,434, primarily comprised of cash in the amount of $229,018 and accounts receivable of $1,233,532. As of March
31, 2023 we had total current liabilities of $2,159,789, consisting of accounts payable of $1,034,427 and the current portion of long-term
debt in the amount of $1,025,362. As a result, on March 31, 2023, the Company had negative working capital of $(696,355). At December
31, 2022, the Company had negative working capital of $(128,371).
As
of March 31, 2023, the Company had long-term assets of $7,197,869, comprised of net equipment assets of $6,437,556, goodwill of $751,421,
and deposits of $8,892. As of March 31, 2023, the Company had long-term liabilities of $3,788,931, comprised of long-term debt, net of
current portion. As of December 31, 2022, the Company had long-term assets of $6,805,827, comprised of net equipment assets of $6,045,514,
goodwill of $751,421, and deposits of $8,892. As of December 31, 2022, the Company had long-term liabilities of $3,738,013, comprised
of long-term debt, net of current portion.
Sources
of Capital
Based on the Company’s current
corporate strategy, its net operating losses for the 12 months following March 31, 2023 are expected to be approximately $1,000,000, which
is comprised of general operating and research and development expenses which we expect to be partially offset by revenue generated by
the Range Reclamation Entities and Range Security. Based on the Company’s cash balance of $229,018, $900,000 available
under its revolving credit line, and its estimated net operating losses of approximately $1,000,000 for the 12-month period ending March
31, 2024, the Company expects to have sufficient funds to operate its business over the next 12 months. The Company expects to generate
positive cash flow from its operating businesses, other than its Cannabinoid Drug Development business, but may also seek additional financing
and other sources of capital to accelerate the funding and execution of its growth strategy and value creation plan.
Our
estimated total expenditures for the 12-month period ending March 31, 2024 could increase if we encounter unanticipated expenses in connection
with operating our business as presently planned. In addition, our estimates of the amount of cash necessary to fund our business may
prove to be too low, and we could spend our available financial resources much faster than we currently expect. If we cannot raise the
capital necessary to continue to develop our business, we will be forced to delay, scale back or eliminate some or all of our proposed
operations. If any of these were to occur, there is a substantial risk that our business would fail.
Since
inception, we have primarily funded our operations through equity and debt financings. Until such time as our operating businesses are
cash flow positive, we expect to continue funding our operations, at least in part, through equity and debt financings. However, sources
of additional funds may not be available when needed, on acceptable terms, or at all. If we issue equity or convertible debt securities
to raise additional funds or to fund, in whole or in part, acquisitions in furtherance of our business strategy, our existing stockholders
may experience substantial dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those
of our existing stockholders. If we incur additional debt, it may increase our leverage relative to our earnings or to our equity capitalization,
requiring us to pay additional interest expenses. Obtaining commercial loans, assuming those loans would be available, would increase
our liabilities and future cash commitments. If we pursue capital through alternative sources, such as collaborations or other similar
arrangements, we may be forced to relinquish rights to our proprietary glycosylated cannabinoid technology or other intellectual property
which, in turn, could result in our receipt of only a portion of any revenue that may be generated from a partnered product or business.
Moreover, regardless of the manner in which we seek to raise capital, we may incur substantial costs in those pursuits, including investment
banking fees, legal fees, accounting fees, printing and distribution expenses and other related costs.
Net
Cash Used in Operating Activities
For
the three months ended March 31, 2023, net cash generated by operating activities was $675,796 compared to net cash used in
operating activities of $394,181 for the three months ended March 31, 2022. This increase of $1,069,977 was primarily attributable
to a lower net loss of $226,860 during the three months ended March 31, 2023, compared to a net loss of $447,974 during the three
months ended March 31, 2022, as well as an increase in accounts payable of $800,619 during the three months ended March 31, 2023,
compared to an increase in accounts payable of $50,993 during the three months ended March 31, 2022, as well as depreciation expense
of $354,184 during the three months ended March 31, 2023, compared to $0 during the three months ended March 31, 2022. Net cash
provided by operating activities during the three months ended March 31, 2023 consisted of a net loss of $226,860 and an increase in
accounts receivable of $252,147, offset by an increase in accounts payable of $800,619 and depreciation expense of $354,184. Net
cash used in operating activities during the three months ended March 31, 2022 consisted primarily of a net loss of $447,974, offset
by an increase in accounts payable of $50,993.
Net
Cash Used in Investing Activities
For
the three months ended March 31, 2023, net cash used in investing activities was $746,226, which consisted of equipment purchased by
the Range Reclamation Entities, Terra Preta and Range Security. No net cash was used in or provided by investing activities during the three months ended March 31, 2022.
Net
Cash Provided By Financing Activities
For
the three months ended March 31, 2023, net cash used in financing activities
was $142,921, compared to net cash provided from financing activities of $400,000 during the three months ended March 31, 2022. Net cash
used in financing activities for the three months ended March 31, 2023 consisted of proceeds of $383,202 from long-term debt, and proceeds
of $100,000 from a revolving credit line, offset by the repayment of long-term debt of $626,123. The cash provided during the three months
ended March 31, 2022 was a result of proceeds of $400,000 from a revolving credit line.
Off-Balance
Sheet Arrangements
We
have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources
that would be material to stockholders.
Critical
Accounting Policies
Our
financial statements and accompanying notes included in this report have been prepared in accordance with United States generally accepted
accounting principles (“U.S. GAAP”) applied on a consistent basis. The preparation of financial statements in conformity
with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting periods.
We
regularly evaluate the accounting policies and estimates that we use to prepare our financial statements. In general, management’s
estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are
believed to be reasonable under the facts and circumstances. Actual results could differ from the estimates made by management.
We
believe the following critical accounting policies require us to make significant judgments and estimates in the preparation of our consolidated
financial statements included in this report:
Use
of Estimates and Assumptions
The
preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. The more significant
estimates and assumption by management include, among others, assumptions used in valuing assets acquired in business acquisitions, reserves
for accounts receivable, assumptions used in valuing equity instruments issued for services, the valuation allowance for deferred tax
assets, accruals for potential liabilities, and assumptions used in the determination of the Company’s liquidity. Actual results
could differ from those estimates.
Business
Combinations
Business
combinations are accounted for using the purchase method of accounting under ASC 805, “Business Combinations.” This method
requires the Company to record assets and liabilities of the businesses acquired at their estimated fair values as of the acquisition
date. Any excess of the cost of the acquisition over the fair value of the net assets acquired is recorded as goodwill. Determining the
fair value requires management to make estimates and assumptions including discount rates, rates of return on assets, and long-term sales
growth rates.
Goodwill
As
referenced by ASC 350 “Intangibles- Goodwill and other” (“ASC 350”), management performs its annual test for
goodwill at least annually or more frequently, if impairment indicators arise.
Revenue
The Company recognizes revenue
under ASC 606, “Revenue from Contracts with Customers”. The core principle of the revenue standard is that a company should
recognize revenue by analyzing the following five steps: (1) identify the contract with the customer; (2) identify the performance obligations
in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations; and (5) recognize
revenue when (or as) each performance obligation is satisfied. The Company primarily invoices customers and recognizes revenue on a periodic
basis for equipment and labor hours provided to a customer on a particular job based on an agreed-upon hourly rate sheet or a fixed amount
for a project. The Company also invoices customers and recognizes revenue for equipment mobilization fees and materials and supplies required
to complete a project. The Company invoices for the sales of chemicals and recognizes revenue when the products are delivered to the customer’s
designated site. Costs for equipment, labor and chemicals are generally expensed as incurred since the projects are generally short-term
and not subject to a contract. The Company also invoices customers for the provision of environmental security services on an agreed-upon
hourly rate for each project. All revenue is recognized at a point in time.
Stock-Based
Compensation
The
Company periodically issues stock options and restricted stock awards to employees and non-employees in non-capital raising transactions
for services and for financing costs. The Company accounts for such grants issued and vesting based on ASC 718, Compensation-Stock Compensation
whereby the value of the award is measured on the date of grant and recognized for employees as compensation expense on the straight-line
basis over the vesting period. Recognition of compensation expense for non-employees is in the same period and manner as if the Company
had paid cash for the services.
Recent
Accounting Pronouncements
Please
refer to Footnote 1 of the accompanying financial statements for management’s discussion of recent accounting pronouncements.