The financial information discussed below is derived from the Company's audited
consolidated financial statements at
Overview
As indicated in Note 3 of the Notes to Consolidated Financial Statements set forth in Item 8, Financial Statements and Supplementary Data, there is substantial doubt as to the ability of the Company to continue as a going concern. The Company has generated material operating losses since inception and its ability to continue as a going concern depends on the successful execution of its operating plan, which includes increasing sales of existing products - and in particular GrowPods and related products - while introducing additional products and services, controlling cost of goods sold and operation expenses, negotiating extensions of existing loans, and raising either debt or equity financing.
The Company needs a substantial amount of additional capital to fund its business, including expansion of its operations, and for repayment of its debts. No assurance can be given that any additional capital can be obtained or, if obtained, will be adequate to meet its needs and the Company may need to take measures to remain a going concern. If adequate capital cannot be obtained on a timely basis and on satisfactory terms, the Company's operations could be materially negatively impacted, or it could be forced to terminate operating.
Impact of the Covid-19 Pandemic
The Covid-19 pandemic, its disruption of the Company's business and its effect on the economy generally have not adversely impacted the Company, due principally to its cost-saving measures. See Item 1A, Risk Factors - The Company's business, financial condition, results of operations and liquidity may be substantially and adversely affected by this pandemic for a detailed discussion of matters relating to this pandemic.
Also, in connection with the pandemic:
? The Company's chief executive officer has waived current payment of his salary
since
the deferred amount, which was
time.
? In addition, the Company is deferring employer payroll taxes, as permitted by
the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act").
? The Company has purchased from Polymation fewer Medtainers than required
under the Production Contract; while doing so has enabled the Company to
preserve cash by reducing expenses, it also subjects it to claims for
breach of that agreement.
? On
principal amount of
pursuant to all regulations and guidance promulgated or provided by the Small
Business Administration and other Federal agencies that are now or may become
applicable to the loan (the Cares Loan"). The loan bore interest at the rate of
1% per annum and, as provided in the CARES Act, no interest was accrued during
the first 6 months after the loan amount was disbursed. On
note was fully forgiven. 15
The Company believes that, owing to the effect of the pandemic on its customers, receivables have been and may continue to be collected more slowly than prescribed by their payment terms and some may prove to be uncollectible.
The Company tested intellectual property and goodwill for impairment in
preparing its financial statements for the year ended
Results of Operations
Comparison of the Years Ended
The following table sets forth information from the consolidated statements of
operations for the years ended
Year Ended December 31, 2021 2020 Revenues$ 5,349,012 $ 2,227,668 Cost of goods sold 4,243,053 1,205,965 Gross profit 1,105,959 1,021,703 Total operating expenses 2,060,657 1,570,935 Loss from operations (954,698 ) (549,232 ) Non-operating income (expense): EIDL grant - 10,000 Forgiveness of PPP Loan and interest 138,567 - Interest (28,925 ) (39,799 )
Total non-operating income ( expense), net 109,642 (29,799 )
Loss before income tax (845,056 ) (579,031 ) Income tax provision - - Net loss$ (845,056 ) $ (579,031 )
Revenues and Cost of Goods Sold
Revenues for the year ended
Operating Expenses Operating expenses for the years endedDecember 31, 2021 , andDecember 31, 2020 , were as follows: Year Ended December 31, 2021 2020 Advertising and marketing$ 74,762 $ 13,961 Bad debt 283 33,511 Depreciation and amortization 278,082 139,580 Professional fees 201,063 202,251 Share-based compensation 270,000 298,076 Payroll 899,770 646,870 General and administrative 336,697 236,686 Total$ 2,060,657 $ 1,570,935
Operating expenses for the years ended
16 Loss from Operations
Loss from operations increased from
Interest
Interest incurred in the years ended
Net Loss
Net loss increased from
Liquidity and Capital Resources
As of
On
The numbers of items of the Company's products sold for 2021, 2020 and 2019 were approximately as follows: Year Ended December 31, 2021 2020 2019 GrowPods and related items 40 - - Medtainers 228,000 272,000 339,000 Humidity control packs 490,000 952,000 443,000 Other products 429,000 234,000 134,815
As of
In addition to the Cares Loan, the Company received
The Company had no material commitments for capital expenditures as of
The Company intends to devote its manpower and capital resources to increasing revenues while working to reduce the cost of goods sold and operating expenses. Doing so depends on the successful execution of its operating plan, which includes increasing sales of existing products, introducing additional products and services, controlling cost of goods sold and operating expenses, negotiating extensions of existing loans, raising either debt or equity financing and, if the GP Acquisition were consummated, integrating the related business into the Company.
Off-Balance-Sheet Arrangements
The Company has no off-balance sheet arrangements.
17 Risks and Uncertainties
See Item 1A, Risk Factors, for information as to certain significant risks. Also, the Company may be affected by inflation, increasing energy costs, increasing transportation costs and increasing rates of interest to an extent that management cannot predict.
Critical Accounting Policies and Estimates
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. Certain estimates could be affected by external conditions, including those unique to its industry, and general economic conditions, which could affect the Company's estimates so as to cause actual results to differ materially from its estimates. The Company re-evaluates all of its accounting estimates at least quarterly, based on these conditions and records adjustments when necessary.
Significant estimates relied upon in preparing the consolidated financial statements contained in this report include revenue recognition, accounts receivable reserves, inventory and related reserves, valuations and purchase price allocations related to business combinations, expected future cash flows used to evaluate the recoverability of long-lived assets, estimated fair values of long-lived assets used to record impairment charges related to intangible assets and goodwill, amortization periods, accrued expenses, share-based compensation, and recoverability of the Company's net deferred tax assets and any related valuation allowances.
Fair Value Measurements
The Company has adopted the provisions of ASC Topic 820, Fair Value Measurements, which defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value and expands disclosure of fair value measurements.
The estimated fair value of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, is carried on a historical cost basis, which approximates their fair value because of the short-term nature of these instruments. The carrying amounts of the Company's short- and long-term credit obligations approximate fair value because the effective yields on these obligations, which include contractual interest rates taken together with other features such as concurrent issuances of warrants and/or embedded conversion options, are comparable to rates of returns for instruments of similar credit risk.
ASC Topic 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC Topic 820 also establishes a fair-value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC Topic 820 describes three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Quoted prices for similar assets and liabilities in active markets or inputs that are observable.
Level 3 - Inputs that are unobservable (for example, cash flow modeling inputs based on assumptions).
Significant judgment is required in evaluating whether an intangible asset has an indefinite useful life and in testing for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, and incorporating general economic and market conditions.
18
The Company reviews intangible assets subject to amortization quarterly to determine if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment or a change in the remaining useful life. Conditions that would indicate impairment and trigger a more frequent impairment assessment include, but are not limited to, a significant adverse change in legal factors or business climate that could affect the value of an asset or an adverse action or assessment by a regulator. If the carrying value of an intangible asset exceeds its undiscounted cash flows, the Company will write down its carrying value to its fair value in the period identified. The Company generally calculates fair value as the present value of estimated future cash flows to be generated by the asset using a risk-adjusted discount rate. If the estimate of an intangible asset's remaining useful life is changed, the Company will amortize the remaining carrying value of the intangible asset prospectively over the revised remaining useful life. The Company also evaluates intangible assets and long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. These changes include but are not limited to significant adverse changes in the business climate, market conditions, or other events, including the Covid-19 pandemic, that indicate an asset's carrying amount may not be recoverable. The recoverability of these assets is measured by comparing the carrying amount of each asset with the future undiscounted cash flows the asset is expected to generate. If the undiscounted cash flows used in the test of recoverability are less than the carrying amount of these assets, the carrying amount of such assets is reduced to fair value.
Pursuant to ASU No. 2017-04, Simplifying the Test for Goodwill Impairment ("ASU
No. 2017-04"), the Company evaluates and tests the recoverability of its
goodwill for impairment at least annually during the fourth quarter of each
fiscal year or more often if circumstances indicate that goodwill may not be
recoverable. The Company has conducted annual impairment tests of goodwill
during the fourth quarter of each year, commencing in the year ended
The fair value of acquired technology and patents, as well as acquired technology that the Company may develop, is determined at their acquisition date primarily using the income approach, which discounts expected future cash flows to present value. The discount rates used in the present value calculations are typically derived from a weighted-average cost-of-capital analysis and then adjusted to reflect risks inherent in the development life cycle as appropriate. Any loss resulting from an impairment test will be reflected in operating income in the Company's consolidated statements of income. The annual impairment testing process is subjective and requires judgment at many points. If these estimates or their related assumptions change in the future, the Company may be required to record impairment charges for these assets not previously recorded.
There was no impairment of intangible assets, long-lived assets or goodwill
during the years ended
Revenue Recognition
Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), as amended by ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net); ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing; ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients; and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, requires a company to recognize revenues when it transfers goods or services to customers in an amount that reflects the consideration that it expects to receive for them.
Under ASU No. 2014-09, as amended, the Company recognizes revenues when a customer obtains control of promised goods or services, or when they are shipped to a customer, in an amount that reflects the consideration that it expects to receive in exchange for them. The Company recognizes revenues following a five-step model: (a) it identifies contract(s) with a customer; (b) it identifies the performance obligations in the contract; (c) it determines the transaction price; (d) it allocates the transaction price to the performance obligations in the contract; and (e) it recognizes revenues when (or as) it satisfies its performance obligation.
Revenues from product sales are recognized when a customer obtains control of the Company's product, which occurs at a point in time, typically upon shipment to the customer. The Company expenses incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that it would have been recognized is one year or less or the amount is immaterial.
Taxes
The Company accounts for income taxes under FASB ASC Topic 740, Accounting for Income Taxes, under which the Company is required to recognize a current tax liability or asset for current taxes payable or refundable and a deferred tax liability or asset for the estimated future tax effects of temporary differences and carry forwards to the extent they are realizable.
19
The Company records a valuation allowance to reduce its deferred tax assets to
the amount that is more likely than not to be realized. While the Company has
considered future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for the valuation allowance, in the event that
it were to determine that it would be able to realize deferred tax assets in the
future in excess of the net recorded amount, an adjustment to the deferred tax
asset would increase income in the period in which such determination was made.
Likewise, should the Company determine that it would not be able to realize all
or part of a net deferred tax asset in the future, an adjustment to that asset
would be charged to income in the period in which such determination was made.
In the year ended
ASC Topic 740.10.30 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740.10.40 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company has no material uncertain tax positions.
Smaller Growth Company
We are a smaller reporting company as defined in Item 10(f)(1) of Regulation
S-K. As such, we may take advantage of certain of the scaled disclosures
available to smaller reporting companies as long as (i) the market value of our
voting and non-voting common stock held by non-affiliates is less than
Climate Change
The Company's business, financial condition, and results of operations have not been materially impacted by federal and state legislation and regulation and international accords regarding climate change, but it cannot predict how they may be impacted in the future. The Company has had no material past capital expenditures for climate-related projects and, unless there are regulatory changes, does not expect to incur them in the future.
Long-Term Obligations
The Company has no long-term obligation that it expects to have a material impact on its liquidity or capital resources.
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