The information contained in this Form 10-Q is intended to update the
information contained in our Annual Report on Form 10-K for the year ended
December 31, 2021 and presumes that readers have access to, and will have read,
the "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other information contained in such Form 10-K. The following
discussion and analysis also should be read together with our financial
statements and the notes to the financial statements included elsewhere in this
Form 10-Q.
The following discussion contains certain statements that may be deemed
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements appear in a number of places in
this Report, including, without limitation, "Management's Discussion and
Analysis of Financial Condition and Results of Operations." These statements are
not guarantees of future performance and involve risks, uncertainties and
requirements that are difficult to predict or are beyond our control.
Forward-looking statements speak only as of the date of this quarterly report.
You should not put undue reliance on any forward-looking statements. We strongly
encourage investors to carefully read the factors described in the Form 10-K in
the section entitled "Risk Factors" for a description of certain risks that
could, among other things, cause actual results to differ from these
forward-looking statements. We assume no responsibility to update the
forward-looking statements contained in this quarterly report on Form 10-Q. The
following should also be read in conjunction with the unaudited Financial
Statements and notes thereto that appear elsewhere in this report.
Overview
Through our wholly-owned subsidiary, One World Pharma S.A.S, a licensed cannabis
cultivation, production and distribution (export) company located in Popayán,
Colombia (nearest major city is Cali). We plan to be a producer of raw cannabis
and hemp plant ingredients for both medical and industrial uses across the
globe. We have received licenses to cultivate, produce and distribute the raw
ingredients of the cannabis and hemp plant for medicinal, scientific and
industrial purposes. Specifically, we are one of the only companies in Colombia
to receive seed, cultivation, extraction and export licenses from the Colombian
government. Currently, we own approximately 30 acres and have a covered
greenhouse built specifically to cultivate high-grade cannabis and hemp. In
addition, we have entered into agreements with local farming co-operatives that
include small farmers and indigenous tribe members, under which they will
cultivate cannabis on up to approximately 140 acres of land using our seeds and
propagation techniques, and sell their harvested products to us on an exclusive
basis. We planted our first crop of cannabis in 2018, which we began harvesting
in the first quarter of 2019 for the purpose of further research and development
activities and quality control testing of the cannabis we have produced. We have
been generating revenue from the sale of our seeds since the second quarter of
2020. From August 2021 through March 2022, we made payments of approximately
$1,400,000 for the purchase of a state of the art distillation machine that we
expect to be placed in service within our vertically integrated extraction
facility during the fourth quarter of 2022. Once the equipment is placed in
service, we will be one of the only companies in Colombia to both hold licenses
and possess the capability to extract high-quality CBD and THC oils. We
terminated our lease on September 30, 2022, and plan to install the equipment at
a new extraction facility when the equipment clears Customs in the fourth
quarter of 2022. We entered into a 5-year lease on the new location on October
1, 2022, where we will combine our office and extraction facilities into the
same building. The new facility is approximately half the cost of the former,
and already contains the necessary electrical and epoxy floors, which will
significantly reduce our tenant improvement costs.
21
Results of Operations for the Three Months Ended September 30, 2022 and 2021:
The following table summarizes selected items from the statement of operations
for the three months ended September 30, 2022 and 2021.
Three Months Ended September 30, Increase /
2022 2021 (Decrease)
Revenues $ 33,373 $ 7,845 $ 25,528
Cost of goods sold 23,969 7,058 16,911
Gross profit 9,404 787 8,617
Operating expenses:
General and administrative 378,910 358,382 20,528
Professional fees 95,946 153,484 (57,538 )
Depreciation expense 9,883 6,939 2,944
Total operating expenses: 484,739 518,805 (34,066 )
Operating loss (475,335 ) (518,018 ) (42,683 )
Total other expense (518,808 ) (149,661 ) 369,147
Net loss $ (994,143 ) $ (667,679 ) $ 326,464
Revenues
Revenues during the three months ended September 30, 2022 were $33,373, compared
to $7,845 during the three months ended September 30, 2021, an increase of
$25,528, or 325%. Revenues increased as we continued to shift our focus toward
producing and selling CBD and THC oils.
Cost of Goods Sold
Cost of goods sold for the three months ended September 30, 2022 were $23,969,
compared to $7,058 for the three months ended September 30, 2021, an increase of
$16,911, or 240%. Cost of goods sold consists primarily of labor, agricultural
raw materials, depreciation and overhead.
General and Administrative Expenses
General and administrative expenses for the three months ended September 30,
2022 were $378,910, compared to $358,382 during the three months ended September
30, 2021, an increase of $20,528, or 6%. The expenses for the current period
consisted primarily of compensation expenses, office rent, and travel costs.
General and administrative expenses increased primarily due to increased
salaries and wages and lease expenses in Colombia over the prior year. General
and administrative expenses included non-cash, stock-based compensation of
$29,347 and $72,334 during the three months ended September 30, 2022 and 2021,
respectively.
Professional Fees
Professional fees for the three months ended September 30, 2022 were $95,946,
compared to $153,484 during the three months ended September 30, 2021, a
decrease of $57,538, or 37%. Professional fees included non-cash, stock-based
compensation of $11,833 and $60,042 during the three months ended September 30,
2022 and 2021, respectively. Professional fees decreased primarily due to
decreased stock-based compensation during the current period.
Depreciation Expense
Depreciation expense for the three months ended September 30, 2022 was $9,883,
compared to $6,939 during the three months ended September 30, 2021, an increase
of $2,944, or 42%. Depreciation expense increased due to additional operational
assets placed in service during the current period.
Other Income (Expense)
Other expenses, on a net basis, for the three months ended September 30, 2022
were $518,808, compared to other expenses, on a net basis, of $149,661 during
the three months ended September 30, 2021, an increase in net expenses of
$369,147, or 284%. Other expenses consisted of $529,915 of interest expense,
including $109,969 of stock-based finance costs on the amortization of debt
discounts, $339,133 of stock-based commitment fees on debt and equity financing,
and a loss on the sale of fixed assets of $9,041, as partially offset by a gain
of $20,148 on the early extinguishment of our extraction facility lease in
Colombia, for the three months ended September 30, 2022, compared to $137,863 of
interest expense, including $116,312 of stock-based finance costs on the
amortization of debt discounts, and a loss on disposal of fixed assets of
$17,563, as offset by $5,000 of sublease income on sublet office space and $765
of interest income during the three months ended September 30, 2021.
Net Loss
Net loss for the three months ended September 30, 2022 was $994,143, or $0.02
per share, compared to $667,679, or $0.01 per share, during the three months
ended September 30, 2021, an increase of $326,464, or 49%. The net loss
increased primarily due to increased stock-based compensation, primarily related
to the issuance of 1,341,276 shares of common stock, valued at $134,128, and
13,667 shares of Series B Preferred stock, valued at $205,005, during the
current period.
22
Results of Operations for the Nine Months Ended September 30, 2022 and 2021:
The following table summarizes selected items from the statement of operations
for the nine months ended September 30, 2022 and 2021.
Nine Months Ended September 30, Increase /
2022 2021 (Decrease)
Revenues $ 76,384 $ 73,450 $ 2,934
Cost of goods sold 54,765 14,810 39,955
Gross profit 21,619 58,640 (37,021 )
Operating expenses:
General and administrative 1,148,100 1,466,954 (318,854 )
Professional fees 380,801 679,141 (298,340 )
Depreciation expense 34,540 29,937 4,603
Total operating expenses: 1,563,441 2,176,032 (612,591 )
Operating loss (1,541,822 ) (2,117,392 ) (575,570 )
Total other expense (753,317 ) (343,698 ) 409,619
Net loss $ (2,295,139 ) $ (2,461,090 ) $ (165,951 )
Revenues
Revenues during the nine months ended September 30, 2022 were $76,384, compared
to $73,450 during the nine months ended September 30, 2021, an increase of
$2,934, or 4%. Revenues increased slightly as we continued to shift our focus
toward producing and selling oils.
Cost of Goods Sold
Cost of goods sold for the nine months ended September 30, 2022 were $54,765,
compared to $14,810 for the nine months ended September 30, 2021, an increase of
$39,955, or 270%. Cost of goods sold consists primarily of labor, agricultural
raw materials, depreciation and overhead.
General and Administrative Expenses
General and administrative expenses for the nine months ended September 30, 2022
were $1,148,100, compared to $1,466,954 during the nine months ended September
30, 2021, a decrease of $318,854, or 22%. The expenses for the current period
consisted primarily of compensation expenses, office rent, and travel costs.
General and administrative expenses decreased primarily due to decreased
stock-based compensation over the prior year. General and administrative
expenses included non-cash, stock-based compensation of $88,041 and $510,468
during the nine months ended September 30, 2022 and 2021, respectively.
Professional Fees
Professional fees for the nine months ended September 30, 2022 were $380,801,
compared to $679,141 during the nine months ended September 30, 2021, a decrease
of $298,340, or 44%. Professional fees included non-cash, stock-based
compensation of $35,399 and $384,283 during the nine months ended September 30,
2022 and 2021, respectively. Professional fees decreased primarily due to
decreased stock-based compensation during the current period.
Depreciation Expense
Depreciation expense for the nine months ended September 30, 2022 was $34,540,
compared to $29,937 during the nine months ended September 30, 2021, an increase
of $4,603, or 15%. Depreciation expense increased as additional equipment was
placed in service.
Other Income (Expense)
Other expenses, on a net basis, for the nine months ended September 30, 2022
were $753,317, compared to other expenses, on a net basis, of $343,698 during
the nine months ended September 30, 2021, an increase in net expenses of
$409,619, or 119%. Other expenses consisted of $886,837 of interest expense,
including $361,921 of stock-based finance costs on the amortization of debt
discounts, $339,133 of stock-based commitment fees on debt and equity financing,
and a loss on the sale of fixed assets of $9,041, as partially offset by a gain
of $20,148 on the early extinguishment of our extraction facility lease in
Colombia, $1,000 of sublet income on our office space, a gain on early
extinguishment of debt of $121,372 on the forgiveness of a PPP Loan and $41 of
interest income, for the nine months ended September 30, 2022, compared to
$347,958 of interest expense, including $286,345 of stock-based finance costs on
the amortization of debt discounts, and a loss on disposal of fixed assets of
$17,563, as offset by $19,500 of sublease income on sublet office space and
$2,323 of interest income during the nine months ended September 30, 2021.
Net Loss
Net loss for the nine months ended September 30, 2022 was $2,295,139, or $0.03
per share, compared to $2,461,090, or $0.04 per share, during the nine months
ended September 30, 2021, a decrease of $165,951, or 7%. The net loss decreased
primarily due to decreased stock-based compensation during the current period.
23
Liquidity and Capital Resources
The following is a summary of the Company's cash flows provided by (used in)
operating, investing, financing activities and effect of exchange rate changes
on cash for the nine months ended September 30, 2022 and 2021:
2022 2021
Operating Activities $ (1,124,967 ) $ (3,120,049 )
Investing Activities (36,851 ) (268,223 )
Financing Activities 1,117,581 4,068,938
Effect of Exchange Rate Changes on Cash (6,820 ) (10,919 )
Net Increase (Decrease) in Cash
$ (51,057 ) $ 669,747
Net Cash Used in Operating Activities
During the nine months ended September 30, 2022, net cash used in operating
activities was $1,124,967, compared to net cash used in operating activities of
$3,120,049 for the nine months ended September 30, 2021. The cash used in
operating activities was primarily attributable to our net loss.
Net Cash Used in Investing Activities
During the nine months ended September 30, 2022, net cash used in investing
activities was $36,851, compared to net cash used in investing activities of
$268,223 for the nine months ended September 30, 2021. The cash used in
investing activities consisted of purchases of fixed assets, as partially offset
by proceeds received on the sale of fixed assets.
Net Cash Provided by Financing Activities
During the nine months ended September 30, 2022, net cash provided by financing
activities was $1,117,581, compared to net cash provided by financing activities
of $4,068,938 for the nine months ended September 30, 2021. The current period
consisted of $1,717,581 of proceeds received on debt financing and $150,000 of
proceeds received on the sale of preferred stock, as partially offset by
$750,000 of repayments on debt, compared to $947,000 of proceeds received on
debt financing and $3,577,505 received on the sale of preferred and common
stock, less debt repayments of $455,567, during the nine months ended September
30, 2021.
Ability to Continue as a Going Concern
As of September 30, 2022, our balance of cash on hand was $68,621, and we had
negative working capital of $2,268,606 and an accumulated deficit of
$22,212,027. We are too early in our development stage to project future revenue
levels, and may not be able to generate sufficient funds to sustain our
operations for the next twelve months. Accordingly, we may need to raise
additional cash to fund our operations. These factors raise substantial doubt
about the Company's ability to continue as a going concern.
In the event sales do not materialize at the expected rates, management would
seek additional financing and would attempt to conserve cash by further reducing
expenses. There can be no assurance that we will be successful in achieving
these objectives; therefore, without sufficient financing it would be unlikely
for the Company to continue as a going concern.
The condensed consolidated financial statements do not include any adjustments
that might result from the outcome of any uncertainty as to the Company's
ability to continue as a going concern. The condensed consolidated financial
statements also do not include any adjustments relating to the recoverability
and classification of recorded asset amounts, or amounts and classifications of
liabilities that might be necessary should the Company be unable to continue as
a going concern. Our ability to scale production and distribution capabilities
and further increase the value of our brands, is largely dependent on our
success in raising additional capital.
Off-Balance Sheet Arrangements
We have no outstanding off-balance sheet guarantees, interest rate swap
transactions or foreign currency contracts. We do not engage in trading
activities involving non-exchange traded contracts.
24
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires our management to make
assumptions, estimates and judgments that affect the amounts reported, including
the notes thereto, and related disclosures of commitments and contingencies, if
any. We have identified certain accounting policies that are significant to the
preparation of our financial statements. These accounting policies are important
for an understanding of our financial condition and results of operations.
Critical accounting policies are those that are most important to the
presentation of our financial condition and results of operations and require
management's subjective or complex judgment, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods. Certain accounting estimates are particularly
sensitive because of their significance to financial statements and because of
the possibility that future events affecting the estimate may differ
significantly from management's current judgments.
While our significant accounting policies are more fully described in notes to
our consolidated financial statements appearing elsewhere in this Form 10-Q, we
believe that the following accounting policies are the most critical to aid you
in fully understanding and evaluating our reported financial results and affect
the more significant judgments and estimates that we used in the preparation of
our financial statements.
Revenue Recognition
The Company recognizes revenue in accordance with ASC 606 - Revenue from
Contracts with Customers. Under ASC 606, the Company recognizes revenue from the
commercial sales of products, licensing agreements and contracts to perform
pilot studies by applying the following steps: (1) identify the contract with a
customer; (2) identify the performance obligations in the contract; (3)
determine the transaction price; (4) allocate the transaction price to each
performance obligation in the contract; and (5) recognize revenue when each
performance obligation is satisfied. The Company's sales to date have primarily
consisted of the sale of seeds. These sales include multi-element arrangements
whereby the Company collects 50% of the sale upon delivery of the sales, and the
remaining 50% upon the completion of the harvest, whether the seeds result in a
successful crop, or not. In addition, the Company has a right of first refusal
to purchase products resulting from the harvest. At September 30, 2022, the
Company had $35,340 of deferred revenues and $22,830 of deferred cost of goods
sold, as included in other current assets on the balance sheet, that are
expected to be recognized upon the customers' completion of their future
harvests.
Inventory
Inventories are stated at the lower of cost or net realizable value. Cost is
determined on a standard cost basis that approximates the first-in, first-out
(FIFO) method. Appropriate consideration is given to obsolescence, excessive
levels, deterioration, and other factors in evaluating net realizable value. Our
cannabis products consist of cannabis flower grown in-house, along with produced
extracts.
Stock-Based Compensation
The Company accounts for equity instruments issued to employees and
non-employees in accordance with the provisions of ASC 718 Stock Compensation
(ASC 718). All transactions in which goods or services are the consideration
received for the issuance of equity instruments are accounted for based on the
fair value of the consideration received or the fair value of the equity
instrument issued, whichever is more reliably measurable. The measurement date
of the fair value of the equity instrument issued is the earlier of the date on
which the counterparty's performance is complete or the date at which a
commitment for performance by the counterparty to earn the equity instruments is
reached because of sufficiently large disincentives for nonperformance.
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ONE WORLD PRODUCTS, INC. 
