UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
Commission file number:
(Exact name of registrant as specified in its charter)
| (State of incorporation) | (IRS Employer Identification No.) | |
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. ☒
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act) ☐ Yes
As of November 15, 2023, the registrant had
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or the negative of these words or other comparable terminology.
The identification in this report of factors that may affect our future performance and the accuracy of forward-looking statements is meant to be illustrative and by no means exhaustive. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty.
Factors that could cause our actual results to differ materially from those expressed or implied by forward-looking statements include, but are not limited to:
| ● | Trends affecting our financial condition, results of operations or future prospects, including the impact of COVID-19; |
| ● | Our business and growth strategies; |
| ● | Our financing plans and forecasts; |
| ● | The factors that we expect to contribute to our success and our ability to be successful in the future; |
| ● | Our business model and strategy for realizing positive results as sales increase; |
| ● | Competition, including our ability to respond to such competition and its expectations regarding continued competition in the market in which we compete; |
| ● | Our ability to meet our projected operating expenditures and the costs associated with development of new projects; |
| ● | The impact of new accounting pronouncements on our financial statements; |
| ● | Whether our cash flows from operating activities will be sufficient to meet our operating expenditures; |
| ● | Our market risk exposure and efforts to minimize risk; |
| ● | Regulations, including tax law and practice, federal and state laws governing the cannabis and cannabinoid industries, and tariff legislation; |
| ● | Our overall outlook including all statements under Management’s Discussion and Analysis of Financial Condition and Results of Operations; |
| ● | That estimates and assumptions made in the preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) may differ from actual results; and |
| ● | Our expectations as to future financial performance, cash and expense levels and liquidity sources. |
Any forward-looking statements in this Quarterly Report on Form 10-Q reflect our current views with respect to future events or to our future financial performance. A more detailed description of risk factors that may affect our operating results can be found in Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q and Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the SEC on March 24, 2023, and our other filings with the SEC. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.
TABLE OF CONTENTS
i
CRYOMASS TECHNOLOGIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, 2023 (unaudited) | December 31, 2022 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Deferred Tax asset | ||||||||
| Prepaid expenses | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT) | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Deferred revenue, current – related party | ||||||||
| Notes payable, current, net of discount | ||||||||
| Total current liabilities | ||||||||
| Deferred revenue, long term – related party | ||||||||
| Notes payable, net of discount | ||||||||
| Notes payable, net of discount – related party | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 12) | ||||||||
| Shareholders’ equity (deficit): | ||||||||
| Preferred stock, $ | ||||||||
| Common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Common stock to be issued | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total shareholders’ equity (deficit) | ( | ) | ||||||
| Total liabilities and shareholders’ equity (deficit) | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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CRYOMASS TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Operating expenses: | ||||||||||||||||
| Personnel costs | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Legal and professional fees | ||||||||||||||||
| Depreciation and amortization expense | ||||||||||||||||
| Research and development | ||||||||||||||||
| Loss on impairment of intangible assets | ||||||||||||||||
| Loss on impairment of goodwill | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expenses): | ||||||||||||||||
| Interest expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gain / (loss) on foreign exchange | ||||||||||||||||
| Total other expenses | ( | ) | ( | ) | ( | ) | ||||||||||
| Net loss before taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income taxes | ||||||||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss per common share: | ||||||||||||||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
CRYOMASS TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
(UNAUDITED)
| Common Stock | Additional Paid-In | Common Stock to | Accumulated | Total Shareholders’ Equity | ||||||||||||||||||||
| Shares | Amount | Capital | Be Issued | Deficit | (Deficit) | |||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Share issuance in exchange for services | ||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Shares issued from warrants exercised | ||||||||||||||||||||||||
| Share issuance in exchange for services | ||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Share issuance in exchange for services | ( | ) | ||||||||||||||||||||||
| Shares issuance from sale of common stock | ||||||||||||||||||||||||
| Share cancellation related to interest on note payable | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Common stock issued for prior period services | ( | ) | ||||||||||||||||||||||
| Common stock issued for current period services | ||||||||||||||||||||||||
| Common stock issued for vested RSUs for prior period services | ( | ) | ||||||||||||||||||||||
| Common stock issued for vested RSUs for current period services | ||||||||||||||||||||||||
| Stock-based compensation for vested RSUs for current period services | - | |||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Common stock issued for current period services | ||||||||||||||||||||||||
| Common stock issued for vested RSUs for current period services | ||||||||||||||||||||||||
| Stock-based compensation for vested RSUs for current period services | - | |||||||||||||||||||||||
| Warrants issued in conjunction with notes payable | - | |||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||
| Common stock issued for vested RSUs for current period services | ||||||||||||||||||||||||
| Stock-based compensation for vested RSUs for current period services | - | |||||||||||||||||||||||
| Share issuance from sale of common stock and warrants | ||||||||||||||||||||||||
| Share issuance from exercise of stock options | ||||||||||||||||||||||||
| Stock options issued for current period services | - | |||||||||||||||||||||||
| Warrants issued in conjunction with notes payable | - | |||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
CRYOMASS TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| For the Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities from continuing operations: | ||||||||
| Amortization of debt discount | ||||||||
| Depreciation and amortization expense | ||||||||
| Loss/(gain) on foreign exchange related to notes payable | ( | ) | ||||||
| Loss on impairment of goodwill | ||||||||
| Loss on impairment of intangible assets | ||||||||
| Share issuances in exchange for services | ||||||||
| Stock-based compensation expense | ||||||||
| Common stock issued for vested RSUs for current period services | ||||||||
| Stock-based compensation for vested RSUs for current period services | ||||||||
| Stock options issued for current period services | ||||||||
| Common stock issued for the current period services | ||||||||
| Change in operating assets and liabilities: | ||||||||
| Prepaid expenses | ( | ) | ||||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Deferred revenue – related party | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Issuance of loans receivable | ( | ) | ||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Purchase of intangible assets | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from issuance of common stock | ||||||||
| Proceeds from exercise of stock options | ||||||||
| Proceeds from notes payable | ||||||||
| Net cash provided by financing activities | ||||||||
| Net decrease in cash and cash equivalents | ( | ) | ( | ) | ||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
| Supplemental disclosure of non-cash investing activities: | ||||||||
| Purchase of property and equipment on credit | $ | |||||||
| Supplemental disclosure of non-cash financing activities: | ||||||||
| Debt discount recognized from warrants issued in conjunction with notes payable | $ | |||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of the Business
CryoMass Technologies Inc. develops and licenses cutting-edge equipment and processes to refine harvested cannabis, hemp, and other premium crops. The company’s patented technology harnesses liquid nitrogen to reduce biomass and then efficiently isolate, collect and preserve delicate resin glands (trichomes) containing prized compounds like cannabinoids and terpenes. Building on this technology, CryoMass has engineered its premier Trichome Separation unit (CryoSift Separator™), optimized via patented cryogenic processes to rapidly capture intact, high-value cannabis and hemp trichomes (CryoSift™).
The Company’s principal office is located at 1001 Bannock St., Suite 612, Denver, CO 80204, and its telephone number is 303-416-7208. The Company’s website is www.cryomass.com. Information appearing on the website is not incorporated by reference into this report.
Cryomass Technologies Inc is the parent company to wholly-owned subsidiaries Cryomass LLC, Cryomass California LLC, and 1304740 B.C. Unlimited Liability Company dba Cryomass Canada.
On June 22, 2021, the Company entered into an Asset Purchase Agreement with Cryocann USA Corp, a California corporation (“Cryocann”), pursuant to which Company acquired substantially all the assets of Cryocann. The acquired assets included the patented cryogenic process titled “System and method for cryogenic separation of plant material” (US patent #10,864,525) for the reduction of biomass and efficient isolation, collection and preservation of delicate resin glands (trichomes) of harvested of hemp and cannabis, and potentially other high value trichome-rich plants.
In September 2021, we were granted an additional patent for our process from the Chinese Intellectual Property Office. In April 2022, we were granted another patent # 3,064,896 from the Canadian Intellectual Property Office. We currently are taking steps to gain further protection for our intellectual property through the European Union Intellectual Property Office and other international jurisdictions.
The first functional commercial unit, known as a CryoSift Separator™, has been installed at the premises of an operating partner, pursuant to a license and lease arrangement, in California.
2. Going Concern Uncertainty, Financial Conditions and Management’s Plans
The Company believes that there is substantial
doubt about the Company’s ability to continue as a going concern. The Company believes that its available cash balance as of the
date of this filing will not be sufficient to fund its anticipated level of operations for at least the next twelve months. The Company
believes that, at the present time, its ability to continue operations depends on cash expected to be available from lease payments and
royalty payments in connection with future revenue generation, or possibly from debt, equity, or other types of investments, to fund its
anticipated level of operations for at least the next twelve months. As of September 30, 2023, the Company had a working capital deficit
of $
The continuation of our Company as a going concern
is dependent upon the continued financial support from our shareholders, the ability of our Company to obtain necessary equity, debt
or other financing to continue operations, and ultimately the attainment of profitable operations. For the nine months ended September
30, 2023, our Company used $
Our financial statements for the three and nine months ended September 30, 2023 have been prepared on a going concern basis and do not include any adjustments that might result from the outcome of this uncertainty.
5
3. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying condensed consolidated financial statements have been prepared in accordance with Generally Accepted Accounting Principles. The condensed consolidated financial statements include the accounts of the Cryomass Technologies Inc, Cryomass LLC, Cryomass California LLC, and 1304740 B.C. Unlimited Liability Company dba Cryomass Canada. All significant intercompany balances and transactions have been eliminated in consolidation. The Company operates as one segment from its corporate headquarters in Colorado.
Use of Estimates
The preparation of the Company’s condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of expenses during the reporting period. Significant estimates and assumptions reflected in these condensed consolidated financial statements include, but are not limited to, determining the fair value of the assets acquired and liabilities assumed in acquisition, determining the useful lives and potential impairment of long-lived assets and potential impairment of goodwill. The Company bases its estimates on historical experience, known trends and other market-specific or other relevant factors that it believes to be reasonable under the circumstances. On an ongoing basis, management evaluates its estimates when there are changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with maturities of three months or less at the time of issuance to be cash equivalents.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash. Periodically, the Company maintains deposits in accredited financial institutions in excess of federally insured limits. The Company deposits its cash in financial institutions that it believes have high credit quality and has not experienced any losses on such accounts. Aside from this, the Company does not believe it is exposed to any unusual credit risk.
Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. Subsequently, the FASB issued several other updates related to revenue recognition (collectively with ASU 2014-09, the “new revenue standards” or “ASC 606”). In June 2020, the FASB issued ASU No. 2020-05, Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842): Effective Dates for Certain Entities, further delaying the effective date for Topic 606 to fiscal years beginning after December 15, 2019 and interim periods within fiscal years beginning after December 15, 2020.
Pursuant to ASC 606, entities recognize revenue in a manner that depicts the transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods or services. The model provides that entities follow five steps: (i) identify the contract with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to each performance obligation, and (v) recognize revenue when or as each performance obligation is satisfied (i.e., either point in time or over time).
The promised goods or services in the Company’s arrangements typically consist of (1) a license, including rights to the Company’s intellectual property; or / and (2) an obligation to make available for use equipment uniquely suited to apply the intellectual property to customers.
Performance obligations are promised goods or services in a contract to transfer a distinct good or service to the customer and are considered distinct when (i) the customer can benefit from the good or service on its own or together with other readily available resources and (ii) the promised good or service is separately identifiable from other promises in the contract. In assessing whether promised goods or services are distinct, the Company considers factors such as the stage of development of the underlying intellectual property, the capabilities of the customer to develop the intellectual property on its own or whether the required expertise is readily available, and whether the goods or services are integral or dependent to other goods or services in the contract. For performance obligations which consist of products, shipping and distribution activities occur prior to the transfer of control of the Company’s products and are considered activities to fulfill the Company’s promise to deliver goods to the customers.
6
The Company estimates the transaction price based on the amount expected to be entitled to for transferring the promised goods or services in the contract. The consideration may include fixed consideration and variable consideration. At the inception of each arrangement that includes variable consideration, the Company evaluates the amount of potential payment and the likelihood that the underlying constraint will be released. The Company utilizes either the most likely amount method or expected value method to estimate the amount expected to be received based on which method best predicts the amount expected to be received. Variable consideration may be constrained and is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period.
Customer prepayments are recorded as contract liabilities (deferred revenue), which shall be subsequently recognized as revenue upon satisfaction of the underlying performance obligations over the life of the contract. The portion of the liabilities that is expected to be recognized as revenue during the succeeding twelve-month period are recorded in Deferred Revenue and the remaining portion is recorded in Deferred Revenue, long term on the accompanying balance sheets at the end of each reporting period.
Expenses
Operating Expenses
Operating expenses encompass personnel costs, research and development expenses, general and administrative expenses, professional and legal fees and depreciation and amortization related to the property and equipment and intangibles acquired through the implementation of internal use software. Personnel costs consist primarily of consulting expense and administrative salaries and wages. General and administrative expenses are comprised of travel expenses, accounting expenses, stock-based compensation, and board fees. Professional services are principally comprised of outside legal and professional fees.
Other Expense, net
Other expense, net consisted of interest expense, other income and (loss) gain on foreign exchange.
Stock-Based Compensation
The fair value of restricted stock units (“RSUs”) granted are measured on the grant date using the closing price of the Company’s common shares on the grant date. For stock options, the Company engages a valuation firm to calculate the grant date fair value of the options issued. The Company accounts for forfeitures as they occur, rather than estimating expected forfeitures over the course of a vesting period. All stock-based compensation costs are recorded in general and administrative expenses in the condensed consolidated statements of operations.
Property and Equipment, net
Purchase of property and equipment are recorded
at cost. Improvements and replacements of property and equipment are capitalized. Maintenance and repairs that do not improve or extend
the lives of property and equipment are charged to expense as incurred. When assets are sold or retired, their cost and related accumulated
depreciation are removed from the accounts and any gain or loss is reported in the condensed consolidated statements of operations.
| Estimated Useful Life | ||
| Machinery and equipment |
7
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price of an acquired entity over the fair value of identifiable tangible and intangible assets acquired and liabilities assumed in a business combination.
Indefinite-lived intangible assets established in connection with business combinations consist of in-process research and development and internal-use software. Intangible assets with indefinite lives are recorded at their estimated fair value at the date of acquisition. Once in-process research and development is placed in service, it will be amortized over the estimated useful life. Internal-use software costs recognized as an intangible asset relates to capitalizable costs of computer software obtained for internal-use as defined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350-40-30-1. All other internal-use software costs are expensed as incurred by the Company. Amortization is recorded straight-line over the estimated useful life of the software. The software has a useful life of 26 months with amortization beginning on April 1, 2023.
Intangible assets with finite lives are recorded
at their estimated fair value at the date of acquisition and are amortized over their estimated useful lives using the straight-line
method. Amortization of assets ceases upon designation as held for sale.
| Estimated Useful Life | ||
| Patent | ||
| In-process research and development | ||
| Internal use software |
Impairment of Goodwill and Intangible Assets
Goodwill
Goodwill is not amortized, but instead is tested annually at December 31 for impairment and upon the occurrence of certain events or substantive changes in circumstances.
We account for the impairment of goodwill under the provisions of Financial Accounting Standards Board (FASB) Accounting Standard Update 2017-04 (“ASU 2017-04”), “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” and FASB Accounting Standards Codification (ASC) 350-20-35, Intangibles – Goodwill and Other – Goodwill.
The Company performs impairment testing for goodwill by performing the following steps: 1) evaluate the relevant events or circumstances to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, 2) if yes to step 1, calculate the fair value of the reporting unit and compare it with its carrying amount, including goodwill, 3) recognize impairment, limited to the total amount of goodwill allocated to that reporting unit, equal to the excess of the carrying value of a reporting unit over its fair value.
Due to delays in implementing the Company’s business model of its cryogenic process, management fully impaired goodwill during the nine months ended September 30, 2023.
8
Indefinite-Lived Intangible Assets and Intangible Assets Subject to Amortization
Indefinite-lived intangible assets are not amortized, but instead are tested annually at December 31 for impairment and upon the occurrence of certain events or substantive changes in circumstances.
We account for the impairment of indefinite-lived intangible assets under the provisions of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 350-30-35, Intangibles – Goodwill and Other – General Intangibles Other Than Goodwill. Following this guidance, the Company compares the estimated fair value of the indefinite-lived intangible assets to its carrying value. If the carrying value exceeds the fair value, the Company recognizes impairment equal to that excess.
We account for the impairment of intangible assets subject to amortization under the provisions of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 360-10-35, Property, Plant, and Equipment. Following this guidance, the Company compares the estimated fair value of the intangible assets subject to amortization to its carrying value. If the carrying value exceeds the fair value, the Company recognizes impairment equal to that excess.
Due to delays in implementing the Company’s business model of its cryogenic process, management fully impaired all related identifiable intangible assets including a patent and in-process research & development during the nine months ended September 30, 2023. Internal use software was not impaired as of September 30, 2023.
Leases
We account for our leases under ASC 842. Under this guidance, arrangements meeting the definition of a lease are classified as operating or financing leases, and are recorded on the condensed consolidated balance sheet as both a right of use asset and lease liability, calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease or our incremental borrowing rate. Lease liabilities are increased by interest and reduced by payments each period, and the right of use asset is amortized over the lease term. For finance leases, interest on the lease liability and the amortization of the right of use asset results in front-loaded expense over the lease term. Variable lease expenses are recorded when incurred.
In calculating the right of use and lease liability, we have elected to combine lease and non-lease components. We exclude short-term leases having an initial term of 12 months or less from the new guidance as an accounting policy election, and recognize rent expense on a straight-line basis over the lease term.
Income Taxes
The Company uses the liability method of accounting
for income taxes as set forth in ASC 740, Income Taxes. Under the liability method, deferred taxes are determined based on the
temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect
during the years in which the basis differences reverse. A valuation allowance is recorded when it is likely that the deferred tax assets
will not be realized. We assess our income tax positions and record tax benefits for all years subject to examination based upon our
evaluation of the facts, circumstances and information available at the reporting date.
9
Fair Value Measurements
Certain assets and liabilities of the Company are carried at fair value under GAAP. Fair value is defined 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. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:
| ● | Level 1 — Quoted prices in active markets for identical assets or liabilities. | |
| ● | Level 2 — Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data. | |
| ● | Level 3 — Unobservable inputs that are supported by little or no market activity that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques. |
The carrying values reported in the condensed consolidated balance sheets for cash, accounts receivable, prepaid expenses, accounts payable, and notes payable approximate fair values because of the immediate or short-term maturities of these financial instruments.
Between April and July 2023, the Company issued warrants in conjunction with promissory notes (the “Promissory Notes”) and common stock subscription agreements (the “Common Stock Subscription Agreements”) to investors as part of a capital raising effort The Company has determined that the Warrants are classified as equity and are initially measured at fair value. The fair value of the Warrants was determined utilizing a Black-Scholes model considering all relevant assumptions at the dates of issuance. As the fair value of the Promissory Notes at the issuance date is less than the cash proceeds received, a debt discount on the Promissory Notes was also recorded. The debt discount will be amortized over the lives of the Promissory Notes using the effective interest method.
Net Loss per Share
The Company follows ASC 260, Earnings Per Share, which requires presentation of basic and diluted earnings per share (“EPS”) on the face of the income statement for all entities with complex capital structures. Net earnings or loss per share is computed by dividing net income or loss by the weighted-average number of common shares outstanding during the period, excluding shares subject to redemption or forfeiture. The Company presents basic and diluted net earnings or loss per share. Diluted net earnings or loss per share reflect the actual weighted average of common shares issued and outstanding during the period, adjusted for potentially dilutive securities outstanding. Potentially dilutive securities are excluded from the computation of the diluted net loss per share if their inclusion would be anti-dilutive. Diluted net loss per share is the same as basic net loss per share for each period.
10
4. Property and Equipment, Net
| September 30, 2023 | December 31, 2022 | |||||||
| Machinery and equipment | ||||||||
| Less: Accumulated depreciation | ( | ) | ( | ) | ||||
| $ | $ | |||||||
Depreciation expense for the three and nine months ended September
30, 2023 was $
5. Goodwill and Intangible Assets
The carrying value of goodwill was $
| September 30, 2023 | ||||||||||||||||||
| Estimated | Gross | Accumulated | Carrying | |||||||||||||||
| Useful Life | Amount | Amortization | Impairment | Value | ||||||||||||||
| Amortized | ||||||||||||||||||
| Patent | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||
| Internal use software | ( | ) | ||||||||||||||||
| In-process research and development | ( | ) | ( | ) | ||||||||||||||
| Total identifiable intangible assets | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||
| December 31, 2022 | ||||||||||||||
| Estimated Useful Life | Gross Amount | Accumulated Amortization | Carrying Value | |||||||||||
| Amortized | ||||||||||||||
| Patent | $ | $ | ( | ) | $ | |||||||||
| In-process research and development | ( | ) | ||||||||||||
| Indefinite-lived | ||||||||||||||
| Internal use software | ||||||||||||||
| Total identifiable intangible assets | $ | $ | ( | ) | $ | |||||||||
| Years ending December 31, | Amount | |||
| 2023 (remainder of year) | ||||
| 2024 | ||||
| 2025 | ||||
11
6. Loans Receivable
On July 15, 2019, the Company entered into a
Membership Interest Purchase Agreement to acquire cannabis-related intellectual property and certain other assets, but not cannabis licenses,
of Critical Mass Industries LLC (“CMI”), a Colorado limited liability company. Effective December 31, 2021, the Company disposed
of all CMI-related assets and extinguished any and all related obligations. In conjunction with the disposal, we received a $
7. Deferred Revenue – Related Party
On August 18, 2023, we signed a license agreement with California-based RubberRock Inc and its affiliates (“RubberRock” or the “Licensee”). Under the agreement, RubberRock obtained from us a license to use and rent one unit of our equipment under certain rights for the use of the licensed patent solely in connection with the equipment and solely in California. We retain title to and have access to the equipment at all times. The duration of the agreement is five years from August 18, 2023.
Under the terms of the license agreement, which
are further detailed below, RubberRock agreed to license the patented process and deploy a Unit in exchange for a territory license fee
(the “Territory License Fee”) of $
In addition to the
Subsequent to the commencement of the RubberRock agreement, our Chief Executive Officer, Christian Noel, joined the board of directors of RubberRock at the end of September 2023, which created a related party disclosure requirement.
During the three months ended September 30, 2023,
we determined that the $
8. Notes Payable
Between April and July 2023, the Company issued
Promissory Notes to investors as part of a capital raising effort. The Promissory Notes issued have a total principal amount of $
12
| Years ending December 31, | Amount | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Total gross principal | ||||
| (Less: debt discount, net of amortization) | ( | ) | ||
| Carrying value as of September 30, 2023 | ||||
9. Related Party Transactions
On September 15, 2022, the Company entered into
a loan agreement of $
The Company received $
| Years ending December 31, | Amount | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| Total gross principal | |||||
| (Less: debt discount, net of amortization) | ( | ) | |||
| Carrying value as of September 30, 2023 | |||||
10. Shareholders’ Equity
From April to June 2022, the Company issued
13
Restricted Stock Unit Awards
The Company adopted its 2019 Omnibus Stock Incentive Plan (the “2019 Plan”), which provides for the issuance of stock options, stock grants and RSUs to employees, directors and consultants. The primary purpose of the 2019 Plan was to enhance the ability to attract, motivate, and retain the services of qualified employees, officers and directors. Any RSUs granted under the 2019 Plan were at the discretion of the Compensation Committee of the Board of Directors. On January 10, 2022, the shareholders approved the 2022 Stock Incentive Plan which then replaced the 2019 Plan.
| Restricted Stock Units | Weighted Average Grant Date Fair Value | |||||||
| Outstanding at December 31, 2022 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited | ||||||||
| Outstanding at March 31, 2023 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited | ||||||||
| Outstanding at June 30, 2023 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited | ||||||||
| Outstanding at September 30, 2023 | ||||||||
| Restricted Stock Units | Weighted Average Grant Date Fair Value | |||||||
| Outstanding at December 31, 2021 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited | ||||||||
| Outstanding at March 31, 2022 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited | ( | ) | ||||||
| Outstanding at June 30, 2022 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited | ||||||||
| Outstanding at September 30, 2022 | ||||||||
14
The total fair value of RSUs vested during the
three and nine months ending September 30, 2023 was $
Stock-based compensation expense relating to
RSU’s was $
Stock Option Awards
| Stock Option Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at December 31, 2022 | $ | $ | ||||||||||||||
| Granted and vested | ||||||||||||||||
| Forfeited | ||||||||||||||||
| Outstanding at March 31, 2023 | $ | $ | ||||||||||||||
| Granted and vested | ||||||||||||||||
| Forfeited | ||||||||||||||||
| Outstanding at June 30, 2023 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Forfeited | ||||||||||||||||
| Outstanding at September 30, 2023 | $ | $ | ||||||||||||||
| Stock Option Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at December 31, 2021 | $ | $ | ||||||||||||||
| Granted and vested | ||||||||||||||||
| Forfeited | ||||||||||||||||
| Outstanding at March 31, 2022 | $ | $ | ||||||||||||||
| Granted and vested | ||||||||||||||||
| Forfeited | ||||||||||||||||
| Outstanding at June 30, 2022 | $ | $ | ||||||||||||||
| Granted and vested | ||||||||||||||||
| Forfeited | ||||||||||||||||
| Outstanding at September 30, 2022 | $ | $ | ||||||||||||||
15
Warrants
| Warrant Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Fair Value | |||||||||||||
| Outstanding at December 31, 2022 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ||||||||||||||||
| Expired | ( | ) | ||||||||||||||
| Outstanding at March 31, 2023 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ||||||||||||||||
| Expired | ( | ) | ||||||||||||||
| Outstanding at June 30, 2023 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ||||||||||||||||
| Expired | ( | ) | ||||||||||||||
| Outstanding at September 30, 2023 | $ | $ | ||||||||||||||
| Warrant Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Fair Value | |||||||||||||
| Outstanding at December 31, 2021 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ||||||||||||||||
| Expired | ||||||||||||||||
| Outstanding at March 31, 2022 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Expired | ||||||||||||||||
| Outstanding at June 30, 2022 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ||||||||||||||||
| Expired | ( | ) | ||||||||||||||
| Outstanding at September 30, 2022 | $ | $ | ||||||||||||||
During the nine months ended September 30, 2023,
the Company issued warrants with the option to purchase
11. Income Taxes
In accordance with ASC 740-270, the Company calculates
the interim tax expense based on an annual effective tax rate (“AETR”). The AETR represents the Company’s estimated
effective tax rate for the year based on full year projection of tax expense, divided by the projection of full year pretax book loss,
adjusted for discrete transactions occurring during the period. The annual effective tax rate for the three months ended September 30,
2023 was
12. Commitments & Contingencies
Occasionally, the Company may be involved in claims and legal proceedings arising from the ordinary course of its business. The Company records a provision for a liability when it believes that it is both probable that a liability has been incurred, and the amount can be reasonably estimated. If these estimates and assumptions change or prove to be incorrect, it could have a material impact on the Company’s condensed consolidated financial statements. Contingencies are inherently unpredictable, and the assessments of the value can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions.
13. Subsequent Events
On October 18, 2023 and November 3, 2023, the
Company received CAD $
16
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This quarterly report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may”, “should”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “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 that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
In this quarterly report, unless otherwise specified, our financial statements are expressed in United States Dollars (US$) and are prepared in accordance with United States generally accepted accounting principles. All references to “common shares” refer to the common shares in our capital stock.
Unless expressly indicated or the context requires otherwise, the terms “Cryomass Technologies,” the “Company,” “we,” “us,” and “our” refer to Cryomass Technologies Inc., a Nevada corporation, and, where appropriate, its wholly owned subsidiaries.
General Overview
History
Cryomass Technologies Inc (“Cryomass Technologies” or the “Company”) began as Auto Tool Technologies Inc., which was incorporated under the laws of the State of Nevada on May 10, 2011. The Company’s name was changed to AFC Building Technologies Inc. effective January 10, 2014. Effective April 26, 2018, the Company changed its name to First Colombia Development Corp. On May 10, 2018, the Company began to establish various business ventures in Colombia through its Colombian subsidiary, First Colombia Devco S.A.S (“Devco”). On July 1, 2019, the Company acquired 100% of the membership interests in General Extract, LLC, a Colorado limited liability company, in exchange for the shares of Devco. The name of this subsidiary was subsequently changed to Cryomass LLC. On July 15, 2019, the Company entered into a Membership Interest Purchase Agreement to acquire cannabis-related intellectual property and certain other assets, but not cannabis licenses, of Critical Mass Industries LLC (“CMI”), a Colorado limited liability company. Effective October 14, 2019, the Company changed its name to Redwood Green Corp. In August 2020, the Company established a wholly owned Colombian subsidiary, Andina Gold Colombia SAS for this purpose acquiring gold properties in Colombia. Effective September 1, 2020, the Company changed its name to Andina Gold Corp. In Q1 2022 the respective subsidiary was closed.
On July 15, 2021, the Company changed its name to Cryomass Technologies Inc and subsequently changed its trading symbol to CRYM. Effective December 31, 2021, the Company disposed of all CMI-related assets and extinguished any and all related obligations.
The Company’s principal office is located at 1001 Bannock St., Suite 612, Denver, CO 80204, and its telephone number is 303-416-7208. The Company’s website is www.cryomass.com. Information appearing on the website is not incorporated by reference into this report.
17
On June 22, 2021, the Company entered into an Asset Purchase Agreement with Cryocann USA Corp, a California corporation (“Cryocann”), pursuant to which Company acquired substantially all the assets of Cryocann.
The patented technology acquired from CryoCann (including US patent #10,864,525) harnesses liquid nitrogen to reduce biomass and then efficiently isolate, collect and preserve delicate resin glands (trichomes) containing prized compounds like cannabinoids and terpenes. Building on this technology, CryoMass has engineered its premier Trichome Separation unit (CryoSift Separator™), optimized via patented cryogenic processes to rapidly capture intact, high-value cannabis and hemp trichomes (CryoSift™). Much like sugar and flour refinements, the resulting CryoSift™ concentrate is a superior product compared to unprocessed biomass. For cultivators, reducing biomass into CryoSift™ slashes volume up to 80%, dramatically lowering storage, handling, and transportation costs. Properly stored, CryoSift™ prevents potency and terpene degradation, preserving value. For processors, the minimized input volume also enables considerable cost savings and logistics advantages. Extracting from CryoSift™ using solvents and manufacturing solventless products unlocks industrial scale yields unattainable otherwise. CryoMass anticipates its efficiencies will catalyze industry-wide shifts in cannabis and hemp post-harvest methods. Additionally, the technology shows promise for diverse trichome-rich plants.
Through an independent engineering and manufacturing firm we refined the design of the CryoSift Separator™ for the handling of harvested hemp, cannabis and other premium crops. Our first CryoSift Separator™ unit has been fully developed and delivered to a licensee in California as described in the following section of this report. The engineering and manufacturing firm has indicated that it has the capacity to manufacture sufficient units to meet our needs for the foreseeable future.
Canadian Patent no. 3 064 896 “Cryogenic Separation of Plant Material” was filed on May 25, 2018 by two assignors, who assigned it, among other, various other intellectual property rights, to a wholly owned subsidiary of the Company as part of the Cryocann June 22, 2021 transaction. The respective Canadian patent was granted on April 19, 2022. Provided that all patent maintenance fees are paid, the Canadian patent no. 3 064 896 will expire on May 25, 2038.
In September 2021, we were granted an additional patent for our process from the Chinese Intellectual Property Office. We currently are taking steps to gain further protection for our intellectual property through the European Union Intellectual Property Office and several other international jurisdictions.
Our Current Business
Our business portfolio includes the accounts of Cryomass LLC, Cryomass California LLC and 1304740 BC ULC dba Cryomass Canada, which are 100% owned by Cryomass Technologies Inc.
18
CryoMass Technologies Inc. develops and licenses cutting-edge equipment and processes to refine harvested cannabis, hemp, and other premium crops. The company’s patented technology harnesses liquid nitrogen to reduce biomass and then efficiently isolate, collect and preserve delicate resin glands (trichomes) containing prized compounds like cannabinoids and terpenes. Building on this technology, CryoMass has engineered its premier Trichome Separation unit (CryoSift Separator™), optimized via patented cryogenic processes to rapidly capture intact, high-value cannabis and hemp trichomes (CryoSift™). Much like sugar and flour refinements, the resulting CryoSift™ concentrate is a superior product compared to unprocessed biomass. For cultivators, reducing biomass into CryoSift™ slashes volume up to 80%, dramatically lowering storage, handling, and transportation costs. Properly stored, CryoSift™ prevents potency and terpene degradation, preserving value. For processors, the minimized input volume also enables considerable cost savings and logistics advantages. Extracting from CryoSift™ using solvents and manufacturing solventless products unlocks industrial scale yields unattainable otherwise. CryoMass anticipates its efficiencies will catalyze industry-wide shifts in cannabis and hemp post-harvest methods. Additionally, the technology shows promise for diverse trichome-rich plants.
Because the trichomes collected with CryoMass technology represent only 10% to 20% of a plant’s volume, they are cheaper to ship and store than gross plant material. For the same reason and because trichomes are free of the waxes and other unwanted materials found in the rest of the plant, processing trichomes into oils and extracts can be far quicker, cheaper and easier than processing gross plant material. Even trichomes captured from dried or frozen plant parts deliver this cost-saving advantage to processors of oils and extracts. The three-dimensional advantage achievable with the CryoSift Separator™ – first-stage cost savings, product enhancement and downstream cost savings – can significantly increase a crop’s wholesale value.
Production and processing of hemp and cannabis is a huge, worldwide industry. In the U.S., for example, the wholesale value of the cannabis crop from just the 11 states permitting adult-use and medical cannabis exceeds $6 billion annually. Growth in the U.S. and in the worldwide market is likely fed in part by the growing acceptance of medicinal cannabis products and anticipated legislative changes in various jurisdictions worldwide.
Several other high-value plants, including species that are important for health and wellness products, wrap their valuable elements in trichomes. The technology we are developing for hemp and cannabis may have profitable application to those other species as well.
In January 2023, we signed a license and lease arrangement with RedTape Core Partners LLC (“RedTape”) to deploy multiple CryoMass trichome separation units at the prospective partner’s facility in California and other locations. The five states covered by the agreement were California, New York, New Jersey, Florida and Pennsylvania. On August 16, 2023, the Company agreed to amend the Patent License and Equipment Rental Agreement with RedTape Core Partners LLC in order to remove the state of California from the five states included in the Agreement, along with concomitant reductions in license fees and an amendment to the license fee payment schedule. To date, no funds have been paid by RedTape to CryoMass pursuant to the lease and license agreement.
On August 18, 2023, the Company entered into a Patent License and Equipment Rental Agreement with Rubberrock, Inc. (“Rubberrock”) for a term of five years, in which the Company licenses its proprietary CryoSift SeparatorTM process and technology and leases one CryoSift SeparatorTM Unit for use in the state of California. Under the terms of the transaction, Rubberrock agreed to pay license fees of $750,000, of which $200,000 was payable within 30 days of installment of the system on the licensee’s premises and $550,000 is payable in quarterly installments over 24 months beginning at the end of the first quarter, and a monthly royalty based on 25% of revenues, subject to minimum royalties over the five-year term of the contract. Of the $200,000 payable within 30 days of installation, $100,000 has been received. Both parties have verbally agreed to defer the remaining $100,000 temporarily and are discussing an amendment to the original agreement. Subsequent to the commencement of the RubberRock agreement, our Chief Executive Officer, Christian Noel, joined the board of directors of RubberRock at the end of September 2023, which created a related party disclosure requirement.
We believe that our technologies will deliver a compelling combination of cost and time savings while enhancing product quality and quantity for largescale cultivators and processors of hemp and cannabis. To that end, Cryomass is working with an extensive pipeline of cultivators and processors in various markets, including several states in the USA, as well as Canada.
19
Results of Operations for the Three Months Ended September 30, 2023 and 2022
Our operating results for the three months ended September 30, 2023 and 2022 are summarized as follows:
| For the Three Months Ended September 30, | Change | |||||||||||||||
| 2023 | 2022 | Dollars | Percentage | |||||||||||||
| Net sales | $ | - | $ | - | - | 0 | % | |||||||||
| Total operating expenses | 1,373,304 | 1,253,826 | 119,478 | 10 | % | |||||||||||
| Loss from operations | (1,373,304 | ) | (1,253,826 | ) | (119,478 | ) | 10 | % | ||||||||
| Total other expenses | (80,562 | ) | 25,413 | (105,975 | ) | 417 | % | |||||||||
| Net loss before taxes | (1,453,866 | ) | (1,228,413 | ) | (225,453 | ) | 18 | % | ||||||||
| Income taxes | - | - | - | 0 | % | |||||||||||
| Net loss | $ | (1,453,866 | ) | $ | (1,228,413 | ) | $ | (225,453 | ) | 18 | % | |||||
Net Sales
There were no net sales for the three months ended September 2023 and 2022.
Operating Expenses
Operating expenses encompass personnel costs, research and development, general and administrative expenses, depreciation and amortization expenses, loss on impairment of intangibles, and legal and professional fees. Total operating expenses were $1,373,304 for the three months ended September 30, 2023 as compared to $1,253,826 for the three months ended September 30, 2022. The net increase of $119,478 or 10%, was primarily attributable to the increase in personnel costs. The increase of $135,813, or 16%, in personnel costs is primarily due to the Company acquiring a consultant for Sarbanes-Oxley compliance in the fourth quarter of 2023.
Other Expense
Other expense for the three months ending September 30, 2023 consisted of $109,302 interest expense – net and $28,740 gain on foreign exchange. Other expense for the three months ending September 30, 2022 consisted of $19,636 interest expense and $45,049 gain on foreign exchange. The increase in interest expense was a result of the Company issuing promissory notes to investors during the second and third quarters of 2023. The gain on foreign exchange predominantly relates to a payable agreement with Cryomass LLC’s supplier as well as other notes denominated in CAD.
Net Loss
For the foregoing reasons, we had a net loss of $1,453,866 for the three months ending September 30, 2023, or $0.01 net loss per common share – basic and diluted, compared to a net loss of $1,228,413 for the three months ending September 30, 2022, or $0.01 net loss per common share – basic and diluted.
Results of Operations for the Nine Months Ended September 30, 2023 and 2022
Our operating results for the nine months ended September 30, 2023 and 2022 are summarized as follows:
| For the Nine Months Ended September 30, | Change | |||||||||||||||
| 2023 | 2022 | Dollars | Percentage | |||||||||||||
| Net sales | $ | - | $ | - | $ | - | 0 | % | ||||||||
| Total operating expenses | 9,179,576 | 4,797,859 | 4,381,717 | 91 | % | |||||||||||
| Loss from operations | (9,179,576 | ) | (4,797,859 | ) | (4,381,717 | ) | 91 | % | ||||||||
| Total other expenses | (234,622 | ) | (13,276 | ) | (221,346 | ) | 1,667 | % | ||||||||
| Net loss before taxes | (9,414,198 | ) | (4,811,135 | ) | (4,603,063 | ) | 96 | % | ||||||||
| Income taxes | - | - | - | 0 | % | |||||||||||
| Net loss | $ | (9,414,198 | ) | $ | (4,811,135 | ) | $ | (4,603,063 | ) | 96 | % | |||||
Net Sales
There were no net sales for the nine months ended September 2023 and 2022.
20
Operating Expenses
Operating expenses encompass personnel costs, research and development, general and administrative expenses, depreciation and amortization expenses, loss on impairment of intangibles, and legal and professional fees. Total operating expenses were $9,179,576 for the nine months ended September 30, 2023 as compared to $4,797,859 for the nine months ended September 30, 2022. The net increase of $4,381,717 or 91%, was primarily attributable to the following changes in operating expenses of:
| ● | Depreciation and Amortization - $233,549 increase |
| ● | Legal and Professional - $1,772,917 decrease |
| ● | Personnel Costs - $825,880 increase | |
| ● | General and Administrative - $259,319 increase |
The increase of $233,549, or 357%, in depreciation and amortization expense is primarily due to the fact that the Company began depreciating machinery in the third quarter of 2022. The decrease in legal and professional fees of $1,772,917, or 76%, is primarily due to large invoices in the first half of 2022 for investor relations services. The increase of $825,880 in personnel costs is due to the Company utilizing a consultant to assist with development of internal controls, as well as three additional staff, in the fourth quarter of 2022 and the first half of 2023. The increase of $259,319 in general and administrative is primarily due to the fact the Company incurred significant costs related to stock compensation expense in 2023 relating to new hires. Additionally, the Company fully impaired goodwill and identifiable intangible assets due to delays in implementing our business model, resulting in a $4,843,043 impairment charge for the nine months ended September 30, 2023.
Other Expense
Other expense for the nine months ending September 30, 2023 consisted of $245,566 interest expense – net and $10,944 gain on foreign exchange. Other expense for the nine months ending September 30, 2022 consisted of $90,894 interest expense and $77,618 gain on foreign exchange. The increase in interest expense was a result of the Company entering into new promissory note agreements during the second and third quarters of 2023. The gain on foreign exchange predominantly relates to a payable agreement with Cryomass LLC’s supplier, as well as other notes denominated in CAD.
Net Loss
For the foregoing reasons, we had a net loss of $9,414,198 for the nine months ending September 30, 2023, or $0.05 net loss per common share – basic and diluted, compared to a net loss of $4,811,135 for the nine months ending September 30, 2022, or $0.02 net loss per common share – basic and diluted.
Liquidity, Capital Resources and Cash Flows
The Company believes that its available cash balance as of the date of this filing will not be sufficient to fund its anticipated level of operations for at least the next twelve months. The Company believes that, at the present time, its ability to continue operations depends on cash expected to be available from lease payments and royalty payments in connection with future revenue generation, as well as possible debt, equity or other investment sources, to fund its anticipated level of operations for at least the next twelve months. As of September 30, 2023, the Company had a working deficit of $1,757,553 and cash balance of $9,485. The Company estimates that it needs approximately $4,200,000 to cover overhead costs and capital expenditure requirements ranging up to $4,500,000 based on the current pipeline of customer activity. The Company believes that the Company will continue to incur losses for the immediate future. The Company expects to finance future cash needs from the results of operations and additional financing until the Company can achieve profitability and positive cash flows from operating activities. However, there can be no assurance that the Company will receive sufficient cash flow from operations or otherwise that we will be able to attract the necessary financing.
Going Concern
The Company believes that there is substantial doubt about the Company’s ability to continue as a going concern. Our financial statements for the nine months ended September 30, 2023 have been prepared on a going concern basis and do not include any adjustments that might result from the outcome of this uncertainty.
21
Capital Resources
The following table summarizes total current assets, liabilities and working (deficit) capital for the periods indicated:
| September 30, 2023 | December 31, 2022 | |||||||
| Current assets | $ | 222,118 | $ | 2,166,496 | ||||
| Current liabilities | 1,979,671 | 1,288,465 | ||||||
| Working (deficit) capital | $ | (1,757,553 | ) | $ | 878,031 | |||
As of September 30, 2023 and December 31, 2022, we had a cash balance of $9,485 and $2,016,057, respectively.
Summary of Cash Flows
| For the Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Net cash used in operating activities | $ | (3,211,969 | ) | $ | (3,853,376 | ) | ||
| Net cash used in investing activities | $ | (74,236 | ) | $ | (796,603 | ) | ||
| Net cash provided by financing activities | $ | 1,279,633 | $ | 2,006,876 | ||||
Net cash used in operating activities
Net cash used in operating activities was $3,211,969 during the nine months ended September 30, 2023. This included a net loss of $9,414,198, partially offset by the following: a non-cash charge related to amortization of debt discount of $34,964, a non-cash charge related to depreciation and amortization expense of $299,044, a non-cash charge from a gain on foreign exchange related to notes payable of $5,972, a non-cash charge related to loss on impairment of goodwill and intangible assets of $4,843,043, a non-cash charge related to common stock issued for vested RSUs for current period services of $131,304, a non-cash charge related to stock-based compensation for vested RSUs for current period services of $378,508, a non-cash charge related to stock options issued for current period services of $177,989, and a non-cash charge related to common stock issued for current period services of $85,738. This was in addition to net changes in prepaid expenses, accounts payable and accrued expenses and deferred revenue of $257,611.
Net cash used in operating activities was $3,853,376 during the nine months ended September 30, 2022. This included a net loss of $4,811,135, a non-cash charge related to amortization of debt discount of $72,917, a non-cash charge related to depreciation and amortization expense of $65,495, a non-cash charge related to share issuances in exchange for services of $546,876, and a non-cash charge related to stock-based compensation of $299,140. This was partially offset by net changes in prepaid expenses, security deposits, and accounts payable and accrued expenses of $26,669.
Net cash used in investing activities
Net cash used in investing activities was $74,236 during the nine months ended September 30, 2023, due to the purchase of property and equipment and intangible assets.
Net cash used in investing activities was $796,603 during the nine months ended September 30, 2022, due to the issuance of loans receivable, purchase of property and equipment, and purchase of intangible assets.
Net cash provided by financing activities
Net cash provided by financing activities for the nine months ended September 30, 2023 was $1,279,633, from the Company issuing promissory notes, common stock, and warrants to investors as part of capital raising efforts.
Net cash provided by financing activities for the nine months ended September 30, 2022 was $2,006,876, from proceeds from issuance of common stock of $256,876 and proceeds from notes payable of $1,750,000.
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Off-Balance Sheet Arrangements
None.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, equity, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to intangibles, accounting for acquisitions, warrants, income taxes, useful life and recoverability of long-lived assets and deferred income tax asset valuations. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable for a smaller reporting company.
Item 4. Controls and Procedures
Management’s Evaluation of Disclosure Controls and Procedures
We have carried out an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), to allow timely decisions regarding required disclosures. Based upon that evaluation, our Company’s CEO and CFO concluded that our Company’s disclosure controls and procedures were not effective as of September 30, 2023.
Management has not formally documented its procedures and controls and as such does not have a sufficient basis to assess its internal controls over financial reporting. Management identified that it did not maintain adequately designed internal control over the preparation and oversight of:
| ● | month-end and period-end financial close processes. |
| ● | non-routine or complex transactions. |
| ● | the adoption of new accounting standards. |
Management’s Report on Internal Control Over Financial Reporting
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2023, the end of the annual period covered by this report and according to the criteria established in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
Based on that evaluation, management has concluded that the Company did not maintain effective internal control over financial reporting as of the quarter ended September 30, 2023 due to the existence of material weakness and significant deficiencies in the internal control over financial reporting described below.
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A significant deficiency is a deficiency, or a combination of deficiencies, in internal controls over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Management has determined that we did not maintain effective internal controls over financial reporting as of the quarter ended September 30, 2023 due to the existence of the following material weakness identified by management:
| ● | Management did not timely detect impairment of goodwill and intangible assets as of June 30, 2023 in accordance with GAAP. |
Management has determined that we did not maintain effective internal controls over financial reporting as of the quarter ended September 30, 2023 due to the existence of the following significant deficiencies identified by management:
| ● | Due to the Company’s size, there is insufficient segregation of duties to prevent or detect on a timely basis a misstatement of our annual or interim financial statements. |
| ● | Information technology controls are ineffective or lacking, An IT strategic plan and general controls related to access, change management, segregation of duties, contingency planning, information security, business applications, and interfaces are not yet adequately implemented, updated and monitored. |
| ● | A top-down risk assessment has not yet been performed and documented by management to identify, analyze, and assess risks related to operations, external financial and non-financial reporting, internal reporting, compliance, fraud or other changes that could significantly impact the internal control environment. |
| ● | Internal controls and related activities that could mitigate financial statement risks within key business processes have either not been established or are not fully adequate, documented, and/or maintained. Also, various regulatory compliance issues currently exist at an entity-level related to the control environment component specific to non-performance and/or insufficient/incomplete performance, document maintenance, review and approval, and the enforcement of individual accountability. |
| ● | Documented accounting and other standard rules, guidelines, policies and procedures for key functions within the organization (HR, Payroll, Finance, Sales, IT, etc) have either not been established, are not complete, and/or are not consistently being utilized and monitored against control activities for compliance and ICFR effectiveness. |
| ● | A whistle-blower program has not yet been established for the anonymous reporting, appropriate tracking, investigating, monitoring, and resolving of alleged wrongdoing, personnel complaints and grievances, without retribution. |
| ● | Recurring, formalized employee communication and training on internal controls and the company’s commitment to ICFR has not yet been established. Additionally, a permanent, independent internal audit solution has not yet been established to perform an ongoing evaluation of the company’s key controls and ICFR, continuous monitoring of corrective actions, and regular reporting of internal control deficiencies and overall effectiveness of the company’s internal control environment. |
We intend to continue to evaluate and strengthen our internal control over financial reporting. These efforts require significant time and resources. If we are unable to establish adequate internal control over financial reporting, we may encounter difficulties in the audit or review of our financial statements by our independent registered public accounting firm, which in turn may have a material adverse effect on our ability to prepare financial statements in accordance with GAAP and to comply with our SEC reporting obligations.
Management engaged the services of an experienced expert in internal controls until September 30, 2023. who evaluated our current system and began implementation of a more effective system to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act have been recorded, processed, summarized and reported accurately. Our management intends to develop or improve procedures to address the current material weakness and significant deficiencies to the extent possible during the next twelve months.
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Management utilizes external experts to assist the Company with technical accounting expertise needs as deemed necessary and has engaged a consultant to perform a formal assessment and remediation of its internal control’s framework. However, no assurance can be made at this point that the implementation of such controls and procedures will be completed in a timely manner or that they will be adequate once implemented.
Attestation report of Registered Public Accounting Firm
This Quarterly Report on Form 10-Q does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting because we are not an “accelerated filer” or a “large accelerated filer”. Our management’s report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this Quarterly Report on Form 10-Q.
Management’s Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer (who is also the Company’s principal executive officer), and our chief financial officer (who is also the Company’s principal financial and accounting officer) to allow for timely decisions regarding required disclosure. Thus, in accordance with Rules 13a-15(b) under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures as of September 30, 2023, which is the end of the period covered by this Form 10-Q. Based on the evaluation of these disclosure controls and procedures, and in light of the material weakness and significant deficiencies found in our internal controls over financial reporting, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective. The ineffectiveness of our disclosure controls and procedures was due to a material weakness and significant deficiencies identified in our internal control over financial reporting.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting that occurred during the quarter ended September 30, 2023. We have not been able to remediate the significant deficiencies described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. Our remediation efforts will continue to be implemented throughout our 2023 and 2024 fiscal years. We believe that the controls that we will be implementing will improve the effectiveness of our internal control over financial reporting. As we continue to evaluate and work to improve our internal control over financial reporting, we may determine to take additional measures to address the material weakness and significant deficiencies or determine to supplement or modify certain of the remediation measures described above.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
In addition to the other information set forth in this Report, you should carefully consider the factors discussed in Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 and subsequent quarterly reports on Form 10-Q, which could materially affect our business, financial condition or future results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
| Exhibit Number |
Description | |
| 10.1* | Restated and Amended Patent License and Equipment Rental Agreement by and between RedTape Core Partners LLC and Cryomass Technologies Inc., dated August 15, 2023. | |
| 10.2* | Patent License and Equipment Rental Agreement Rubberrock Inc., dated August 18, 2023. | |
| 31.1* | Section 302 Certification under the Sarbanes-Oxley Act of 2002 of the Principal Executive Officer. | |
| 31.2* | Section 302 Certification under the Sarbanes-Oxley Act of 2002 of the Principal Financial Officer and Principal Accounting Officer. | |
| 32.1* | Section 906 Certification under the Sarbanes-Oxley Act of 2002 of the Principal Executive Officer. | |
| 32.2* | Section 906 Certification under the Sarbanes-Oxley Act of 2002 of the Principal Financial Officer and Principal Accounting Officer. | |
| 101.INS | Inline XBRL Instance Document | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
| * | Filed herewith. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| CRYOMASS TECHNOLOGIES INC. | |
| (Registrant) | |
| Dated: November 20, 2023 | |
| /s/ Christian Noel | |
| Christian Noel | |
| Chief Executive Officer and Director | |
| (Principal Executive Officer) | |
| Dated: November 20, 2023 | |
| /s/ Philip Mullin | |
| Philip Mullin | |
| Chief Financial Officer and Treasurer | |
| (Principal Financial Officer and Principal Accounting Officer) |
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