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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
| TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____ to _____
Commission
File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class: | Trading Symbol | Name of each exchange on which registered: | ||
| OTC Markets |
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the 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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller
reporting company | |
| Emerging
growth company |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
☐
As of May 9, 2022, there were shares of the registrant’s common stock outstanding.
MALACHITE INNOVATIONS, INC.
Quarterly Report on Form 10-Q
For the Quarterly Period Ended
March 31, 2022
INDEX
| 2 |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
MALACHITE INNOVATIONS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2022 AND 2021
(Unaudited)
| 3 |
MALACHITE INNOVATIONS, INC.
CONSOLIDATED BALANCE SHEETS
March 31, 2022 | December 31, 2021 | |||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Prepaid expenses | ||||||||
| Total current assets | ||||||||
| Deposits | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders’ Deficit | ||||||||
| Current Liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
| Line of credit | ||||||||
| Total liabilities | ||||||||
| Stockholders’ Deficit | ||||||||
| Common stock, par value $ per share; shares authorized; shares issued and outstanding | ||||||||
| Additional paid-in-capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Total Liabilities and Stockholders’ Deficit | $ | $ | ||||||
See accompanying notes to the consolidated financial statements.
| 4 |
MALACHITE INNOVATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenues | $ | $ | ||||||
| Operating expenses: | ||||||||
| General and administrative | ||||||||
| Research and development | ||||||||
| Total operating expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Other income (expenses) | ||||||||
| Gain on extinguishment of liabilities | - | |||||||
| Interest income | - | |||||||
| Interest expense | ( | ) | - | |||||
| Total other income (expenses), net | ( | ) | ||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Basic and diluted loss per common share: | $ | ( | ) | $ | ( | ) | ||
| Weighted average number of common shares outstanding | ||||||||
| Basic and diluted | ||||||||
See accompanying notes to the consolidated financial statements.
| 5 |
MALACHITE INNOVATIONS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
THREE MONTHS ENDED MARCH 31, 2022 AND 2021
| Three months ended March 31, 2022 (Unaudited) | ||||||||||||||||||||
| Common Stock | Additional | |||||||||||||||||||
| Number of shares | Amount | Paid-in Capital | Accumulated Deficit | Total | ||||||||||||||||
| Balance – December 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||
| Balance as of March 31, 2022 (Unaudited) | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Three months ended March 31, 2021 (Unaudited) | ||||||||||||||||||||
| Common Stock | Additional | |||||||||||||||||||
| Number of shares | Amount | Paid-in Capital | Accumulated Deficit | Total | ||||||||||||||||
| Balance – December 31, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Fair value of vested stock options | - | - | - | |||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||
| Balance as of March 31, 2021 (Unaudited) | $ | $ | $ | ( | ) | $ | ||||||||||||||
See accompanying notes to the consolidated financial statements.
| 6 |
MALACHITE INNOVATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
| Fair value of vested stock options | - | |||||||
| Gain on extinguishment of liabilities | - | ( | ) | |||||
| Operating lease expense | - | |||||||
| Changes in operating assets and liabilities: | ||||||||
| Prepaid expense and other current assets | ||||||||
| Deposits | ( | ) | ||||||
| Accounts payable and accrued liabilities | ( | ) | ||||||
| Operating lease liability | - | ( | ) | |||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from line of credit | - | |||||||
| Net cash provided by financing activities | - | |||||||
| Net increase (decrease) in cash | ( | ) | ||||||
| Cash and cash equivalents - beginning of period | ||||||||
| Cash and cash equivalents - end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | $ | $ | ||||||
See accompanying notes to the consolidated financial statements.
| 7 |
MALACHITE INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2022 AND 2021
(Unaudited)
1. BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Malachite Innovations, Inc. (the “Company”, “we”, “us” or “our”), was incorporated in the State of Nevada on June 29, 2007.
Originally founded in 2007 as Legend Mining Inc., the Company began operations as a mineral extraction exploration business. In 2011, the Company changed its name to Stevia First Corp. and pursued a new strategy focused on developing stevia-based additives for the food and beverage industry. In 2015, the Company changed its name to Vitality Biopharma, Inc. and pursued a new strategy focused on developing cannabinoid-based prodrugs anticipated to treat inflammatory conditions of the gastrointestinal tract by unlocking the therapeutic properties of cannabinoids but without their unwanted psychoactive side effects.
In October 2021, the Company changed its name to Malachite Innovation, Inc. and reorganized its corporate structure and created the following two wholly-owned operating subsidiaries: (i) Graphium Biosciences, Inc., a Nevada corporation (“Graphium”), into which the Company contributed all of its drug development assets; and (ii) Daedalus Ecosciences, Inc., a Nevada corporation (“Daedalus”). Graphium plans to focus its business activities on the health and wellness of people, with a particular focus on advancing our broad portfolio of over 100 glycosylated cannabinoid prodrugs. Daedalus plans to focus its business activities on the health and wellness of the planet through ESG investments, with a particular focus on deploying technological innovations and eco-friendly solutions to remedy difficult environmental situations in economically challenged communities.
Going Concern
The
accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of business. As reflected in the accompanying financial statements, during the three
months ended March 31, 2022, the Company incurred a net loss of $
The
ability to continue as a going concern is dependent on the Company attaining and maintaining profitable operations in the future and/or
raising additional capital to meet its obligations and repay its liabilities arising from normal business operations when they come due.
We do not presently have significant revenue to fund our business from our operations, and will need to obtain most of our necessary funding from external sources in the near term. Since inception, the Company has experienced recurring operating losses and negative operating cash flows, and we have funded our operations primarily through equity and debt financings, and we expect to continue to rely on these sources of capital in the near term, with longer-term funding expected to come from revenue and profits from the anticipated ESG operations of our Daedalus Ecosciences subsidiary. Based on the availability of the equity financing line and additional financing available under our revolving credit facility, the Company believes it will have enough funds to ensure continuing operations as a stand-alone entity for a period of at least one year from the issuance of these consolidated financial statements. However, if we raise additional funds by issuing equity or convertible debt securities, our existing stockholders’ ownership will be diluted, and obtaining commercial loans would increase our liabilities and future cash commitments. If we cannot raise the money that we need in order to continue to develop our business, we will be forced to delay, scale back or eliminate some or all of our proposed operations.
| 8 |
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Graphium Biosciences, Inc., Daedalus Ecosciences, Inc., and Vitality Healthtech, Inc. (dissolved in May 2021), and have been prepared in accordance with accounting principles generally accepted in the United States of America. Intercompany balances and transactions have been eliminated in consolidation. The Company’s fiscal year end is December 31.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. The more significant estimates and assumptions by management include, among others, assumptions used in valuing assets acquired in business acquisitions, reserves for accounts receivable, assumptions used in valuing equity instruments issued for services, the valuation allowance for deferred tax assets, and accruals for potential liabilities. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less at the date of acquisition to be cash equivalents. From time to time, the Company’s cash account balances exceed the balances covered by the Federal Deposit Insurance System. The Company has never suffered a loss due to such excess balances.
Income Taxes
The Company follows the asset and liability method of accounting for income taxes. Under this method, deferred income tax assets and liabilities are recognized for the estimated tax consequences attributable to differences between the financial statement carrying values and their respective income tax basis (temporary differences). The effect on deferred income tax assets and liabilities of a change in tax rates is recognized as income (loss) in the period that includes the enactment date.
Leases
The Company determines whether a contract is, or contains, a lease at inception. Right-of-use assets represent the Company’s right to use an underlying asset during the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at lease commencement based upon the estimated present value of unpaid lease payments over the lease term. The Company uses its incremental borrowing rate based on the information available at lease commencement in determining the present value of unpaid lease payments. The Company had no lease commitments for longer than one year as of March 31, 2022. The laboratory space lease in Rocklin, California was renewed in March 2022 and ends on March 31, 2023.
| 9 |
The Company periodically issues stock options and restricted stock awards to employees and non-employees in non-capital raising transactions for services. The Company accounts for such grants issued and vesting based on ASC 718, Compensation-Stock Compensation whereby the value of the award is measured on the date of grant and recognized for employees as compensation expense on the straight-line basis over the vesting period. Recognition of compensation expense for non-employees is in the same period and manner as if the Company had paid cash for the services. The Company recognizes the fair value of stock-based compensation within its Statements of Operations with classification depending on the nature of the services rendered.
The fair value of the Company’s stock options is estimated using the Black-Scholes-Merton Option Pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or restricted stock, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes-Merton Option Pricing model and based on actual experience. The assumptions used in the Black-Scholes-Merton Option Pricing model could materially affect compensation expense recorded in future periods.
Basic loss per share is computed by dividing the net loss applicable to common stockholders by the weighted average number of outstanding common shares during the period. Shares of restricted stock are included in the basic weighted average number of common shares outstanding from the time they vest. Diluted loss per share is computed by dividing net loss applicable to common stockholders by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued. Shares of restricted stock are included in the diluted weighted average number of common shares outstanding from the date they are granted unless they are antidilutive. Diluted loss per share excludes all potential common shares if their effect is anti-dilutive. The following potentially dilutive shares were excluded from the shares used to calculate diluted earnings per share as their inclusion would be anti-dilutive:
| March 31, 2022 | December 31, 2021 | |||||||
| Options | ||||||||
| Warrants | ||||||||
| Total | ||||||||
Patents and Patent Application Costs
Although the Company believes that its patents and underlying technology have continuing value, the amount of future benefits to be derived from the patents is uncertain. Accordingly, patent costs are expensed as incurred.
Research and Development
Research and development costs consist primarily of fees paid to consultants and outside service providers, patent fees and costs, and other expenses relating to the acquisition, design, development and testing of the Company’s treatments and product candidates. Research and development costs are expensed as incurred.
Fair Value of Financial Instruments
FASB ASC 825, “Financial Instruments” requires that the Company disclose estimated fair values of financial instruments. Financial instruments held by the Company include, among others, accounts payable. The carrying amounts reported in the balance sheets for assets and liabilities qualifying as financial instruments are a reasonable estimate of fair value.
| 10 |
Segments
As
of October 1, 2021, we began operating under
In accordance with the “Segment Reporting” Topic of the ASC, the Company’s chief operating decision maker has been identified as the Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Existing guidance, which is based on a management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about products and services, major customers, and the countries in which the entity holds material assets and reports revenue. All material operating units qualify for aggregation under “Segment Reporting” due to their similar customer base and similarities in: economic characteristics; nature of products and services; and procurement, manufacturing, and distribution processes..
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires entities to use a forward-looking approach based on current expected credit losses to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. ASU 2016-13 is effective for the Company beginning April 1, 2023, and early adoption is permitted. The Company does not believe the potential impact of the new guidance and related codification improvements will be material to its financial position, results of operations and cash flows.
Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future financial statements.
| Shares | Weighted Average Exercise Price | |||||||
| Balance outstanding at December 31, 2021 | $ | |||||||
| Granted | ||||||||
| Exercised | ||||||||
| Expired | ( | ) | ||||||
| Cancelled | ||||||||
| Balance outstanding at March 31, 2022 | $ | |||||||
| Balance exercisable at March 31, 2022 | $ | |||||||
| 11 |
Number of Options |
Weighted Average Exercise Price |
Weighted Average Grant- date Stock Price |
||||||||||
| Options Outstanding, March 31, 2022 | $ | $ | ||||||||||
| $ | $ | |||||||||||
| $ | $ | |||||||||||
| $ | $ | |||||||||||
| $ | $ | |||||||||||
| $ | - | $ | - | |||||||||
| $ | - | $ | - | |||||||||
| $ | - | $ | - | |||||||||
| $ | - | $ | - | |||||||||
| Options Exercisable, March 31, 2022 | $ | $ | ||||||||||
| $ | $ | |||||||||||
| $ | $ | |||||||||||
| $ | $ | |||||||||||
| $ | $ | |||||||||||
| $ | - | $ | ||||||||||
| $ | - | $ | ||||||||||
| $ | - | $ | ||||||||||
| $ | - | $ | ||||||||||
There is remaining unamortized cost of the outstanding stock-based awards at March 31, 2022. At March 31, 2022, the outstanding stock options had intrinsic value.
3. WARRANTS
A summary of warrants to purchase common stock during the three months ended March 31, 2022 is as follows:
| Shares | Weighted Average Exercise Price | |||||||
| Balance outstanding at December 31, 2021 | $ | |||||||
| Granted | ||||||||
| Exercised | ||||||||
| Expired/Cancelled | ||||||||
| Balance outstanding and exercisable at March 31, 2022 | $ | |||||||
At
March 31, 2022, the
4. LINE OF CREDIT
In
November 2021, the Company secured a revolving line of credit with a bank with a limit of $
5. GAIN ON EXTINGUISHMENT OF ADVANCE
In
July 2018, the Company received a payment from a third party in the amount of $
6. COMMITMENTS AND CONTINGENCIES
The Company received a letter in February 2021 from counsel for the Company’s director’s and officer’s insurance carrier (the “insurer”) demanding that the Company reimburse the insurer for sums advanced by the insurer to a former director of the Company as defense costs in connection with a claim purportedly arising under a previous directors and officers insurance policy. The Company believes it has no liability for this claim on the basis of, among other things, Nevada law, the Company’s governing documents and the language of the policy. Accordingly, as of March 31, 2022, no contingent liability has been recorded in the Company’s consolidated statements of financial condition for this matter.
| 12 |
7. SEGMENT INFORMATION
ASC 280, “Segment Reporting” establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organizational structure as well as information about services, categories, business segments and major customers in financial statements. The Company has two reportable segments that are based on the following business units: Cannabinoid Prodrug Operations and ESG Operations. In accordance with the “Segment Reporting” Topic of the ASC, the Company’s chief operating decision maker has been identified as the Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Existing guidance, which is based on a management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about products and services, major customers and the countries in which the entity holds material assets and reports revenue. All material operating units qualify for aggregation under “Segment Reporting” due to their similar customer base and similarities in: economic characteristics; nature of products and services; and procurement, manufacturing and distribution processes. The Company operates two reportable business segments:
| ● | Cannabinoid Prodrug Operations – research and development primarily related to the Company’s cannabinoid pharmaceuticals |
| ● | Environmental, Social and Governance (ESG) Operations – development of innovations addressing the health and wellness of the planet, with a particular focus on deploying technological innovations and eco-friendly solutions to remedy difficult environmental situations in economically challenged communities |
The Company had no inter-segment sales for the periods presented.
Summarized financial information concerning the Company’s reportable segments is shown as below:
By Categories
| For the three months ended March 31, 2022 | ||||||||||||||||
| Cannabinoid Prodrug Operations | ESG Operations | Corporate | Total | |||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Total assets | ||||||||||||||||
| Capital expenditures for long-lived assets | $ | $ | $ | $ | ||||||||||||
| For the three months ended March 31, 2021 | ||||||||||||||||
| Cannabinoid Prodrug Operations | ESG Operations | Corporate | Total | |||||||||||||
| Net loss | $ | ( | ) | $ | - | $ | ( | ) | $ | ( | ) | |||||
| Total assets | ||||||||||||||||
| Capital expenditures for long-lived assets | $ | $ | $ | $ | ||||||||||||
8. SUBSEQUENT EVENTS
In
April 2022, the Company drew a total of $
| 13 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
As used in this discussion and analysis and elsewhere in this Quarterly Report, the “Company”, “we”, “us” or “our” refer to Malachite Innovations, Inc., a Nevada corporation.
Cautionary Statement
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Unaudited Condensed Financial Statements and the related notes thereto contained in Part I, Item 1 of this Quarterly Report. The information contained in this Quarterly Report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this Quarterly Report and in our other reports filed with the Securities and Exchange Commission (the “SEC”), including our Transition Report on Form 10-KT for the nine months ended December 31, 2021 filed on March 31, 2022, and the related audited financial statements and notes included therein.
Certain statements made in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Forward-looking statements are projections in respect of future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “intend,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, which may cause our or our industry’s actual results, levels of activity or performance to be materially different from any future results, levels of activity or performance expressed or implied by these forward-looking statements. These risks and uncertainties include: general economic and financial market conditions; our ability to obtain additional financing as necessary; our ability to continue operating as a going concern; any adverse occurrence with respect to our business or; results of our research and development activities that are less positive than we expect; our ability to bring our intended products to market; market demand for our intended products; shifts in industry capacity; product development or other initiatives by our competitors; fluctuations in the availability and costs of raw materials required in our drug development process; other factors beyond our control; and the other risks described under the heading “Risk Factors” in our Transition Report on Form 10-KT filed with the SEC on March 31, 2022.
Although we believe that the expectations and assumptions reflected in the forward-looking statements we make are reasonable, we cannot guarantee future results, levels of activity or performance. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those expressed by any forward-looking statements. As a result, readers should not place undue reliance on any of the forward-looking statements we make in this report. Forward-looking statements speak only as of the date on which they are made. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason.
Company Overview
Unless otherwise provided in this Quarterly Report, references to the “Company,” “we,” “us”, and “our” refer to Malachite Innovations, Inc., a Nevada corporation formed on June 29, 2007 as Legend Mining Inc., and its consolidated subsidiaries. On October 10, 2011, we completed a merger with our wholly-owned subsidiary, Stevia First Corp., whereby we changed our name from “Legend Mining Inc.” to “Stevia First Corp.” On July 15, 2016, our Board of Directors and shareholders approved a name change to “Vitality Biopharma, Inc.” On October 1, 2021, we completed a merger with our wholly-owned subsidiary, Malachite Innovations, Inc., whereby we changed our name from “Vitality Biopharma, Inc.” to “Malachite Innovations, Inc.”
Malachite Innovations is a company focused on improving the health and wellness of people and the planet. We seek to accomplish this objective through the operation of two wholly-owned subsidiaries: (i) Graphium Biosciences, Inc. which is focused on developing new innovations targeting the health and wellness of people, with a particular focus on advancing our broad portfolio of over 100 glycosylated cannabinoid prodrugs and (ii) Daedalus Ecosciences, Inc. which is focused on evaluating new innovations targeting the health and wellness of the planet through an Environmental, Social and Governance (“ESG”) business strategy, with a particular focus on deploying technological innovations and eco-friendly solutions to remedy difficult environmental situations in economically challenged communities.
| 14 |
Our corporate headquarters is located in Cleveland, Ohio. As of March 31, 2022, we employed three full-time employees, including one research professional working in our office and laboratory space in Rocklin, California. We also have, in the past, engaged the services of scientific and regulatory consultants to assist in our research and development activities, which is an approach that provides us with flexible and experienced resources to advance our corporate objectives while maintaining a relatively lower overhead cost structure.
Graphium Biosciences, Inc.
Cannaboside Prodrugs
Our cannabosides are cannabinoid-glycoside prodrugs, which were discovered through application of the Company’s proprietary enzymatic bioprocessing technologies that are converted within the body after administration from an inactive molecule into a pharmacologically active drug. Currently, the Company has produced more than 100 novel cannabosides, including glycosylated tetrahydrocannabinol (THC), cannabidiol (CBD), cannabidivarin (CBDV) and cannabinol (CBN), that are covered by worldwide patents and patent applications for composition of matter, method of production and method of use.
A prodrug is a compound that, after administration, is metabolized into a pharmacologically active drug. Prodrugs are often designed to improve drug properties and reduce known or expected toxicities and adverse side effects. By using our proprietary enzymatic bioprocessing technologies, our clinical research team has developed a novel family of prodrugs by combining cannabinoid and glucose molecules. The resulting compounds, known as cannabosides, have unique commercial applications and patentable compositions of matter, which are separate and distinct from ordinary cannabinoids. The advantages of cannabosides may include: (i) administration in a convenient oral formulation, (ii) targeted delivery with release in the colon or large intestine, (iii) improved stability with limited degradation or drug metabolism, and (iv) delayed release enabling longer-lasting effects and fewer administrations by patients.
Our proprietary glycosylation process, which results in adding one or more glucose molecules to compounds, may enable our new cannabosides to act as prodrugs that achieve targeted delivery of the bioactive compounds of cannabinoids to the gastrointestinal tract. Glycosylated compounds are generally more stable and water soluble, so upon ingestion, we believe they will remain intact and transit through the esophagus, stomach and upper intestine with limited absorption or degradation from stomach acids. However, once the glycosylated compounds reach the large intestine, we expect them to encounter glycoside hydrolase enzymes secreted by the human intestinal microbiota that will cleave the polar glucose residues and release the active cannabinoid compound primarily in the large intestine or colon.
We have focused our research and development activities on the glycosylation of cannabinoids given their well-known positive effects on the human endocannabinoid system. Our research and development activities originally focused on the glycosylation of CBD and then later expanded into the glycosylation of THC. The use of the cannabinoid THC has been shown to provide substantial anti-inflammatory benefits on the human body, among other benefits, but is limited as a pharmaceutical option given its psychoactive and intoxicating properties. However, by glycosylating THC, we have learned through initial animal studies that the binding of glucose and THC molecules restricts the release of THC into the body’s digestive system until the prodrug reaches the large intestine, at which point the glycoside hydrolase enzymes cleave the glucose from the prodrug and the THC is released in a targeted and restricted manner. Further, we have learned through our initial animal studies that this targeted release of THC, which could be provided in very low doses to achieve physiologically beneficial results, serves as an anti-inflammatory agent in the lower gastrointestinal tract and minimizes the amount of THC absorbed into the blood stream, therefore avoiding the psychoactive and intoxicating properties that hinder the broader pharmaceutical use of THC.
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We are developing our THC-glycoside prodrugs for the treatment of gastrointestinal diseases, including inflammatory bowel disease (IBD) and irritable bowel syndrome (IBS) because of the targeted release described previously. IBD is a frequently chronic inflammatory condition where parts of the digestive system become inflamed from an overactive immune response. The disease can lead to irreversible damage to the gastrointestinal tract and may require surgery to remove affected areas of the intestine. Two major forms of the disease are Crohn’s disease, which can affect any part of the digestive system, and ulcerative colitis, which often affects the colon or large intestine. The disease is often unpredictable with periods of painful and debilitating symptoms followed by periods of remission with limited symptoms. IBS has similar symptoms to IBD, including abdominal pain, but the underlying disease process is quite different. IBS is a functional gastrointestinal disorder that commonly affects the large intestine and is characterized by abdominal cramping, diarrhea, constipation, and pain. Currently, patients suffering from IBD are frequently prescribed anti-inflammatory drugs such as steroids, biologics and immunosuppressants, and patients suffering from IBS are prescribed antibiotics, antidepressants and gastrointestinal motility compounds, all of which often result in unwanted side effects.
Our most promising THC-glycoside (VBX-100) is being developed as an oral prodrug for the treatment of IBD and IBS. VBX-100 was selected from our THC-glycoside portfolio for compatibility with commercial production techniques and the optimal prodrug delivery profile that maximizes intestinal anti-inflammatory properties while minimizing psychoactive or intoxicating effects. Initial pre-clinical studies on the efficacy of VBX-100 in animal models have shown favorable outcomes, including reduced inflammation of the gastrointestinal tract and no measurable systemic THC found in tissue examined using highly-sensitive testing equipment.
In light of our limited financial resources and the significant capital and human resources needed to advance our drug development program to a revenue-generating stage, we have determined that the value of our cannaboside prodrug assets would likely be maximized through a strategic transaction such as (i) a spin-off of our Graphium Biosciences subsidiary into a new publicly-traded company infused with sufficient funding to advance its drug development program, or (ii) a sale of Graphium Biosciences or its drug development assets to a biotech partner with the resources necessary to advance our drug development program. The Company is actively exploring both strategic alternatives for its drug development assets to maximize shareholder value.
Orphan Drug Designation
In January 2018, we filed a request with the FDA’s Office of Orphan Products Development (OOPD) for an Orphan Drug Designation of our VBX-100 prodrug for the treatment of pediatric ulcerative colitis. In March 2018, the OOPD denied our request based, in part, on the FDA’s decision to no longer grant Orphan Drug Designation status to drugs for pediatric subpopulations of common diseases (i.e., diseases or conditions with an overall prevalence of over 200,000), unless the use of the drug in the pediatric subpopulation meets the regulatory criteria for an orphan subset, or the disease in the pediatric subpopulation is considered a different disease from the disease in the adult population.
In December 2019, we received a letter from the OOPD informing us that the FDA determined that the Company may be eligible for pediatric-subpopulation designation because we submitted our original request for an Orphan Drug Designation before the guidance Clarification of Orphan Designation of Drugs and Biologics for Pediatric Subpopulations of Common Diseases was finalized in July 2018.
Accordingly, in May 2020, we filed a response letter with the OOPD addressing the other deficiencies noted in the Company’s original submission in January 2018, which included, among other things (1) support for the prevalence of pediatric ulcerative colitis; (2) our scientific rationale for the specific animal models used in our pre-clinical animal studies; and (3) more comprehensive supporting documentation for the use of VBX-100 in pediatric patients with ulcerative colitis. In August 2020, we received a letter from the OOPD informing us that it was unable to grant our request for an Orphan Drug Designation status because our VBX-100 prodrug was administered before and after colitis was induced in our in vivo mouse studies, which resulted in the need for more scientific data to support the efficacy of our VBX-100 prodrug in a treatment-only setting. As a result, we were advised to perform a second in vivo mouse study in which our VBX-100 prodrug would be administered only after colitis was induced in order to provide a clear indication that the active drug was released only after ulcerative colitis was present. In May 2021, we completed the treatment-only in vivo mouse study and filed a supplemental response letter with the OOPD providing the requested in vivo treatment-only mouse study results in support of our position that VBX-100 may be effective as a treatment for pediatric ulcerative colitis.
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On August 9, 2021, we received a letter from the OOPD stating that we have been granted Orphan Drug Designation for our glycosylated cannabinoid VBX-100 for the treatment of pediatric ulcerative colitis. The Company is currently evaluating several regulatory pathways for the advancement of its VBX-100 prodrug through pre-clinical and clinical studies, including leveraging the benefits of the Orphan Drug Designation granted by the OOPD.
Daedalus Ecosciences
Overview
Daedalus Ecosciences is focused on creating shareholder value by addressing the health and wellness of the planet through an ESG-focused business strategy, with a particular focus on deploying technological innovations and eco-friendly solutions to remedy difficult environmental situations in economically challenged communities.
Our ESG business strategy is based on the foundational principle that sustainability and value creation are interconnected. Rather than evaluating the merits of an opportunity based solely on the short-term direct profitability of a proposed business initiative, sustainable business practice takes a holistic approach and considers the environmental, social and financial impacts of that initiative on a wide range of stakeholders, including shareholders, the environment and local communities. We believe that a strong ESG proposition, properly capitalized, will help us expand into and create value in new environmentally-focused markets. We also believe that a robust ESG business model can enhance our investment returns by allocating capital to more promising and more sustainable opportunities.
A stronger external-value proposition may enable the Company to achieve greater strategic freedom. Given that certain of the ESG business initiatives under consideration may require governmental approvals or support, we believe that a focus on ESG core principles can ease regulatory pressures and help reduce the Company’s risk of adverse government action. We also believe that a strong ESG proposition can help us attract and retain quality employees, enhance employee motivation by instilling a sense of purpose, and increase productivity overall.
The Company will require additional capital to successfully pursue its ESG business strategy. While we believe there are an increasing number of sources of financing available for ESG initiatives, there can be no assurance that the Company will successfully raise the needed capital. We believe that a commitment to ESG business principles will allow us to generate strong financial returns for shareholders while also creating long-term environmental and social benefits.
Initially, we intend to focus our ESG business strategy on acquiring and developing businesses we believe have potential to conserve, protect and re-purpose the natural environment in those areas in the U.S. that have been negatively impacted by mining. Our business development strategy will initially focus on the following areas:
| ● | Land reclamation | |
| ● | Water treatment and remediation | |
| ● | Carbon footprint reduction | |
| ● | Water usage and conservation | |
| ● | Renewable energy usage | |
| ● | Recycling and disposal practices | |
| ● | Green products, technologies, and infrastructure | |
| ● | Relationship with the U.S. Environmental Protection Agency (EPA) and other environmental regulatory bodies |
We may also build, invest in or acquire companies that use blockchain, or distributed ledger technology, to account for and verify voluntary-market carbon credits generated by increased usage of renewable resources or the decreased usage of non-renewable resources to enable a more efficient and transparent global market for carbon credits. This may include companies (i) developing innovative products or solutions to reduce or mitigate carbon emissions; (ii) developing technologies that drive blockchain registry of credits or tokens; (iii) issuing tokens based on registry of carbon credits; and (iv) developing exchange facilities for carbon credits.
We believe that the Company is well-positioned from a managerial and operational perspective to pursue these business initiatives given the experience of management in connection with other ventures successfully developing and executing various reclamation and remediation programs at coal mines in Appalachia and creating profitable next-generation eco-friendly initiatives and stable jobs in local communities previously reliant primarily on the highly cyclical coal mining industry.
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In March 2022, the Company entered into a non-binding letter of intent with the owners of Range Environmental Resources, Inc. (“Range”), a West Virginia-based environmental services company operating throughout Appalachia, to purchase 80% of their shares in Range, a company primarily focused on the reclamation of former coal mines, the remediation of non-compliant streams and waterways, and the reimagination of challenging environmental situations into next generation industries and job-creating commercial activities. In addition to this proposed transaction, Company management is actively pursuing a number of other ESG-focused investment opportunities to advance this mission with a particular focus on some of the most challenging environmental situations in disadvantaged communities.
Results of Operations
Three Months Ended March 31, 2022 and March 31, 2021
Our net loss during the three months ended March 31, 2022 was $447,974 compared to a net loss of $360,631 for the three months ended March 31, 2021. We had no revenue from continuing operations during either the 2022 or 2021 period.
During the three months ended March 31, 2022, we incurred general and administrative expenses in the aggregate amount of $317,941, compared to $586,670 incurred during the three months ended March 31, 2021 (a decrease of $268,729). General and administrative expenses generally include corporate overhead, salaries and other compensation costs, financial and administrative contracted services, marketing, consulting costs and travel expenses. The majority of the decrease in general and administrative costs in the period relates to stock-based compensation which decreased to $0 in the period ending March 31, 2022, as compared to $112,310 in the period ending March 31, 2021, expense related to directors and officers insurance, which decreased to $120,390 during the period ending March 31, 2022, from $219,125 during the 2021 period (a decrease of $98,735), and legal fees, which decreased to $3,746 in the period ending March 31, 2022, as compared to $81,476 in the period ending March 31, 2021 (a decrease of $77,730).
In addition, during the three months ended March 31, 2022, we incurred research and development costs of $125,730, compared to $70,637 during the three months ended March 31, 2021 (an increase of $55,093). This increase resulted from an increase in wages related to research and development, which increased to $84,311 in the period ending March 31, 2022, as compared to $48,919 in the period ending March 31, 2021 (an increase of $35,392), and legal fees, which increased to $31,617 during the three months ended March 31, 2022, from $0 during the three months ended March 31, 2021.
During the three months ended March 31, 2022, we recorded total net other expense in the amount of $4,303, compared to total net other income recorded during the three months ended March 31, 2021, in the amount of $296,676. This difference was primarily attributable to the gain on extinguishment of liabilities of $296,653 recorded during the three months ended March 31, 2021.
The increase in net loss attributable to common stockholders during the three months ended March 31, 2022 compared to the three months ended March 31, 2021 in an amount equal to $87,343 is primarily due to the recognition of gains on the extinguishment of liabilities in the amount of $296,676 during the three months ended March 31, 2021, compared to no gains recognized during the three months ended March 31, 2022, offset by (i) a $268,729 decrease in general and administrative expenses during the three months ended March 31, 2022 compared to the three months ending March 31, 2021, and (ii) a $55,093 increase in research and development expenses during three months ended March 31, 2022, compared to the three months ended March 31, 2021.
Liquidity and Capital Resources
We have incurred losses since inception resulting in an accumulated deficit of $49,588,652 as of March 31, 2022, and further losses are anticipated in the development of our business.
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As of March 31, 2022, we had total current assets of $45,046. Our total current assets as of March 31, 2022 were comprised of cash in the amount of $44,162 and prepaid expenses in the amount of $884. Our total current liabilities as of March 31, 2022 were $883,553, represented by $750,000 due under a revolving credit line and accounts payable of $133,553 including a $33,440 lease payment attributable to our now-dissolved wholly-owned subsidiary, The Control Center, Inc., for which Malachite Innovations, Inc. is not responsible. As a result, on March 31, 2022, we had negative working capital of $838,507. We had no long-term liabilities as of March 31, 2022.
Sources of Capital
We do not expect to generate any revenue in the near term. Based on our current corporate strategy, our total expenditures for the 12 months following March 31, 2022 are expected to be approximately $1,800,000, which is comprised of general operating and research and development expenses. Based on our cash balance of $44,162, the availability of $4,830,050 under our $5,000,000 equity financing line and $250,000 available under our revolving credit line as of March 31, 2022, and our estimated total expenditures of approximately $1,800,000 for the 12-month period ending March 31, 2023, we expect to have sufficient funds to operate our business over the next 12 months. We also expect to obtain additional financing and other sources of capital to fund our planned future operations.
Our estimated total expenditures for the 12-month period ending March 31, 2023 could increase if we encounter unanticipated expenses in connection with operating our business as presently planned. In addition, our estimates of the amount of cash necessary to fund our business may prove to be too low, and we could spend our available financial resources much faster than we currently expect. If we cannot raise the capital necessary to continue to develop our business, we will be forced to delay, scale back or eliminate some or all of our proposed operations. If any of these were to occur, there is a substantial risk that our business would fail.
Since inception, we have primarily funded our operations through equity and debt financings. We expect to continue to fund our operations primarily through equity and debt financings in the foreseeable future. However, sources of additional funds may not be available when needed, on acceptable terms, or at all. If we issue equity or convertible debt securities to raise additional funds or to fund, in whole or in part, acquisitions in furtherance of our business strategy, our existing stockholders may experience substantial dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing stockholders. If we incur additional debt, it may increase our leverage relative to our earnings or to our equity capitalization, requiring us to pay additional interest expenses. Obtaining commercial loans, assuming those loans would be available, would increase our liabilities and future cash commitments. If we pursue capital through alternative sources, such as collaborations or other similar arrangements, we may be forced to relinquish rights to our proprietary glycosylated cannabinoid technology or other intellectual property and could result in our receipt of only a portion of any revenue that may be generated from a partnered product or business. Moreover, regardless of the manner in which we seek to raise capital, we may incur substantial costs in those pursuits, including investment banking fees, legal fees, accounting fees, printing and distribution expenses and other related costs.
Net Cash Used in Operating Activities
We have not generated positive cash flows from operating activities. For the three months ended March 31, 2022, net cash used in operating activities was $394,181 compared to net cash used in operating activities of $557,334 for the three months ended March 31, 2021. This decrease was primarily attributable to a gain on extinguishment of liabilities of $296,653 recognized during the three months ended March 31, 2021, and an increase in accounts payable, partially offset by a decrease in the expenses recorded for stock-based compensation related to stock options. Net cash used in operating activities during the three months ended March 31, 2022 consisted primarily of a net loss of $447,974, offset by an increase in accounts payable of $50,993. Net cash used in operating activities during the three months ended March 31, 2021 consisted primarily of a net loss of $360,631, and a gain on extinguishment of liabilities of $296,653, partially offset by $112,310 related to stock-based compensation.
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Net Cash Used in Investing Activities
During the three months ended March 31, 2022 and March 31, 2021, no net cash was used in or provided by investing activities.
Net Cash Provided By Financing Activities
During the three months ended March 31, 2022, net cash provided from financing activities was $400,000, from a revolving credit line. During the three months ended March 31, 2021, no net cash was used in or provided by financing activities.
Off-Balance Sheet Arrangements
We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that would be material to stockholders.
Critical Accounting Policies
Our financial statements and accompanying notes included in this report have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) applied on a consistent basis. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
We regularly evaluate the accounting policies and estimates that we use to prepare our financial statements. In general, management’s estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from the estimates made by management.
We believe the following critical accounting policies require us to make significant judgments and estimates in the preparation of our consolidated financial statements included in this report:
Use of Estimates and Assumptions
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. The more significant estimates and assumption by management include, among others, assumptions used in valuing assets acquired in business acquisitions, reserves for accounts receivable, assumptions used in valuing equity instruments issued for services, the valuation allowance for deferred tax assets, accruals for potential liabilities, and assumptions used in the determination of the Company’s liquidity. Actual results could differ from those estimates.
Stock-Based Compensation
The Company periodically issues stock options and restricted stock awards to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for such grants issued and vesting based on ASC 718, Compensation-Stock Compensation whereby the value of the award is measured on the date of grant and recognized for employees as compensation expense on the straight-line basis over the vesting period. Recognition of compensation expense for non-employees is in the same period and manner as if the Company had paid cash for the services.
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Revenue
The Company’s revenue recognition policies will follow the guidance of Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers. ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms of contracts, which includes (1) identifying the contracts or agreements with a customer, (2) identifying our performance obligations in the contract or agreement, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations, and (5) recognizing revenue as each performance obligation is satisfied.
Recent Accounting Pronouncements
Please refer to Footnote 1 of the accompanying financial statements for management’s discussion of recent accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We have established disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that information relating to the Company is accumulated and communicated to management, including our principal officers, as appropriate to allow timely decisions regarding required disclosure. Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2022, and have concluded that our disclosure controls and procedures were effective as of March 31, 2022.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended March 31, 2022, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. The impact and outcome of litigation, if any, is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are not currently a party to and our properties are not currently the subject of any material pending legal proceedings the adverse outcome of which, individually or in the aggregate, would be expected to have a material adverse effect on our financial position or results of operations.
Item 1A. Risk Factors
Please refer to the risks described under the heading “Risk Factors” in our Transition Report on Form 10-KT filed with the SEC on March 31, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
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Item 6. Exhibits
† Furnished herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| MALACHITE INNOVATIONS, INC. | ||
| By: | /s/ Michael Cavanaugh | |
| Michael Cavanaugh | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: May 10, 2022 | ||
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EXHIBIT INDEX
† Furnished herewith.
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