RNGE 10-Q
Range Impact, Inc. (RNGE)
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 November 13, 2023, there were shares of the registrant’s common stock outstanding.
MALACHITE INNOVATIONS, INC.
Quarterly Report on Form 10-Q
For the Quarterly Period Ended
September 30, 2023
INDEX
| 2 |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
MALACHITE INNOVATIONS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022
| 3 |
MALACHITE INNOVATIONS, INC.
CONSOLIDATED BALANCE SHEETS
| September 30, 2023 | December 31, 2022 | |||||||
| (Unaudited) | (Audited) | |||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable | ||||||||
| Unbilled receivables | ||||||||
| Prepaid expenses | ||||||||
| Total current assets | ||||||||
| Long-term Assets | ||||||||
| Equipment, net of accumulated depreciation | ||||||||
| Land | ||||||||
| Buildings, net of accumulated depreciation | ||||||||
| Goodwill | ||||||||
| Deposits | ||||||||
| Total long-term assets | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Current portion of long-term debt | ||||||||
| Line of credit | ||||||||
| Total current liabilities | ||||||||
| Long-term Liabilities | ||||||||
| Long-term debt, net of current portion | ||||||||
| Total long-term debt | ||||||||
| Total liabilities | ||||||||
| Stockholders’ Equity | ||||||||
| Common stock, par value $ per share; shares authorized; and shares issued and outstanding, respectively | ||||||||
| Additional paid-in-capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
See accompanying notes to the consolidated financial statements.
| 4 |
MALACHITE INNOVATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of services | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Research and development | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Income (loss) from operations | ( | ) | ( | ) | ||||||||||||
| Other income: | ||||||||||||||||
| Gain on bargain purchase | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest income | ||||||||||||||||
| Gain on loan forgiveness | ||||||||||||||||
| Total other income, net | ||||||||||||||||
| Net income (loss) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Basic and diluted income (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
(Unaudited)
| Three months ended September 30, 2023 | ||||||||||||||||||||
| Common Stock | Additional | |||||||||||||||||||
| Number of Shares | Amount | Paid-in Capital | Accumulated Deficit | Total | ||||||||||||||||
| Balance as of June 30, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Shares issued for cash | ||||||||||||||||||||
| Fair value of vested stock options | - | |||||||||||||||||||
| Net income | - | |||||||||||||||||||
| Balance as of September 30, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Three months ended September 30, 2022 | ||||||||||||||||||||
| Common Stock | Additional | |||||||||||||||||||
| Number of Shares | Amount | Paid-in Capital | Accumulated Deficit | Total | ||||||||||||||||
| Balance as of June 30, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Shares issued for cash | ||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance as of September 30, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Nine months ended September 30, 2023 | ||||||||||||||||||||
| Common Stock | Additional | |||||||||||||||||||
| Number of Shares | Amount | Paid-in Capital | Accumulated Deficit | Total | ||||||||||||||||
| Balance as of December 31, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Shares issued for cash | ||||||||||||||||||||
| Fair value of vested stock options | - | |||||||||||||||||||
| Net income | - | |||||||||||||||||||
| Balance as of September 30, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Nine months ended September 30, 2022 | ||||||||||||||||||||
| Common Stock | Additional | |||||||||||||||||||
| Number of Shares | Amount | Paid-in Capital | Accumulated Deficit | Total | ||||||||||||||||
| Balance as of December 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Shares issued for cash | ||||||||||||||||||||
| Shares issued in exchange for Range | ||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance as of September 30, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
See accompanying notes to the consolidated financial statements.
| 6 |
MALACHITE INNOVATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| Gain on bargain purchase | ( | ) | ||||||
| Fair value of vested stock options | ||||||||
| Depreciation | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Unbilled receivables | ( | ) | ( | ) | ||||
| Forgiveness of PPP loan | ( | ) | ||||||
| Prepaid expense and other current assets | ( | ) | ||||||
| Accounts payable and accrued liabilities | ( | ) | ||||||
| Deposits | ( | ) | ( | ) | ||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||
| Equipment purchases | ( | ) | ( | ) | ||||
| Cash paid in consideration for Collins Building acquisition | ( | ) | ||||||
| Long-term debt issued for Collins Building acquisition | ( | ) | ||||||
| Cash paid for acquisition of land | ( | ) | ||||||
| Cash acquired in acquisition of Range Environmental Resources | ||||||||
| Cash paid for acquisition of Range Environmental Resources | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Issuance of shares for cash | ||||||||
| Proceeds from notes issued in acquisition of Collins Building | ||||||||
| Proceeds from long-term debt | ||||||||
| Repayment of long-term debt | ( | ) | ( | ) | ||||
| Proceeds from (payoff of) line of credit | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Net increase in cash and cash equivalents | ||||||||
| 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 | $ | $ | ||||||
| Forgiveness of PPP loan | ||||||||
| Stock issued for acquisition | ||||||||
| Income taxes | ||||||||
See accompanying notes to the consolidated financial statements.
| 7 |
MALACHITE INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022
(Unaudited)
1. BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Malachite Innovations, Inc. (the “Company”, “we”, “us”, “our” or “Malachite”), was incorporated in the State of Nevada on June 29, 2007. Malachite is a public company dedicated to improving the health and wellness of people and the planet through a novel and innovative approach to impact investing. Malachite owns and operates several complementary operating businesses focused on developing long-term solutions to environmental, social, and health challenges, with a particular focus on economically disadvantaged communities. Malachite takes an opportunistic approach to impact investing by leveraging its competitive advantages and looking at solving old problems in new ways. Malachite seeks to thoughtfully allocate its capital into strategic opportunities that are expected to make a positive impact on the people-planet ecosystem and generate strong investment returns for our shareholders.
Originally founded in 2007 as Legend Mining Inc., the Company began operations as a mineral extraction exploration business focused on Canadian gold reserves, but failed to secure any mineral reserves to execute its strategy. In 2011, the Company changed its name to Stevia First Corp., relocated its operations to California, and pursued a new strategy focused on developing stevia-based sweetener additives for the food and beverage industry by using a novel glycosylation process it developed to chemically attach glucose molecules to stevia molecules. In 2015, due a lack of commercial viability of its glycosylated stevia product, the Company changed its name to Vitality Biopharma, Inc. and used the same glycosylation process to develop non-psychoactive glycosylated cannabinoids for the treatment of chronic inflammatory conditions of the gastrointestinal tract.
In October 2021, the Company changed its name to Malachite Innovations, Inc. and created two wholly-owned operating subsidiaries: (i) Graphium Biosciences, Inc., a Nevada corporation (“Graphium”), into which the Company contributed all of its drug development assets; and (ii) Daedalus Ecosciences, Inc., a Nevada corporation (“Daedalus”) which was formed to serve as a holding company for the Company’s future impact investing operating businesses.
In May 2022, Daedalus acquired Range Environmental Resources, Inc., a West Virginia corporation (“Range Environmental”), and Range Natural Resources, Inc., a West Virginia corporation (“Range Natural” and together with Range Environmental, the “Range Reclamation Entities”). The Range Reclamation Entities provide land reclamation, water restoration and environmental consulting services to mining and non-mining customers throughout the Appalachian region with the goal of returning land to pre-mining conditions or repurposing the land for natural, commercial, agricultural or recreational use. The Range Reclamation Entities’ water restoration services seek to improve rivers, streams and discharges through novel and innovative treatment applications to help customers meet their various regulatory standards and requirements. The Range Reclamation Entities also provide environmental consulting services to customers typically in connection with land reclamation and water restoration projects and as an additional value-add service, sells water treatment chemicals manufactured by third parties to their customers. Range Natural also provides resource mining services for customers incidental to the reclamation and repurposing of mine sites. In August 2023, the Company acquired Collins Building & Contracting, Inc., a West Virginia corporation (“Collins Building”). Collins Building is an environmental services business that primarily focuses on the reclamation of abandoned mine land sites in West Virginia.
| 8 |
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 nine
months ended September 30, 2023, the Company recorded net income of $
The
ability to continue as a going concern is dependent on the Company 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.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America. Intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes revenue under ASC 606, “Revenue from Contracts with Customers”. The core principle of the revenue standard is that a company should recognize revenue by analyzing the following five steps: (1) identify the contract with the customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations; and (5) recognize revenue when (or as) each performance obligation is satisfied. The Company primarily invoices customers and recognizes revenue on a periodic basis for equipment and labor hours provided to a customer on a particular job based on an agreed-upon hourly rate sheet or a fixed amount for a project. The Company also invoices customers and recognizes revenue for equipment mobilization fees and materials and supplies required to complete a project. The Company invoices for the sales of chemicals, stone and other products and recognizes revenue when the products are delivered to the customer’s designated site or when control of these products is transferred to its customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those products. Sales and other taxes that the Company collects concurrent with revenue producing activities are excluded from revenue. Costs for equipment, labor and chemicals are generally expensed as incurred since the projects are generally short-term and not subject to a contract. The Company also invoices customers for the provision of environmental security services on an agreed-upon hourly rate for each project. All revenue is recognized at a point in time.
| 9 |
The Company recognizes revenue from contracts for financial reporting purposes over time. Progress toward completion of the Company’s contracts is measured by the percentage of cost incurred to date compared to estimated total costs for each contract. This method is used because management considers total cost to be the best available measure of progress on contracts. Because of inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used will change significantly within the near term.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less at the date of acquisition to be cash equivalents. From time to time, the Company’s cash account balances exceed the balances covered by the Federal Deposit Insurance System. The Company has never suffered a loss due to such excess balances.
Accounts Receivable
Trade
accounts receivable are stated at the amount management expects to collect from the balances outstanding at the end of each fiscal period
reflected in the consolidated balance sheets. Based on management’s assessment, it has concluded that losses on balances outstanding
as of those dates will be immaterial and, therefore,
Unbilled Receivables
Unbilled receivables represent revenue that has been recognized on projects for which billings have not been presented to the customer because the amounts were earned but not billable at the balance sheet date.
Property and Equipment
Property and equipment is carried at cost. Expenditures for maintenance and repairs are charged to cost of services. Additions and betterments are capitalized. The cost and related accumulated depreciation of equipment sold or otherwise disposed of are removed from the accounts and any gain or loss is reflected in the current year’s earnings.
| September 30, 2023 | December 31, 2022 | |||||||
| Equipment | $ | $ | ||||||
| Buildings | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Net book value | ||||||||
| Depreciation expense | $ | $ | ||||||
The Company provides for depreciation of property and equipment using the straight-line method for both financial reporting and federal income tax purposes over the estimated -year useful lives of the equipment.
The Company assesses the recoverability of its property and equipment by determining whether the depreciation of the assets over their remaining lives can be recovered through projected future cash flows generated by the assets. There were no assets identified for impairment.
| 10 |
Land
Land is carried at cost. The Company assesses the recoverability of its land by determining whether the cost of the land can be recovered through projected future cash flows generated by the land. No land was identified for impairment.
Delivery Costs
Delivery costs are classified as cost of sales.
Goodwill
Goodwill is tested for impairment annually and more frequently if events or changes in circumstances indicate that it is more likely than not (i.e., a likelihood greater than 50%) that the intangible asset is impaired.
Income Taxes
The Company follows the asset and liability method of accounting for income taxes. Under this method, deferred income tax assets and liabilities are recognized for the estimated tax consequences attributable to differences between the financial statement carrying values and their respective income tax basis (temporary differences). The effect on deferred income tax assets and liabilities of a change in tax rates is recognized as income (loss) in the period that includes the enactment date.
Leases
The Company determines whether a contract is, or contains, a lease at inception. Right-of-use assets represent the Company’s right to use an underlying asset during the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at lease commencement based upon the estimated present value of unpaid lease payments over the lease term. The Company uses its incremental borrowing rate based on the information available at lease commencement in determining the present value of unpaid lease payments. As of September 30, 2023, the Company had no material lease commitments.
The Company periodically issues stock options and restricted stock awards to employees and non-employees in non-capital raising transactions for services. The Company accounts for such grants issued and vesting based on ASC 718, Compensation-Stock Compensation whereby the value of the award is measured on the date of grant and recognized for employees as compensation expense on the straight-line basis over the vesting period. Recognition of compensation expense for non-employees is in the same period and manner as if the Company had paid cash for the services. The Company recognizes the fair value of stock-based compensation within its Consolidated Statements of Operations with classification depending on the nature of the services rendered.
The fair value of the Company’s stock options is estimated using the Black-Scholes-Merton Option Pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or restricted stock, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes-Merton Option Pricing model and based on actual experience. The assumptions used in the Black-Scholes-Merton Option Pricing model could materially affect compensation expense recorded in future periods.
| 11 |
Basic income (loss) per share is computed by dividing the net income (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 income (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 income (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:
| September 30, 2023 | December 31, 2022 | |||||||
| 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 glycosylated cannabinoid drug candidates. Research and development costs are expensed as incurred.
Fair Value of Financial Instruments
FASB ASC 825, “Financial Instruments” requires that the Company disclose estimated fair values of financial instruments. Financial instruments held by the Company include, among others, accounts receivable, accounts payable and long-term debt. The carrying amounts reported in the balance sheets for assets and liabilities qualifying as financial instruments are a reasonable estimate of fair value.
Segments
As of September 30, 2023, the Company has
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 and major customers. All material operating units qualify for aggregation under “Segment Reporting” due to their similar customer base and similarities in: economic characteristics; geographic location of operation; nature of products and services; and procurement, manufacturing, and distribution processes.
| 12 |
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 was effective for the Company beginning January 1, 2023. This did not have a material effect on the Company’s financial position, results of operations, or cash flows.
Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future financial statements.
2. ACQUISITION OF COLLINS BUILDING & CONTRACTING
On August 31, 2023, the Company entered into a stock purchase agreement
with the owner of Collins Building & Contracting, Inc. (“Collins Building”), pursuant to which the owner agreed to sell
all of the outstanding common stock of Collins Building to the Company in exchange for (a)
The
Company accounted for the transaction as a business combination in accordance ASC 805 “Business Combinations”. The Company
has performed an allocation of the purchase price paid for the assets acquired and the liabilities assumed. The fair values of the assets
acquired are set forth below. Because the fair values exceeded the purchase price, we recognized a gain on the purchase of $
| Fair value of assets acquired: | ||||
| Equipment | $ | |||
| Land | ||||
| Buildings | ||||
| Total assets acquired | ||||
| Less: Gain on bargain purchase price | ( | ) | ||
| Purchase price | $ | |||
| Cash consideration | ||||
| Long-term notes issued to the seller | ||||
| Total purchase price | $ | |||
| Acquisition transaction costs incurred | $ |
3. ACQUISITION OF RANGE ENVIRONMENTAL RESOURCES AND RANGE NATURAL RESOURCES
In May 2022, the Company and its wholly-owned subsidiary, Daedalus Ecosciences, Inc., entered into a share purchase agreement with Range Environmental Resources, Inc. (“Range Environmental”) and Range Natural Resources, Inc. (“Range Natural”, and collectively with Range Environmental, the “Range Reclamation Entities”), and the two (2) shareholders of the Range Reclamation Entities (the “Range Shareholders”) (the “Range Share Purchase Agreement”), pursuant to which the Company issued a total of shares of the Company’s common stock to the Range Shareholders and paid cash consideration of $ to the Range Shareholders in exchange for % of the outstanding common stock of each of the Range Reclamation Entities.
Subsequent to entering into the Range Share Purchase Agreement, the Company
discovered that Joshua Justice, one of the Range Shareholders (“Justice”), made certain misrepresentations in the Range Share
Purchase Agreement. On July 12, 2022, the Company entered into a Separation Agreement, by and among the Company, Daedalus Ecosciences,
the Range Reclamation Entities, and Justice and his spouse (the “Separation Agreement”)
| 13 |
Subsequently, on October 11, 2022, Daedalus Ecosciences and Jeremy Starks, the remaining Range Shareholder (“Starks”), entered into a share purchase agreement, effective as of May 11, 2022 (the “Starks Agreement”), pursuant to which Starks exchanged his % common stock ownership of the Range Reclamation Entities for % of the Cash Dividends and Sale Proceeds (as both terms are defined in the Starks Agreement) of the Range Reclamation Entities. As a result of the merger of Daedalus Ecosciences into Malachite as of December 31, 2022, the Range Reclamation Entities are reported as wholly-owned subsidiaries of the Company in the financial statements made part of this Form 10-Q. No other changes were made to the consideration received by Starks as part of the Range Share Purchase Agreement and he remains as President of each of the Range Reclamation Entities.
The Company accounted for the above transactions as a business combination in accordance ASC 805 “Business Combinations”. The Company has performed an allocation of the purchase price paid for the assets acquired and the liabilities assumed. The fair values of the assets acquired are set forth below. The allocation of the purchase price is based on management’s estimates.
| Fair value of assets acquired: | ||||
| Cash | $ | |||
| Accounts receivables | ||||
| Property and equipment | ||||
| Goodwill | ||||
| Total assets acquired | ||||
| Fair value of liabilities assumed | ( | ) | ||
| Purchase price | $ | |||
| Cash consideration | ||||
| Common stock consideration | ||||
| Total purchase price | $ | |||
| Acquisition transaction costs incurred | $ |
Goodwill
has an assigned value of $
4. GOODWILL
Goodwill
was $
| September 30, 2023 | December 31, 2022 | |||||||
| Environmental Services: | ||||||||
| Beginning Balance | $ | $ | ||||||
| Acquisitions | ||||||||
| Adjustments | ||||||||
| Ending Balance | $ | $ | ||||||
5. EQUITY
Issuance of Common Stock and Warrants
On
April 11, 2023, the Company entered into securities purchase agreements providing for the issuance and sale by the Company of (i)
shares of the Company’s common stock (the “April Shares”) at a price of $ per share and (ii)
warrants to purchase up to an additional
| 14 |
On
August 24, 2023, the Company entered into a securities purchase agreement providing for the issuance and sale by the Company of
shares of the Company’s common stock (the “August Shares”) at a price of $0.15 per share. After deducting for fees
and expenses, the aggregate net proceeds from the sale of the August Shares were approximately $
Stock options issued during the three months ended September 30, 2023 and the three months ended September 30, 2022
During the three months ended September 30, 2023, the Company granted options to an outside advisor to purchase shares of the Company’s common stock with exercise prices of $ per share that expire five years from the date of grant. Options to purchase all shares vested upon grant. The fair value of each option award was estimated on the date of grant using the Black-Scholes-Merton Option Pricing model based on the following assumptions: (i) volatility rate of %, (ii) discount rate of %, (iii) expected dividend yield, and (iv) expected life of years, which is the term of the options. The total fair value of the option grants at their grant dates was approximately $ which was allocated to general and administrative expenses during the three months ended September 30, 2023.
stock options were granted to directors, advisors, and employees during the three months ended September 30, 2022.
During the three months ended September 30, 2023, total stock-based compensation expense related to vested stock options was $. During the three months ended September 30, 2022, the Company recorded no stock-based compensation expense related to vested stock options. At September 30, 2023, the remaining unamortized cost of the outstanding stock-based awards was approximately $ and will be amortized on a straight-line basis over the remaining vesting period of years.
| Shares | Weighted Average Exercise Price | |||||||
| Balance outstanding at December 31, 2022 | $ | |||||||
| Granted | ||||||||
| Exchanged | ||||||||
| Exercised | ||||||||
| Expired | ( | ) | ||||||
| Forfeited | ||||||||
| Balance outstanding at September 30, 2023 | $ | |||||||
| Balance exercisable at September 30, 2023 | $ | |||||||
At September 30, 2023, the outstanding stock options had intrinsic value of $.
| 15 |
Number of Options | Weighted Average Exercise Price | Weighted Average Grant- Date Stock Price | ||||||||||
| Options Outstanding, September 30, 2023 | $ | $ | ||||||||||
| $ | $ | |||||||||||
| $ | $ | |||||||||||
| $ | $ | |||||||||||
| $ | $ | |||||||||||
| $ | $ | |||||||||||
| $ | $ | |||||||||||
| $ | - | $ | - | |||||||||
| $ | - | $ | - | |||||||||
| $ | - | $ | - | |||||||||
| $ | - | $ | - | |||||||||
| Number of Options | Weighted Average Exercise Price | Weighted Average Grant- Date Stock Price | ||||||||||
| Options Outstanding and Exercisable, September 30, 2023 | $ | $ | ||||||||||
| $ | $ | |||||||||||
| $ | $ | |||||||||||
| $ | $ | |||||||||||
| $ | $ | |||||||||||
| $ | $ | |||||||||||
| $ | $ | |||||||||||
| $ | - | $ | - | |||||||||
| $ | - | $ | - | |||||||||
| $ | - | $ | - | |||||||||
| $ | - | $ | - | |||||||||
7. WARRANTS
A summary of warrants to purchase common stock issued during the nine months ended September 30, 2023 is as follows:
| Shares | Weighted Average Exercise Price | |||||||
| Balance outstanding at December 31, 2022 | $ | |||||||
| Granted | ||||||||
| Exercised | ||||||||
| Expired | ||||||||
| Balance outstanding and exercisable at September 30, 2023 | $ | |||||||
At
September 30, 2023, the
| 16 |
8. LINES OF CREDIT
In
November 2022, the Company secured a bank line of credit with a limit of $
In
June 2023, the Range Reclamation Entities secured a separate bank line of credit with a limit of $
9. LONG-TERM DEBT OBLIGATIONS
Long-term
debt consists of debt on vehicles and equipment, which serves as the collateral, and debt issued as part of the acquisition of Collins
Building. Interest rates range from
A summary of payments due under the long-term debt by year is as follows:
| 2023 – due between October 1, 2023 and September 30, 2024 | $ | |||
| 2024 – due between October 1, 2024 and September 30, 2025 | ||||
| 2025 – due between October 1, 2025 and September 30, 2026 | ||||
| 2026 – due between October 1, 2026 and September 30, 2027 | ||||
| 2027 – due between October 1, 2027 and September 30, 2028 | ||||
| 2028 and later – due on October 1, 2028 and thereafter | ||||
| Total long-term debt | $ |
10. MAJOR CUSTOMER AND CONCENTRATION OF CREDIT RISK
Sales
to the Company’s two largest customers were
Accounts
receivable from one customer were
11. 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 September 30, 2023, no contingent liability has been recorded in the Company’s consolidated statements of financial condition for this matter.
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12. SEGMENT INFORMATION
ASC
280, “Segment Reporting” establishes standards for reporting information about operating segments on a basis consistent with
the Company’s internal organization structure as well as information about services, categories, business segments and major customers
in financial statements. The Company has
The five reportable segments that result from applying the aggregation criteria are as follows:
| ● | Range Reclaim – land reclamation, water restoration, incidental mining and land repurposing |
| ● | Range Water - biochar product development and water solutions business |
| ● | Range Security – security services on mine land being reclaimed and repurposed for non-fossil fuel uses |
| ● | Range Land – mine land being acquired, reclaimed and repurposed for non-fossil fuel uses |
| ● | Drug Development – glycosylated cannabinoid drug development program |
The Company operated two reportable business segments during the three and nine months ended September 30, 2022, the Drug Development and Range Reclaim segments. The other business segments began operating in 2023.
The Company had no inter-segment sales for the periods presented.
Summarized financial information concerning the Company’s reportable segments is shown as below:
By Categories
| For the three months ended September 30, 2023 | ||||||||||||||||||||||||||||
| Range Reclaim | Range Water | Range Security | Range Land | Drug Development | Corporate | Total | ||||||||||||||||||||||
| Sales | $ | $ | $ | | $ | $ | $ | $ | ||||||||||||||||||||
| Cost of services | ||||||||||||||||||||||||||||
| Gross profit | ||||||||||||||||||||||||||||
| Net income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Total assets | ||||||||||||||||||||||||||||
| Depreciation | ||||||||||||||||||||||||||||
| Interest expense | ||||||||||||||||||||||||||||
| Tax expense | ||||||||||||||||||||||||||||
| Capital expenditures for long-lived assets | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
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| For the nine months ended September 30, 2023 | ||||||||||||||||||||||||||||
| Range Reclaim | Range Water | Range Security | Range Land | Drug Development | Corporate | Total | ||||||||||||||||||||||
| Sales | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Cost of services | ||||||||||||||||||||||||||||
| Gross profit | ||||||||||||||||||||||||||||
| Net income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Total assets | ||||||||||||||||||||||||||||
| Depreciation | ||||||||||||||||||||||||||||
| Interest expense | ||||||||||||||||||||||||||||
| Tax expense | ||||||||||||||||||||||||||||
| Capital expenditures for long-lived assets | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| For the three months ended September 30, 2022 | ||||||||||||||||
| Range Reclaim | Drug Development | Corporate | Total | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of services | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Net income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||
| Total assets | ||||||||||||||||
| Capital expenditures for long-lived assets | $ | $ | $ | $ | ||||||||||||
| For the nine months ended September 30, 2022 | ||||||||||||||||
| Range Reclaim | Drug Development | Corporate | Total | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of services | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Net income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||
| Total assets | ||||||||||||||||
| Capital expenditures for long-lived assets | $ | $ | $ | $ | ||||||||||||
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13. PRO FORMA INFORMATION
The unaudited pro forma sales and net income data gives effect to the acquisition of Collins Building as if it had occurred on January 1, 2023, the beginning of the Company’s 2023 fiscal year, and to the acquisition of the Range Entities as if it had occurred on January 1, 2022, the beginning of the Company’s 2022 fiscal year.
| For the nine months ended September 30, 2023 | ||||||||
| Sales | Net income | |||||||
| Acquired companies | ||||||||
| Collins Building | $ | $ | ||||||
| All other companies | ||||||||
| Total | $ | $ | ||||||
| For
the nine months ended September 30, 2022 |
||||||||
| Sales | Net loss | |||||||
| Acquired companies | ||||||||
| Range Entities | $ | $ | ( |
) | ||||
| All other companies | ( |
) | ||||||
| Total | $ | $ | ( |
) | ||||
14. SUBSEQUENT EVENTS
On
October 30, 2023, the Company entered into warrant exchange agreements with certain holders of warrants to exchange warrants to purchase
a total of shares of the Company’s common stock for an aggregate of
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
As used in this discussion and analysis and elsewhere in this Quarterly Report, the “Company”, “we”, “us” or “our” refer to Malachite Innovations, Inc., a Nevada corporation.
Cautionary Statement
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Unaudited Condensed Financial Statements and the related notes thereto contained in Part I, Item 1 of this Quarterly Report. The information contained in this Quarterly Report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this Quarterly Report and in our other reports filed with the Securities and Exchange Commission (the “SEC”), including our Annual Report on Form 10-K for the year ended December 31, 2022 filed on March 31, 2023, and the related audited financial statements and notes included therein.
Certain statements made in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Forward-looking statements are projections in respect of future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “intend,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, which may cause our or our industry’s actual results, levels of activity or performance to be materially different from any future results, levels of activity or performance expressed or implied by these forward-looking statements. These risks and uncertainties include: general economic and financial market conditions; our ability to obtain additional financing as necessary; our ability to continue operating as a going concern; any adverse occurrence with respect to our business or; results of our research and development activities that are less positive than we expect; our ability to bring our intended products to market; market demand for our intended products; shifts in industry capacity; product development or other initiatives by our competitors; fluctuations in the availability and costs of raw materials required in our drug development process; other factors beyond our control; and the other risks described under the heading “Risk Factors” in our Annual Report on Form 10-K filed with the SEC on March 31, 2023.
Although we believe that the expectations and assumptions reflected in the forward-looking statements we make are reasonable, we cannot guarantee future results, levels of activity or performance. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those expressed by any forward-looking statements. As a result, readers should not place undue reliance on any of the forward-looking statements we make in this report. Forward-looking statements speak only as of the date on which they are made. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason.
Company Overview
Malachite Innovations, Inc. (“Malachite”) is a public company dedicated to improving the health and wellness of people and the planet through a novel and innovative approach to impact investing. Malachite owns and operates several complementary operating businesses focused on developing long-term solutions to environmental, social, and health challenges, with a particular focus on economically disadvantaged communities. Malachite takes an opportunistic approach to impact investing by leveraging its competitive advantages and looking at solving old problems in new ways. Malachite seeks to thoughtfully allocate its capital into strategic opportunities that are expected to make a positive impact on the people-planet ecosystem and generate strong investment returns for our shareholders.
Our corporate headquarters is located in Cleveland, Ohio, with additional office locations in Fola, West Virginia, Flatwoods, West Virginia, and Rocklin, California. As of November 13, 2023, we employed 74 full-time employees and engaged various consultants and professional service firms to provide us with flexible and experienced resources to advance our corporate objectives while maintaining a cost-effective overhead structure. We strive to instill a corporate culture of honesty, integrity and respect while advancing our mission of doing well by doing good.
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Operating Business Segments
Our five operating business segments are: (i) Range Reclaim, (ii) Range Water, (iii) Range Security, (iv) Range Land, and (v) Drug Development.
Information about our business segments should be read together with “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Range Reclaim
In May 2022, the Company acquired Range Environmental Resources, Inc., a West Virginia corporation (“Range Environmental”) and Range Natural Resources, Inc., a West Virginia corporation (“Range Natural” and together with Range Environmental, the “Range Reclamation Entities”). The Range Reclamation Entities provide land reclamation, water restoration and environmental consulting services to mining and non-mining customers throughout the Appalachian region with the goal of returning land to pre-mining conditions or repurposing the land for natural, commercial, agricultural, residential or recreational use. The Range Reclamation Entities’ water restoration services seek to improve rivers, streams and discharges through novel and innovative treatment applications to help customers meet their various regulatory standards and requirements. The Range Reclamation Entities also provide environmental consulting services to customers, typically in connection with land reclamation and water restoration projects, and, as an additional value-add service, sell water treatment chemicals manufactured by third parties to their customers. Range Natural also mines natural resources, including coal, for customers incidental to the reclamation and repurposing of mine sites.
According to the U.S. Energy Information Administration (the “EIA”), the United States had 551 coal mines in 2020, comprised of 370 active mines, 141 idled or closed mines, and 40 new or activated mines. Approximately 82% of those coal mines were located in Appalachia (which comprises the Appalachian Mountains and is commonly known as the cultural region in the Eastern United States stretching from the southern part of New York to the northern parts of Alabama and Georgia). According to the EIA, there were approximately three times as many coal mines in the United States in 2008 (compared to 2020) with approximately 89% located in Appalachia. The precipitous decline in the number of operating coal mines since 2008 is due to various supply, demand and regulatory factors, including a reduction in demand for coal as a source of electricity due to the increased use of natural gas and renewable energy, an increase in coal production costs due to inflation and the dearth of cost-effective locations remaining for mining, and a more stringent and costly regulatory environment, all of which have resulted in an increasingly difficult market for coal producers.
In 2000, coal was responsible for 1,966 billion kWh of electricity generation, which represented 52% of the total electricity generation in the United States. However, in 2022, coal was responsible for only 828 billion kWh of electricity generation, which represented 20% of the total electricity generation in the United States. According to the EIA, 23% of the 200,568 megawatts of coal-fired capacity currently operating in the United States is scheduled to retire by the end of 2029 due to the high cost of operations, continued competition from natural gas and renewable energy resources, and sustainability initiatives of energy producers.
However, the reclamation of closed and inactive mine sites has not kept pace with the increase in closed and idled mine sites, thus creating a substantial backlog of reclamation work that needs to be completed on former mine sites. According to the U.S. Office of Surfacing Mining Reclamation and Enforcement (“OSMRE”), there are approximately 50,000 high-priority abandoned mine land locations in the United States resulting from legacy coal mining operations that failed to adequately reclaim the land and waterways back to their natural state. Additionally, there are tens of thousands of active mine sites in the United States that require contemporaneous reclamation of land and waterways during the active mining process, and an estimated equally large number of idled mine locations that also require significant land reclamation and water restoration services.
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Under the Surface Mining Control and Reclamation Act of 1977 (“SMCRA”), OSMRE was established for two basic purposes: (i) to ensure coal mines in the United States operate in a manner that protects citizens and the environment during mining operations and to restore the land to beneficial use following mining, and (ii) to implement an Abandoned Mine Land (“AML”) reclamation program to address the hazards and environmental degradation resulting from two centuries of coal mining activities that occurred before SMCRA was passed in 1977. The AML reclamation program is funded through fees levied against coal producers based on tons of coal produced. As of September 2020, the AML reclamation fund had collected a total of $11.7 billion in coal mining fees over the life of the program, with $9.5 billion (81%) appropriated and distributed in accordance with SMCRA, and $2.2 billion (19%) unappropriated and available for future disbursement. In November 2021, the Infrastructure Investment and Jobs Act was enacted, which, among other things, authorized $11.3 billion in new funding to be appropriated for deposit into the AML reclamation fund. Importantly, the AML reclamation fund is only available to help fund the reclamation of mines abandoned before SMCRA was enacted in 1977; therefore, all mines abandoned after the year 1977 cannot access funding from the AML reclamation fund and must obtain funding from other sources.
Additionally, each state in Appalachia has a Department of Environmental Protection (“DEP”) or an equivalent agency that oversees coal mining permitting, operations, and reclamation. Under DEP rules and regulations, coal mining companies are required to develop a mining and reclamation plan that is approved by the applicable state agency, obtain a mining permit from the state, and secure a reclamation surety bond from a qualified third-party insurance company or provide a comparable financial guarantee. The reclamation surety bond provides the state with financial assurances that land reclamation and waterway restoration will be performed in accordance with the original reclamation plan once mining is complete if the coal mining company, as primary obligor, fails to perform. Therefore, there are at least three groups who may need land reclamation, water restoration and environmental auditing services: (i) mining companies when permits are active and reclamation bonds are not in default, (ii) surety bond insurers when reclamation bonds are in default, and (iii) states through their AML reclamation funds for mine lands abandoned before 1977 and for mine lands with defaulted coal mining companies and surety bond insurers after 1977.
At the time of acquisition in May 2022, the Range Reclamation Entities had one reclamation customer, 15 pieces of owned and financed equipment, eight pieces of leased equipment, and 12 employees, all located and operating in West Virginia. As of September 30, 2023, approximately 16 months later, the businesses had four reclamation customers, 62 pieces of owned and financed equipment, and 56 employees in West Virginia. For the full year 2021, the Range Reclamation Entities had revenues of approximately $2.5 million. For the partial year period from May 11, 2022 to December 31, 2022, the Range Reclamation Entities had revenues of approximately $4.8 million. For the first nine months of 2023, the Range Reclamation Entities had revenues of approximately $12.2 million. The Range Reclamation Entities have also made a significant investment in recruiting, retaining and rewarding employees, including providing new benefits such as health insurance, paid time off, vacation days, 401K retirement plan, and job advancement training. The Range Reclamation Entities’ employees are their most valuable asset, and therefore we are committed to building a best-in-class culture and financially rewarding our talented, hard-working employees so that we can maximize the good we can do for our employees and their families.
The Range Reclamation Entities are planning for continued growth in their land reclamation, water restoration and consulting businesses by expanding their market share with existing coal mining customers reclamation bond insurers, and the DEP of each state in Appalachia for AML projects, adding new coal mining and non-coal mining customers, and collaborating with the Company’s other operating businesses to generate incremental sales opportunities. We will seek to add additional employees, equipment and technologies to support these ambitious growth goals to ensure we successfully execute our value creation plans for the Company and our shareholders.
In August 2023, the Company acquired Collins Building, which owned 105 pieces of reclamation equipment with attachments, plus a sandstone quarry and mechanics shop located in West Virginia. Collins Building is an environmental services business that primarily focuses on reclaiming abandoned mine land sites for the West Virginia Department of Environmental Protection as part of its AML Reclamation Program.
Range Water
Terra Preta, LLC, an Ohio limited liability company (“Terra Preta”), is a biochar product development and environmental solutions business started by the Company in December 2022. Terra Preta is developing a novel and innovative combination of biochar, proprietary materials and structural designs intended to create several first-of-its-kind agricultural and water filtration products and solutions.
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Biochar is a solid, lightweight carbon-rich material produced by the thermal decomposition of organic material (such as cellulosic feedstock, including wood and plants) using a chemical-conversion process known as pyrolysis. Carbonization pyrolysis is a chemical degradation process that heats organic materials to produce carbon-rich biochar, liquid bio-oils, and syngas products. Since organic material is thermally decomposed without oxygen during the pyrolysis process, combustion does not occur, so the process allows for the permanent capture of carbon in the biochar end-product and eliminates the release of climate-damaging carbon dioxide into the atmosphere. The specific yield of biochar during the carbonization pyrolysis process depends on several variables such as temperature, heating time and heating rate. Lower temperatures, longer heating times and lower heating rates typically yield more biochar and less bio-oil and syngas.
Terra Preta has been launched to build a full-cycle, carbon-negative business that reduces greenhouse gases from the atmosphere, passively filters contaminated water without the use of harsh chemicals, and provides a fortified, nutrient-rich soil amendment to improve the growth of agricultural products.
Greenhouse gases, comprised of carbon dioxide, methane, nitrous oxide and fluorinated gases, are gases that trap heat in the atmosphere, and are generally believed to result in warmer temperatures and climate change, including changing weather patterns, rising sea levels, and more extreme weather events. Carbon dioxide enters the atmosphere through, among other things, the burning of fossil fuels, solid waste and other biomass materials, and is removed from the atmosphere when absorbed by plants during the photosynthesis process. Terra Preta is in discussions with a large affiliated landowner to enter into a long-term lease or purchase of at least 100 acres of former mine land in West Virginia for the planting, growth and harvesting of crops to serve as the primary feedstock for our biochar production operations. The newly planted crops would then act as a “carbon sink”, drawing substantial amounts of carbon dioxide from the atmosphere into the plants through the photosynthesis process. When the plants are harvested, biochar is produced through the carbonization pyrolysis process and the captured carbon dioxide is permanently preserved as carbon in the biochar product for use in water treatment and agricultural end uses.
Pursuant to rules adopted under the Clean Water Act of 1972 (“Clean Water Act”), the U.S. Environmental Protection Agency (“EPA”) has implemented various pollution control programs such as wastewater standards for industry and recommendations for pollutants in surface waters. The Clean Water Act prohibits any party from discharging pollutants into a water of the United States unless they have a permit issued under the National Pollutant Discharge Elimination System (“NPDES”), which contains limits on what a party can discharge and establishes monitoring and reporting requirements. On mining sites, coal operators are required to sample and test their water discharges on a regular basis to ensure compliance with the Clean Water Act and applicable NPDES permits. Currently, most mining operators treat non-compliant water with temporary holding ponds and expensive chemicals such as pH adjusters, coagulants and flocculants that require constant reapplication to ensure compliance. Terra Preta will focus on developing a proprietary, biochar-based passive treatment system that treats non-compliant mine site discharges to ensure compliance with the Clean Water Act and NPDES permits without the need for holding ponds or expensive chemicals.
Sustainable agriculture plays a critical role in the stability, growth, and diversification of our future food supply chain and the growth of plants intended to serve as a carbon sink to reduce greenhouse gases. High-quality soil, a key condition for sustainable agriculture, requires organic matter, microorganisms, nutrients, and optimal compaction. Subsoils with a sufficient number of air-filled pores have little restriction to drainage and aeration, and typically are able to decompose and cycle organic matter and nutrients more efficiently. Alternatively, soil with poor aeration leads to the build-up of carbon dioxide, reduces the ability of plants to absorb water and nutrients, and leads to increased plant stress and root disease. To help address the ill effects of soil compaction, Terra Preta is developing a proprietary, fortified biochar soil amendment that provides unique soil structuring characteristics that will allow plants to grow strong roots that optimize the absorption of water and nutrients, thereby reducing root stress and disease.
In December 2022, Terra Preta filed trademarks for biochar goods and services related to agricultural and water treatment applications. In March 2023, Terra Preta filed provisional patents related to novel and innovative agricultural and water treatment solutions and designs. Additionally, in March 2023, Terra Preta purchased two pyrolysis ovens that each produce one ton of biochar per day to advance our research and development activities. We anticipate that several biochar-based water filtration and soil amendment products will be available for production and sale by the end of 2024.
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Range Security
Range Security Resources, LLC, an Ohio limited liability company (“Range Security”), is an environmental security services business started by the Company in November 2022. Range Security is focused on providing eco-friendly, technology-driven security services to active and former mine sites, with a particular focus on locations transitioning from coal mining to next generation industries. Range Security is intended to serve as a complementary business to the Range Reclamation Entities.
Mine sites in the Appalachian region frequently comprise thousands of acres of natural habitat with valuable infrastructure and operating assets disbursed across large tracts of land. However, many of these mine sites lack adequate broadband access or cellular service, and therefore traditional technology-based security solutions are not available. Also, due to the large land areas and often challenging access roads and mountainous terrain, consistent visual confirmation of the safety and security of high value assets is problematic, and unnecessary amounts of carbon dioxide are emitted from heavy-duty trucks used to perform frequent visual security checks. Furthermore, due to the remoteness and lack of technological options, most security services in the market fail to provide an independent verification of the security status of a mine site and confirmation of visual security checks, resulting in a customer’s uncertainty regarding the actual security services being provided.
Valuable assets commonly found on mine sites requiring high-levels of security services include office buildings, coal operation facilities such as preparation plants and loadout facilities, power stations and electrical lines, vehicles and heavy equipment, supplies and chemicals, and spare parts and components. These high-value assets are frequently the target of theft since all or parts of these assets can be easily removed from the mine site and sold for cash. Unfortunately, the actual damage to the operation resulting from this type of destructive theft is frequently many times the market value of the stolen item, primarily due to the losses resulting from the down-time of operations, the cost of repairs and replacement components, and the long-term damage to critical infrastructure that can be repurposed and used to attract next generation industries once the mining is complete.
In March 2023, Range Security was engaged by its first customer for environmental security services covering a 13,000-acre coal mine site in Central West Virginia. In October 2023, Range Security was engaged by its second customer for environmental security services covering a 16,000-acre coal mine site in Eastern Kentucky. Range Security has hired 15 new security professionals, and is focusing its recruitment efforts on military veterans, police officers, and other professionals with security experience. Range Security has purchased two fuel-efficient utility task vehicles for ground surveillance and a thermal-imaging drone for aerial surveillance, all of which use significantly less fuel and electricity to operate than traditional security vehicles and provide a much broader coverage range with a substantially lower carbon footprint. Range Security is also in the process of establishing satellite-based wireless service to support video surveillance and enable a mobile technology solution used by our security professionals to provide real-time evidence of visual security checks. Range Security plans to expand its security service business onto several additional mine sites prior to the end of 2023, with a particular focus on locations with valuable infrastructure being repurposed into non-coal multi-use complexes with attractive job growth prospects and next generation industry opportunities.
Range Land
Range Land, LLC, an Ohio limited liability company (“Range Land”), is a land acquisition company started by the Company in August 2023. Range Land is focused on acquiring former mine lands with the goal of reclaiming and repurposing the sites for non-fossil fuel uses, including commercial, industrial, residential and recreational developments. Range Land is specifically interested in renewable energy facilities, innovative agricultural installations, and projects focused on improving the quality and condition of our air, land and waterways.
According to industry estimates, Appalachia contains nearly one million acres of abandoned, idled and non-performing mine sites that are burdened with significant land reclamation and water restoration obligations. Many of these troubled mine sites are subject to mining permits and associated reclamation bonds, which as a result, prevents the land from being repurposed for non-mining uses until the land has been reclaimed and the permits and bonds have been released by the applicable state’s environmental protection department. Water quality is a particularly challenging issue since a permit can only be released if the site has at least 12-months of compliant water samples without active chemical treatment, which heightens the need for water restoration solutions to help transition former mine land to non-mining uses.
The Company, through it several operating businesses, has assembled the internal resources and capabilities to reclaim land, restore waterways, install innovative water treatment solutions, and secure the mine site to protect the significant historical investment in infrastructure. In additional to these in-house capabilities, the Company and its operating businesses also possess deep knowledge and expertise about the permit and bond release process, which is a critical step necessary to unlock the underlying value of the former mine land for non-fossil fuel uses. Range Land is actively reviewing several mine sites throughout Appalachia to acquire, reclaim and repurpose in order to improve the land and create non-fossil fuel economic development opportunities for disadvantaged local coal communities.
In September 2023, Range Land, through its wholly owned subsidiary CLV Azurite Land, LLC, an Ohio limited liability company (“CLV Azurite”), acquired through three transactions over 1,900 acres of surface interest at an idled mine complex in West Virginia. CLV Azurite is in active discussions with the holder of the permits and bonds associated with the acquired land to ensure that the acquired surface acreage can be repurposed for alternative non-fossil fuel uses. Concurrently, CLV Azurite is in active discussions with an experienced and well-capitalized development partner to convert the former mine land into a large solar energy facility on a majority of the acquired surface acreage. Under such an arrangement, CLV Azurite would be the landlord and the solar developer-operator would be the tenant required to pay CLV Azurite a negotiated lease payment on a per acre basis.
Drug Development
Graphium Biosciences, Inc., a Nevada corporation (“Graphium”), is a cannabinoid-based drug development company tracing its history of technological innovation and drug advancement back to October 2011 through two predecessor entities, Stevia First Corp. and Vitality Biopharma, Inc. In October 2021, the Company formed Graphium as a wholly-owned subsidiary and transferred all of its drug development assets to this newly-formed entity.
Graphium is advancing a broad portfolio of glycosylated cannabinoid prodrugs that have been developed to unlock the rebalancing effects of the endocannabinoid system to address numerous chronic conditions with inadequate pharmaceutical options. Graphium’s leading drug candidate, VBX-100, is a glycosylated tetrahydrocannabinol (“THC”) cannabinoid that targets inflammatory conditions of the gastrointestinal tract but without unwanted psychoactive or intoxicating side effects.
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Cannabinoids, including THC and cannabidiol (“CBD”), have well-known therapeutic benefits through their interaction with the human endocannabinoid system, which serves a regulating and rebalancing function in the body. For decades, patients have used cannabinoids to activate the endocannabinoid system to provide relief for numerous chronic and debilitating ailments, including inflammation, pain, anxiety, depression, and cancer. However, THC, a commonly-used cannabinoid with significant therapeutic benefit, is psychoactive and intoxicating, and therefore its use has many practical, and in some cases legal, limitations. Nevertheless, many patients with chronic health conditions, including gastrointestinal inflammation, continue to use cannabinoids because current pharmaceutical offerings do not provide adequate therapeutic relief or result in unwanted side effects.
Our novel scientific discovery was the development of a proprietary enzymatic bioprocessing technology that adds one or more glucose molecules to a cannabinoid, resulting in our proprietary glycosylated cannabinoid compounds. Our glycosylated cannabinoids act as prodrugs that achieve targeted delivery of the bioactive cannabinoids within the body once they are activated. Prodrugs are compounds that, after administration, are metabolized into a pharmacologically active drug and are often designed to improve drug properties and reduce known or expected toxicities and adverse side effects. The advantages of our glycosylated cannabinoid prodrugs may include: (i) administration in a convenient oral formulation, (ii) targeted delivery with release in the colon or large intestine, (iii) improved stability with limited degradation or drug metabolism, and (iv) delayed release enabling longer-lasting effects and fewer administrations by patients.
We have learned through our animal studies that glucose bound to cannabinoid molecules are inactive and poorly absorbed from the intestines, allowing the combined molecule to reach the large intestine where glycoside hydrolase enzymes cleave the glucose and the cannabinoid is released in a targeted and restricted manner. Further, we have learned through our animal studies that a targeted release of THC, which could be provided in very low doses to achieve physiologically beneficial results, serves as an anti-inflammatory agent in the lower gastrointestinal tract and minimizes the amount of THC absorbed into the blood stream. Therefore, we anticipate our glycosylated cannabinoid prodrug will provide the anti-inflammatory benefits of low-dose THC while avoiding the psychoactive and intoxicating properties that hinder the broader pharmaceutical use of THC. Initially, we are targeting the $20 billion inflammatory bowel disease (“IBD”) market in the United States, which is composed of patients suffering from ulcerative colitis and Crohn’s disease, both chronic and debilitating conditions with no cure. We also believe our glycosylated cannabinoids could also be used to treat other indications, including, among others, irritable bowel syndrome (“IBS”), anxiety, depression, autism and cancer.
By using our proprietary enzymatic bioprocessing technologies, our research team has developed a novel family of over 250 glycosylated cannabinoid prodrugs. These glycosylated cannabinoids have unique commercial applications and patentable compositions of matter, which are separate and distinct from ordinary cannabinoids. Currently, our intellectual property is comprised of the following patents: (i) Cannabinoid Glycoside Prodrugs and Methods of Synthesis: Patent filed in 2016 and granted in 2021 for the invention of novel glycosylated cannabinoids and methods of targeted delivery for the treatment of gastrointestinal disorders, including IBD and IBS, (ii) Antimicrobial Compositions Comprising Cannabinoids and Methods of Using the Same: Patent filed in 2018 and granted in 2021 for the use of cannabinoids as antibiotics for the treatment of Clostridioides difficile, (iii) Novel Cannabinoid Glycosides and Uses Thereof: Patent filed in 2020 and in prosecution for additional novel cannabinoid glycosides and includes research data supporting the improved characteristics and commercial production strategies for these new molecules, and (iv) Continuous Enzymatic Perfusion Reactor System: Patent filed in 2021 and in prosecution for our improved reactor system for the efficient enzymatic glycosylation of hydrophobic small molecules, including cannabinoids. We believe our intellectual property portfolio of glycosylated cannabinoids possess significant value and, as a result, we have allocated substantial resources to ensure that our U.S. and international patents are properly filed and successfully prosecuted. As our research efforts involving glycosylated cannabinoids continue to progress, we plan to file additional patents to further expand our growing family of intellectual property assets and create long-term value for our shareholders.
Our research team has performed 23 animal studies to test the safety, efficacy and dosing levels of our glycosylated cannabinoids, which have provided us with favorable scientific data and the opportunity to further refine our drug development plan. We have performed two industry standard colitis disease mouse models: (i) TNBS model in 2017 and 2018 that generated favorable colitis prevention data, and (ii) DSS model in 2021 that generated favorable colitis treatment data. In 2021, we received a letter from the Food and Drug Administration’s (“FDA”) Office of Orphan Products Development stating that we have been granted Orphan Drug Designation for our glycosylated cannabinoid VBX-100 for the treatment of pediatric ulcerative colitis. An Orphan Drug Designation provides several benefits, including fee waivers, tax credits, fast tracking of regulatory processes, and seven years of market exclusivity.
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Due to our development of pharmaceutical products, we are subject to extensive regulation by the FDA and other federal, state, and local agencies. Also, since we are researching and developing cannabinoid-based products, we are subject to regulation by the U.S. Drug Enforcement Administration (“DEA”). Our research and development activities focus on cannabinoids, particularly THC and CBD derived from the cannabis plant, which the DEA has classified as Schedule I substances. Schedule I substances are defined as drugs with no currently accepted medical use and a high potential for abuse. In May 2019, the DEA informed us that it had determined that they consider our VBX-100 prodrug a Schedule I substance. As a result, any developing, testing, manufacturing, or clinical studies involving our VBX-100 prodrug, and by inference potentially all of our THC-glycoside molecules, are required to be properly licensed by the DEA and adhere to strict diversion control standards.
We are working closely with a third-party contract research organization to develop a detailed drug development plan to advance our leading drug candidate, VBX-100, through Phase II clinical trials by the end of 2026, subject to receipt of sufficient funding, which is currently estimated to be approximately $15.0 million. The Company is actively seeking to raise the necessary funding by issuing new common shares of Graphium to investors to advance our leading drug candidate, VBX-100. If we are successful in raising the necessary capital and advancing VBX-100 through Phase II clinical studies, then we would seek to maximize shareholder value by either selling our drug development assets to a strategic purchaser or raising additional capital to advance VBX-100 through Phase III clinical trials.
Impact Investing Strategy
Our impact investing strategy aims to improve the health and wellness of people and the planet, while also generating long-term sustainable financial returns for our shareholders. We believe that doing well and doing good are not mutually exclusive, and that an impact investing strategy can balance the environmental, social, and economic needs of people and the planet while also generating attractive risk-adjusted financial returns for shareholders.
Our impact investing strategy provides an opportunity for our dedicated team to address pressing environmental, social, and economic challenges, such as climate change, air and water pollution, educational inequality and economic disparity, through the development of novel and innovative solutions. By actively directing investment capital towards businesses that are working to create positive environmental, social, and economic outcomes, our impact investing strategy can meaningfully contribute to an improved people-planet ecosystem and a healthier and happier way of life.
We have a particular interest in providing environmental and social solutions in economically-disadvantaged regions of the United States. Initially, the Company is targeting the Appalachian region, which is home to communities with some of the most disadvantaged income, education and employment demographics in the United States. Our ambitious strategy is to allocate investment capital and management resources to acquire, reclaim, and repurpose former mine sites in Appalachia that have the potential to provide positive environmental and social impact in these disadvantaged coal communities to maximize the good we can do for people and the planet.
Impact Investing Process
Our Company maintains a rigorous investment process comprised of sourcing, underwriting, acquiring or originating, and growing impact investing opportunities. Our executive management team is responsible for the construction, execution, and continued refinement of our impact investing process, which relies upon the decades of experience of our executive management team and a periodic review, evaluation and adoption of best practices employed in the direct investment and private equity industry.
Our impact investing process starts with identifying and evaluating potential investment opportunities. We use a variety of sources to identify potential impact investments, including our extensive network of industry contacts, third party intermediaries and proprietary research performed by our executive management team. Each potential impact investment is evaluated based on its fit with our corporate strategy, the individual risks and opportunities of each potential investment, and any synergies with our other impact investments. This detailed due diligence review is aimed at identifying and addressing material investment risks and opportunities to create long-term sustainable value for our shareholders. Furthermore, our evaluation of each potential impact investment incorporates, to the extent appropriate, consideration of environmental, social and governance (“ESG”) and diversity, equity and inclusion (“DEI”) factors in the investment decision-making process.
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Our impact investments are commonly structured as stock or asset acquisitions with transaction consideration in the form of cash and the Company’s common stock so the former owners of impact investment acquisitions are properly aligned with our public shareholders in the creation of future value. Additionally, the Company has developed innovative business projects that fit within our corporate strategy and have been allocated capital and resources to grow and increase shareholder value.
After a potential impact investment is acquired, or an organic innovation is launched, our executive management team is responsible for closely monitoring on a regular basis the performance of each investment. Each operating business has an experienced management team that is responsible for executing a value creation plan with active support, collaboration and input from the Company’s executive management team. We believe a balanced approach to individual management and corporate governance provides the managers of the operating businesses with the freedom and autonomy to preserve their ownership mindset while also providing the Company’s executive team with the optimal level of involvement in order to maximize the overall benefits to the Company’s shareholders.
As the value creation plan is executed for each operating business, the Company’s executive team, in consultation with the management team of each business unit, will regularly evaluate the strategic options for the business, which could include additional investment to fund strategic growth and expansion, maximizing current cash flow without further investments, or a potential exit to a strategic or financial buyer. This process of evaluating strategic options is dynamic and involves many considerations, including an evaluation of the current and future market conditions, the current and future financial performance of the operating business, changes in its competitive advantages, new competitors, macro and micro market conditions, and exit valuations.
Environmental, Social and Governance
ESG principles are central to our mission of improving the health and wellness of people and the planet. Our impact investing strategy is dedicated to pursuing opportunities that improve the long-term sustainability of our people-planet ecosystem, reverse the damaging effects of climate change, and revitalize disadvantaged communities into next generation cities. We believe that considering ESG principles, along with the profit potential of an investment, enables our team to take a broader, more holistic approach to capital deployment by considering a wide range of stakeholders, including shareholders, the environment and local communities.
We believe our genuine commitment to ESG principles, which is at the heart of our impact investing strategy, truly differentiates our Company from other businesses whose dedication to ESG principles is more peripheral. We believe our strong commitment to ESG principles will allow us to attract similarly-committed customers, suppliers, employees, financial partners, and federal, state and local partnerships who are motivated by our shared sense of purpose and commitment to doing well by doing good.
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Diversity, Equity and Inclusion
Our employees are integral to fostering a culture of honesty, integrity and respect. We believe hiring, training, motivating and retaining talented individuals is critical to the successful execution of our impact investing strategy. Our employees are our single most important asset.
We seek to attract employees with different backgrounds and unique perspectives, and provide a safe environment for them to collaborate in a respectful manner so our Company can benefit from their best collective thinking. We believe a diverse, equitable and inclusive workforce increases innovation and creativity, improves decision making, increases adaptability and flexibility, and improves stakeholder engagement. Additionally, we believe these benefits will ultimately result in greater profits and an increase in long-term shareholder value.
Competition
Our Company is focused on a large and growing marketplace for impact investing, and therefore, is anticipated to face competition from a variety of operating businesses and investment funds who are developing business plans and operating strategies to satisfy the increasing demands of these types of investments in the marketplace. In almost all cases, these competitors are larger and better capitalized operating businesses and investment funds.
Our Company competes on the basis of a number of factors, including access to capital, access to impact investing opportunities, recruitment and retention of key personnel, market share with key customers, strong relationships with reclamation bond insurance companies and state regulators, and supply relationships with critical vendors. Our ability to continue to compete effectively in our lines of business will depend upon our ability to attract new employees, retain and motivate our existing employees, and invest in new equipment.
Information Systems
Since inception, the Company and its subsidiaries have used QuickBooks as its general ledger accounting software. However, given the significant current and anticipated growth of its operating businesses and the need for more robust information for management analysis and decision-making, the Company transitioned all of its accounting software services from QuickBooks to Foundation Software in the second quarter of 2023.
Foundation Software, founded in Cleveland, Ohio in 1985, is specifically designed for service companies, particularly those in the construction, contracting and reclamation industries. Foundation Software offers the Company several enhanced features critical to the successful execution of its value creation plan, including (i) general ledger accounting, including accounts payable, accounts receivable, inventory and customer billing, (ii) equipment tracking on job sites, maintenance, utilization and depreciation, (iii) employee tracking on job sites, time and materials, utilization, and billing, (iv) job costing and profitability reporting segmented by customers, job types and location, and (v) numerous real-time management dashboard and key performance indicator reports that will allow management to closely monitor the performance of each operating business and react on a timely basis to business opportunities and issues. Furthermore, Foundation Software will allow the Company and its operating businesses to more easily scale their operations and efficiently and cost-effectively support the anticipated growth of each business.
Results of Operations
Three Months Ended September 30, 2023 and September 30, 2022
Our revenue for the three months ended September 30, 2023 was $5,455,633 and our gross profit was $2,857,766 (representing a 52% gross profit margin) compared to revenue for the three months ended September 30, 2022 of $1,547,258 and gross profit of $357,783 (representing a 23% gross profit margin).
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For the three months ended September 30, 2023, we incurred general and administrative expenses in the aggregate amount of $1,057,055 compared to $449,041 incurred for the three months ended September 30, 2022 (an increase of $608,014). General and administrative expenses generally include corporate overhead, salaries for administrative and management personnel and other related compensation costs, financial and administrative contracted services, marketing, consulting costs and travel expenses. These costs include the operations of Collins Building which was acquired in August 2023 and the Range Reclamation Entities which were acquired in May 2022. The majority of the increase in general and administrative expenses relates to salaries which increased to $531,172 for the three months ended September 30, 2023, as compared to $132,879 for the three months ended September 30, 2022 (an increase of $398,293) as a result of the hiring of additional administrative and management personnel in connection with the expansion of the Company’s business operations.
In addition, for the three months ended September 30, 2023, we incurred research and development costs of $140,840, compared to $106,744 for the three months ended September 30, 2022 (an increase of $34,096). These costs consist primarily of the salary of our Chief Science Officer, rent for our Rocklin lab space, patent-related legal fees, and consulting fees. This increase primarily resulted from an increase in consulting fees in the amount of $54,000, offset by a decrease in wages allocated to research and development of $19,330.
For the three months ended September 30, 2023, we recorded total net other income of $1,744,304, compared to total net other income recorded for the three months ended September 30, 2022 of $78,386. This increase of $1,665,918 was primarily attributable to the gain recognized on the purchase of Collins Building of $1,875,150, partially offset by the increased amount of interest expense related to equipment financing and the financing of the purchase of Collins Building of $135,467.
Our net income for the three months ended September 30, 2023 was $3,404,175 compared to a net loss of $119,616 for the three months ended September 30, 2022 (an improvement of $3,523,791).
Nine Months Ended September 30, 2023 and September 30, 2022
Our revenue for the nine months ended September 30, 2023 was $12,468,787 and our gross profit was $4,351,869 (representing a 35% gross profit margin), compared to revenue for the nine months ended September 30, 2022 of $2,186,617 and gross profit of $422,735 (representing a 19% gross profit margin).
For the nine months ended September 30, 2023, we incurred general and administrative expenses in the aggregate amount of $2,419,001 compared to $1,147,308 incurred for the nine months ended September 30, 2022 (an increase of $1,271,693). The majority of the increase in general and administrative costs relates to increased salary expense which increased by $456,666 and legal fees which increased by $338,922.
For the nine months ended September 30, 2023, we incurred research and development costs of $354,461, compared to $340,297 for the nine months ended September 30, 2022 (an increase of $14,164). This increase primarily resulted from an increase in consulting fees of $72,000, partially offset by a decrease in wages allocated to research and development of $38,708.
For the nine months ended September 30, 2023, we recorded total net other income of $1,635,670, compared to total net other income recorded during the nine months ended September 30, 2022 of $54,094. This increase of $1,689,764 during the nine months ended September 30, 2023 was primarily attributable to the gain recognized on the purchase of Collins Building of $1,875,150, partially offset by an increase in interest expense of $188,760, and a gain of $109,435 related to the forgiveness of a PPP loan recorded during the nine months ended September 30, 2022.
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Our net income for the nine months ended September 30, 2023 was $3,214,077 compared to a net loss of $1,010,776 for the nine months ended September 30, 2022 (an improvement of $4,224,853).
Liquidity and Capital Resources
As of September 30, 2023, we had total current assets of $4,075,750, comprised of cash in the amount of $1,026,286, accounts receivable of $2,897,234, unbilled receivables of $49,148 and prepaid expenses of $103,082. As of September 30, 2023, we had total current liabilities of $5,335,662, consisting of outstanding amounts on our lines of credit of $1,900,000, accounts payable of $924,282 and the current portion of long-term debt of $2,511,380. As a result, on September 30, 2023, the Company had negative working capital of $1,259,912. At December 31, 2022, the Company had negative working capital of $128,371.
As of September 30, 2023, the Company had long-term assets of $14,768,739, comprised of net equipment assets of $12,268,855, land of $1,531,758, buildings of $196,729, goodwill of $751,421, and deposits of $19,976. As of September 30, 2023, the Company had long-term liabilities of $5,891,557, comprised of long-term debt, net of current portion. As of December 31, 2022, the Company had long-term assets of $6,805,827, comprised of net equipment assets of $6,045,514, goodwill of $751,421, and deposits of $8,892. As of December 31, 2022, the Company had long-term liabilities of $3,738,013, comprised of long-term debt, net of current portion.
Sources of Capital
Based on the Company’s current corporate strategy, we expect our general operating expenses to be substantially offset by revenue generated by the Range Reclamation Entities, Collis Building and Range Security. We expect the Company’s operating businesses to generate operating income and positive cash flow over the 12 months following September 30, 2023. Based on the Company’s current cash balance and $100,000 currently available under its revolving credit line, the Company expects to have sufficient funds to operate its business over the next 12 months. If additional capital is needed in excess of our current capital resources, we will explore financing options to accelerate the funding and execution of our growth strategy and shareholder value creation plan.
Our estimated total cash needs for the 12-month period ending September 30, 2024 could increase if we encounter unanticipated lower revenues and higher 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.
Until such time as the Company and its operating businesses are cash flow positive, we expect to continue funding our operations, at least in part, through equity and debt financings. However, sources of additional funds may not be available when needed, on acceptable terms, or at all. If we issue equity or convertible debt securities to raise additional funds or to fund, in whole or in part, acquisitions in furtherance of our business strategy, our existing stockholders may experience substantial dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing stockholders. If we incur additional debt, we would incur additional interest expenses, and assuming those loans would be available, it would increase our liabilities and future cash commitments. 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 and other related costs.
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Net Cash Used in Operating Activities
For the nine months ended September 30, 2023, net cash provided by operating activities was $1,074,719 compared to net cash used in operating activities of $568,536 for the nine months ended September 30, 2022. This difference of $1,643,255 was primarily attributable to the Company’s net income of $3,214,077 for the nine months ended September 30, 2023, compared to a net loss of $1,010,776 for the nine months ended September 30, 2022 and depreciation of $1,026,052, offset by the gain of $1,875,150 recognized on the purchase of Collins Building and an increase in accounts payable of $1,915,848, for the nine months ended September 30, 2023. Net cash used in operating activities for the nine months ended September 30, 2022 consisted primarily of a net loss of $1,010,776, offset by depreciation of $187,923 and a decrease in accounts receivable of $554,181.
Net Cash Used in Investing Activities
For the nine months ended September 30, 2023, net cash used in investing activities was $7,146,525 compared to net cash used in investing activities of $1,977,502 for the nine months ended September 30, 2022. Net cash used in investing activities during the nine months ended September 30, 2023 consisted of equipment purchases totaling $1,134,417, cash paid or financed in connection with the acquisition of Collins Building totaling $5,035,250 and cash paid for land of $976,858. Net cash used in investing activities for the nine months ended September 30, 2022 consisted primarily of equipment purchases totaling $1,243,329 and cash paid in connection with the acquisition of Range Environmental of $750,000.
Net Cash Provided By Financing Activities
For the nine months ended September 30, 2023, net cash provided by financing activities was $6,655,723 compared to net cash provided by financing activities of $3,664,494 for the nine months ended September 30, 2022. Net cash provided by financing activities during the nine months ended September 30, 2023 consisted of $1,410,000 received from the issuance of common stock and warrants, proceeds of $4,035,250 from long-term debt issued in connection with the acquisition of Collins Building, proceeds of $383,202 from other long-term debt and $1,900,000 from revolving lines of credit, offset by repayments on long-term debt of $1,072,729. Net cash provided by financing activities during the nine months ended September 30, 2022 consisted of $3,250,000 received from the issuance of common stock and warrants, proceeds of $923,309 from long-term debt, offset by $350,000 paid off on a revolving line of credit.
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.
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We believe the following critical accounting policies require us to make significant judgments and estimates in the preparation of our consolidated financial statements included in this report:
Use of Estimates and Assumptions
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. The more significant estimates and assumption by management include, among others, assumptions used in valuing assets acquired in business acquisitions, reserves for accounts receivable, assumptions used in valuing equity instruments issued for services, the valuation allowance for deferred tax assets, accruals for potential liabilities, and assumptions used in the determination of the Company’s liquidity. Actual results could differ from those estimates.
Business Combinations
Business combinations are accounted for using the purchase method of accounting under ASC 805, “Business Combinations.” This method requires the Company to record assets and liabilities of the businesses acquired at their estimated fair values as of the acquisition date. Any excess of the cost of the acquisition over the fair value of the net assets acquired is recorded as goodwill. Determining the fair value requires management to make estimates and assumptions including discount rates, rates of return on assets, and long-term sales growth rates.
Goodwill
As referenced by ASC 350 “Intangibles- Goodwill and Other” (“ASC 350”), management performs its annual test for goodwill at least annually or more frequently, if impairment indicators arise.
Revenue
The Company recognizes revenue under ASC 606, “Revenue from Contracts with Customers”. The core principle of the revenue standard is that a company should recognize revenue by analyzing the following five steps: (1) identify the contract with the customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations; and (5) recognize revenue when (or as) each performance obligation is satisfied. The Company primarily invoices customers and recognizes revenue on a periodic basis for equipment and labor hours provided to a customer on a particular job based on an agreed-upon hourly rate sheet or a fixed amount for a project. The Company also invoices customers and recognizes revenue for equipment mobilization fees and materials and supplies required to complete a project. The Company invoices for the sales of chemicals and recognizes revenue when the products are delivered to the customer’s designated site. Costs for equipment, labor and chemicals are generally expensed as incurred since the projects are generally short-term and not subject to a contract. The Company also invoices customers for the provision of environmental security services on an agreed-upon hourly rate for each project. All revenue is recognized at a point in time.
The Company recognizes revenue from contracts for financial reporting purposes over time. Progress toward completion of the Company’s contracts is measured by the percentage of cost incurred to date compared to estimated total costs for each contract. This method is used because management considers total cost to be the best available measure of progress on contracts. Because of inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used will change significantly within the near term.
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Stock-Based Compensation
The Company periodically issues stock options and restricted stock awards to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for such grants issued and vesting based on ASC 718, Compensation-Stock Compensation whereby the value of the award is measured on the date of grant and recognized for employees as compensation expense on the straight-line basis over the vesting period. Recognition of compensation expense for non-employees is in the same period and manner as if the Company had paid cash for the services.
Recent Accounting Pronouncements
Please refer to Footnote 1 of the accompanying financial statements for management’s discussion of recent accounting pronouncements.
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 September 30, 2023, and have concluded that our disclosure controls and procedures were effective as of September 30, 2023.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended September 30, 2023, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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 Annual Report on Form 10-K filed with the SEC on March 31, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On August 24, 2023, the Company entered into a securities purchase agreement providing for the issuance and sale by the Company of 6,666,667 shares of the Company’s common stock (the “August Shares”) at a price of $0.15 per share. After deducting for fees and expenses, the aggregate net proceeds from the sale of the August Shares were approximately $1,000,000.
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Item 6. Exhibits
† Furnished herewith.
* Filed 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: November 14, 2023 | ||
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EXHIBIT INDEX
† Furnished herewith.
* Filed herewith
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