ITEM 1. BUSINESS
Overview
We hold a license from Cell Science to plant cell-extraction and replication technology and related proprietary equipment, processes, and formulations to produce, manufacture, and sell cannabis-related byproducts—sometimes referred to as cannabinoids—exclusively in North America, Central America, and the Caribbean for medical, food additive, and recreational uses.
During our fiscal year ended July 31, 2021, we collaborated with Cell Science, through Dr. Peter Whitton, the principal inventor of the technology and an affiliate of both Cell Science and us, to demonstrate application of the technology. In a July 2021 amendment to our license agreement with Cell Science, we altered the testing requirements and accepted the results then achieved, which required us to issue a one-year note for a one-time payment of $3.5 million, subject to specified setoffs, to obtain a fully paid license. In January 2022, and in lieu of any reduction to the one-time payment note, we agreed to accept assignment of all rights under the lease for the facility in which the laboratory that we used for the efficacy demonstration testing process is located, as well as all rights in all laboratory equipment and related assets used in the efficacy demonstration testing process.
During our most recent fiscal year completed on July 31, 2022, we expanded our consulting team to support our efforts to organize the launch of our commercialization efforts, identify possible sources of required financing, and initiate conversations with potential commercialization partners, particularly selected multi-state operators with established production, distribution, and marketing infrastructure, expertise, and financing. Conversations with some of these sources and potential commercialization partners continue, but we have not reached any definitive commitments, understandings, or agreements. We are continuing our efforts.
We propose to undertake additional work to determine the limits of the technology, maximize production efficiency, reduce production costs, and customize the process and products for potential commercialization partners, which we believe will enhance our commercialization efforts. We intend to coordinate these efforts with the requirements of potential funding and commercialization opportunities. Subject to successfully completing our ongoing work, we intend to seek to commercialize the licensed technology through joint ventures, strategic partners, sublicenses, and other arrangements that may enable us to take advantage of the technical, regulatory relationships and experience, and financial resources of experienced cannabinoid production firms. We intend to authorize these third parties to incorporate the technology into production facilities they fund, build, and operate to produce medical, food additive, and recreational cannabis-related products in compliance with applicable state and federal law. We will need additional financing from external sources to begin these efforts.
The licensed intellectual property is based on established bioscience principles and practices and has been demonstrated on a limited basis. Testing of the process has met agreed technical specifications, including equipment, processes, and formulations, for production in batches in which seed cells are grown in a biologically active controlled and monitored environment within our proprietary production pods that could be replicated to produce commercial quantities. However, our licensed technology has not been scaled up to produce cannabinoids in commercial quantities routinely and reliably. Accordingly, our ability to commercialize the intellectual property through strategic partners, joint venturers, and sublicensees is dependent on successful completion of necessary application engineering, which we cannot assure will occur.
Our licensed technology describes a process to mirror, or replicate, the cannabinoid flavor, aroma, and CBD and THC potency qualities of the source plant’s cells without growing the plant. We do not now, and do not intend to, produce, transport, or sell cannabis or cannabinoids directly.
Since early 2020, our business activities and all efforts to advance the demonstration of the validity of our licensed technology have been adversely affected due to the COVID-19 pandemic. The COVID-19 virus and its Delta, Omicron, and possible other variants, as well as government and private sector responses to them, have caused and continue to cause delays, increased costs, and interrupted travel and, in general, to negatively impact all our activities.
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Our License
Based on completion of conditions specified in our Integrated License Agreement discussed below, on May 17, 2022, we filed and recorded with the US Patent and Trademark Office the Patent and Technology License, which we refer in this document as the “License.” In this document, Cell Science granted us a fully-paid, exclusive, royalty free, perpetual, irrevocable right and license, with the right to sublicense, cell-extraction and replication technology and related proprietary equipment, processes, and formulations to produce, manufacture, and sell cannabis-related byproducts—sometimes referred to as cannabinoids—exclusively in North America, Central America, and the Caribbean for medical, food additive, and recreational uses.
Our Integrated License Agreement
On December 20, 2018, we entered into a Patent and Technology License Agreement, which was amended and restated effective December 31, 2019, which in turn was further amended on September 22, 2020 (the “Amended Restated License”), to license, with the right to sublicense, the described cell-extraction and replication technology and related proprietary equipment, processes, and medium formulations to be used in a commercially-sized bioreactor laboratory to produce, manufacture, and sell cannabinoids – exclusively in North America, Central America, and the Caribbean – for medical, food additive, and recreational uses. As consideration for the grant of the license, we issued 210,000,000 shares of common stock, subject to adjustment, and agreed to a one-time payment of $3.5 million, less an amount equal to all cash and expense advances to Cell Science representatives to the technical team involved in the testing (the “One-time Payment”). The One-time Payment is evidenced by a promissory note for $3.5 million to Cell Science due in January 2023. As a result of the issuance of these shares, Cell Science became our largest stockholder.
In consideration of the December 2018 license granted by Cell Science, we issued to Cell Science 210,000,000 shares of common stock, which constituted about 69.70% of our issued stock as July 31, 2022. The shares initially issued to Cell Science were subject to reduction if the results of the efficacy demonstration showed less than targeted results. In September 2020, we released 20,000,000 shares from possible reduction, and in February 2021, we released an additional 6,000,000 shares.
Based on an evaluation of the efficacy demonstration testing results achieved to date, and in light of the desire to accelerate the launch of our commercialization program directed at achieving recurring revenue, on July 12, 2021, we agreed to rely on the results from five bioreactors rather than two groups of five preselected bioreactors. We accelerated the measurement criteria to measure the commercial efficacy of the licensed technology, and further determined to accept the test results from the five bioreactors as meeting the Cell Science efficacy demonstration requirements. As a result of our acceptance of the efficacy demonstration test results in July 2021, we released all remaining 184,000,000 shares initially issued to Cell Science under our intellectual property license. In January 2022, we accepted assignment of all rights under the lease for the facility in which the laboratory we use is located including all rights in all laboratory equipment and related assets used in the efficacy demonstration testing process in lieu of any reduction to the One-time Payment note. See below.
The Amended Restated License, as subsequently amended by the 2020 and 2021 successive amendments, are all are merged into a single, integrated agreement that are together hereinafter referred to as the “Integrated License Agreement.”
Under the Integrated License Agreement and notwithstanding the grant of the License as described above, we remain obligated to pay certain patent prosecution and other intellectual property protection costs that could be substantial. We do not plan to establish or maintain any deposits or reserves to pay these costs. If we fail to meet these obligations, Cell Science could terminate our License and then have the right to assume our position in any outstanding commercialization arrangements. If Cell Science assumes outstanding obligations, it would step into our position as commercial partner or sublicensee, precluding us from participating in further revenue from that relationship, notwithstanding our potential continuing liability for obligations to commercial partners, or from further commercialization efforts.
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The possibility that Cell Science, a foreign entity, may assume our obligations to our commercial partners may be a risk to them that may have a material adverse effect on our commercialization efforts. If Cell Science refuses to assume our obligations under our commercialization arrangements, the rights of our commercial partners may be subject to dispute, which would likely result in claims for damages that our commercial partners would seek to recover from us. The existence of the right of Cell Science to terminate our License on which our commercialization arrangements will be based may be considered a substantial risk to potential commercial partners and correspondingly impair the success of our commercialization efforts.
Product and Process Refinement
Having accepted the test results demonstrating efficacy of the licensed technology in July 2021 and subject to obtaining required financing, we will continue to refine the licensed process, focusing on determining the limits of the technology, maximizing production efficiency, reducing production costs, and customizing features to address the requirements of potential commercialization partners. We undertake specific tasks based on our understanding of the expectations and anticipated requirements on potential commercialization partners. These efforts are underway at laboratory facilities in Van Nuys, California, in which the efficacy demonstration was completed. We acquired rights to use that facility through agreements with our affiliates, Cell Science and OZ Corporation, in January 2022. As part of our ongoing laboratory work, we will develop a standardized operating manual, technical descriptions, and related documentation with a view to supporting joint venturers, strategic alliance partners, sublicensees, and others in constructing and operating commercial production plants. We intend to more fully define the scope and description of the technology and outline general requirements for equipment, materials, utility requirements, facility specifications, and consumables. This work will require that we hire employees and engage consultants with required scientific and technical expertise.
Proposed Commercialization
General
We are proceeding with efforts to generate revenue through commercializing our licensed technology. In order to access the technical, financial, and operating and regulatory experience of companies already in the cannabinoid industry, we are identifying and initiating discussions with multi-state cannabinoid producers and marketers about possible joint venture arrangements or other strategic relationships. In pursuing these relationships, we will seek to balance the cash and other resources that the other party may provide to accelerate our market entry against the potential revenue that we will need to share with our partner. Our focus on joint ventures and strategic relationships will take priority over our earlier intent to sublicense to third parties the use of the licensed technology and related specifications for proprietary equipment, processes, and medium formulations to produce, manufacture, and sell cannabinoids. We do not currently have any commitment for any joint venture, strategic alliance, sublicense, and other arrangement, except as described below. We do not now, and do not at any time intend to, produce, distribute, or market cannabis or cannabis products.
We intend to enter commercialization arrangements for the licensed technology only with third parties that are permitted in the applicable jurisdiction to legally produce and manufacture cannabis-derived products and byproducts for sale and use, including a cannabis concentrate powder product for the medical, food additive, and recreational cannabis consumption markets. The licensed technology is designed to produce, after the final processing step, both THC and CBD concentrates that mirror the source cells with potency meeting our requirements. Generally, we will seek commercialization through firms that have the requisite cannabinoid permits and financial ability to scale-up commercially sized bioreactor production facilities capable of producing at each production site 60,000 pounds per annum of a predictably harvested plant-derived material with reliable qualities and quantities.
Currently, state cannabinoid regulations are generally based on live-grow plant-based cannabinoid production that may not specifically address possible production through a plant cell-extraction and replication process. Further, current regulatory regimes may not easily be adaptable to laboratory production methods such as ours. Therefore, to support our commercialization program, we anticipate that initially we will need to collaborate with state regulators to adapt or amend current statutes, regulations, and administrative policies to accommodate laboratory production, and we may need to obtain any special clearances from state licensing authorities for our
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plant cell-extraction and replication processes on behalf of commercial partners. These efforts may not be successful and will likely increase costs and delay commercialization and revenues.
In addition to initial engineering that we plan to undertake, we will be responsible for ongoing research and development costs and creating a licensing sales and support operation. Commercial partners will be required to fund production facilities construction, staffing, and operation. Commercial partners will also be responsible for all required regulatory permits and compliance.
Sublicense with Integrity Cannabis Solutions, Inc.
On April 17, 2020, through our subsidiary, we entered into a Strategic Alliance Agreement with Integrity Cannabis Solutions, Inc. (“ICS”), an unaffiliated Florida corporation, to collaborate: (i) to facilitate the building and operation of a commercial-scale production facility in Florida; and (ii) to enter a sublicense.
We entered into a Patent and Technology Sublicense Agreement (the “Sublicense Agreement”) on April 22, 2020, under which we granted to ICS the right to use the sublicensed technology to produce, manufacture, market, and sell CBD and related byproducts and derivatives having less than 0.3% measurable THC on a dry weight basis. The sublicense will become effective when the efficacy demonstration is complete with confirmed results demonstrating that: (a) the cannabinoid concentrates produced, harvested, and dried during a full cycle of the licensed technology process contain at least 90% of the measurable percentage levels of THC and CBD as the donor cells; (b) this result is achieved at a project utility, production, and supplies cost of $0.10 per gram, or roughly $100 per kilogram; (c) we have provided the operations manual; and (d) we have provided all necessary equipment designs and vendor resources. Since we waived compliance with the original efficacy demonstration requirements that were effective when we entered into our agreements with ICS, we will need to renegotiate the terms of our arrangements with ICS, and we cannot assure that we will be successful in doing so.
Under the existing Sublicense Agreement, ICS is obligated to pay to us a continuing royalty equal to 8% of the wholesale product price sales revenue from the production of CBD raw product concentrate in the production facility using the sublicensed technology. The royalty payments are payable quarterly in arrears, beginning after the first quarter of commercial production. We cannot predict when actual production may commence.
We have informally discussed with ICS how we might move forward with our arrangements for placing a plant into production, but no new agreements have been reached, and we cannot assure that we will be able to negotiate mutually acceptable terms for proceeding.
Commercialization Support Services
We intend to provide our commercial partners with business and technical support to help them build and equip a commercial production laboratory to use our cell-extraction and replication technologies and related proprietary equipment, processes, and medium formulations. Our technical support will include component planning related to a variety of matters, such as:
·build-out requirements, including necessary leasehold improvements to support the operation of the licensed science production facility, utility requirements, equipment procurement and set-up, initial testing, plans, and permits;
·regulatory compliance review of the licensed science;
·staffing plans, including in-house sales, recommended qualifications for hiring a science officer and technical team members;
·introduction to external consultant, engineer, compliance, shipping/packing, and distribution resources;
·procurement and installation of proprietary bioreactors and all support equipment;
·process training for:
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oseed culture harvest from donor plants;
oseed culture growth cycle;
ocell growth cultivation filtration cycle;
odrying equipment operation post-production processing options for the plant material;
oconcentrate plant material distillation process;
oinitial product harvest and packaging plant material handling;
oguidelines for internal and third-party laboratory testing contract review of services;
oguidelines for product to market options; and
·consulting to utilize the product in regulated proprietary products.
Sources and Availability of Raw Materials
Completion and operation of a facility using our licensed technology to produce cannabinoids is dependent on the availability of standard biological laboratory equipment and supplies and the acquisition and operation of proprietary equipment. In some cases, existing available equipment must be significantly modified and customized to perform required tasks and procedures. Similarly, medium formulations have been developed from raw materials commercially available from multiple suppliers. Since early 2020, the efficacy testing has been materially and adversely impacted by the shortages or unavailability of equipment or supplies. We will continue to be subject to these shortages and delays as we continue the production and process engineering.
Our commercialization of the cell-extraction and replication technology will require us to obtain raw materials for cell culture media that are mixed and packaged by third parties for sale to a sublicensee. We cannot predict whether commercial partners will be able to readily acquire or build the equipment or obtain the supplies necessary to construct and operate a commercial cannabinoid production without unusual costs or delays.
Patents
We license the following patent applications under our Integrated License Agreement. We do not currently own any other intellectual property.
Patents:
Application No.
| Title
| Filing Date
| Jurisdiction
|
1717554.8
| A method of production of phytocannabinoids for use in medical treatments
| 10/25/2017
| United Kingdom
|
|
|
|
|
16/290,708(*)
| A method of production of phytocannabinoids for use in medical treatments
| 3/1/2019
| United States
|
*The United States Patent and Trademark Office approved and granted Patent US10477791 on November 19, 2019.
Patents Cooperation Treaty Filing:
Application No.
| Title
| Filing Date
| Jurisdiction
|
2018/077149
| A method of production of phytocannabinoids for use in medical treatments
| 10/5/2018
| PCT
|
The protection of proprietary rights relating to our licensed cell-extraction and replication technology is critical for the business. We intend to file additional patent applications to protect certain technology and improvements considered important to the development of the licensed technology and our business. We also intend to rely upon trade secrets, know-how, continuing technological innovation and licensing opportunities, and a comprehensive and robust confidentiality and nondisclosure discipline.
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Although we intend to seek patent protection for additionally developed proprietary technology, the patent positions of our products are generally uncertain and involve complex legal and factual questions. Consequently, we do not know whether any current or possible future patent applications will result in the issuance of any patents or whether such patent applications will be circumvented or invalidated. We cannot assure that all U.S. patents that may pose a risk of infringement can or will be identified. In addition, although we do not believe that any patents or other proprietary rights that we license infringe upon the rights of third parties, there may be third parties that hold patents of which we are unaware. This includes competitors or potential competitors that may have filed applications for, or received, patents and obtained additional patents and proprietary rights relating to compounds or processes competitive with those covered under the Integrated License Agreement.
We could incur substantial legal and other costs to protect our proprietary rights against infringement by third parties. Similarly, we cannot assure that others may not assert infringement claims against us in the future, and we recognize that any such assertion may require us to incur legal and other defense costs, enter compromise royalty arrangements, or terminate the use of some technologies. Furthermore, we could face delays in obtaining licenses when we may have infringed on other patents and may encounter delays in product market introductions while attempting to design around conflicting intellectual property rights.
We rely on patented and unpatented trade secrets, and we cannot assure that we can meaningfully protect our rights to them or that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to or disclose our trade secrets and technology. We require confidentiality agreements to be executed in circumstances when our personnel, consultants, and advisors will have access to proprietary information. We cannot assure, however, that these agreements will provide meaningful protection against, or in the event of, unauthorized use or disclosure of such information. Further, disclosures of our proprietary information may enable others to challenge our process or facilitate reverse engineering important components of our technology.
Research and Development
We had no research and development expenditures during the fiscal years ended July 31, 2021 and 2020, and thereafter. Instead, we have benefitted from, and relied on, the research and development of affiliates.
Cannabis Industry
According to trade journals, business news following the cannabis industry worldwide, and public company information available for Canadian companies and U.S. companies domiciling in Canada, the average industry reported (including both private and public companies) cost to grow cannabis flower and trim in an inside-grow facility in California is approximately $800 to $950 per pound, without capital expenses or taxes, and approximately $420 per pound in a typical California greenhouse grow. The end-product flower, before taxation, depending on the state and the strain, is selling for $1,200 a pound to over $4,000 a pound.
We believe that the combination of the licensed technology and processes could deliver a high-quality plant-derived material at costs below $250 per pound, including the license royalty payments to us in a commercially scaled laboratory, which we estimate is approximately one-third the capital expense cost of a comparable greenhouse grow facility.
Competition
We believe that competition in the commercial cannabinoid industry is based primarily on price per unit, predictable and replicable taste, aroma, and CBD or THC concentration, and compatibility with applicable regulatory requirements.
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Cost is a function of both amortization of required capital costs and operating expenses. Based on the efficacy testing to date, we believe that capital costs for our cell-extraction and replication production facilities will compare favorably to capital costs required for a plant-based open-grow greenhouse or an inside-grow hydroponic production facility of similar capacity. Similarly, we project lower per-unit production operating costs for cell-replicated production than open-grow greenhouse or hydroponic production facilities. Our estimates are financial approximations of the economic effects derived during the efficacy testing, and we cannot assure their accuracy for scaled production.
Another principal competitive factor is the replicable and predictable ability of our cell-extraction and replication technology to produce cannabinoids with flavor, aroma, and CBD or THC concentration that accurately mirrors the source cells. A part of this quality consistence and assurance is that laboratory-produced cannabinoids are free of pests, blights, and varied “flower potency” harvests common to the current plant-based live-grow industry. Our planned production and process engineering will address assuring that the satisfactory test results achieved to date can be achieved in large-scale commercial production facilities.
We believe the value to potential commercial partners will be dependent on their ability to scale the application of the technology and trade secret processes in production laboratories at the same or lower capital and operating costs than approaches common to the industry for live-grow plants in outside, greenhouse, or hydroponic production.
As noted and discussed in greater detail below under “Government Approvals and Regulation in the U.S. Cannabis Industry,” we anticipate that our ability to enter commercialization arrangements will face competition from sponsors of live-grow plant production facilities that are more directly and predictably regulated than plant cell-extraction and replication technologies like we use. The need for us and our prospective commercial partners to coordinate regulatory licenses and compliance for our nontraditional production approach may result in delays and regulatory unpredictability that may adversely affect our commercialization efforts. Therefore, to support our commercialization program, we expect that we will need to initiate efforts to obtain any required special clearances from state licensing authorities for our production processes as well as provide continued support to our commercial partners.
We consider anyone producing THC and CBD to be both a prospect for commercializing our licensed science as well as a competitor for any prospective commercialization arrangement. We believe principal competitors for our plant-based process are the synthetic producers, such as Ginko and many others, as well as traditional greenhouse production methods, which claim lower capital costs and higher quality than warehouse grown cannabis. MedMen, for example, enjoys the advantages of established production capabilities. MedMen, headquartered in Culver City, California, is engaged in the clone-to-production cannabis business with operations for cultivation and retail paired in California and eight other U.S. states. These companies have been in the market for many years and have significant resources and established market share. There are a growing number of new entrants of various sizes into the cannabis growing industry that, together with the industry leaders, present a large, diversified, well-funded, and capably managed array of competitors with capital investments in competing cultivation processes. Many of the firms with which our commercial partners will compete have large financial and management resources and established positive industry reputations, distribution channels, customer relationships, operating histories, and reputations. We cannot assure that our licensed science will be able to compete effectively.
Government Approvals and Regulation in the U.S. Cannabis Industry
Legislation and Interpretation
Thirty-three states and the District of Columbia currently have laws broadly legalizing cannabis in some form for either medicinal or recreational use. However, cannabis is a Schedule I drug under the Controlled Substances Act of 1970, or CSA, and is therefore illegal under federal law. The U.S. Supreme Court has ruled that the federal government has the right to regulate and criminalize the sale, possession, and use of cannabis, even for medical purposes. Thus, even where cannabis has been legalized under state law, its use, possession, or cultivation remains a violation of federal law.
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The U.S. Department of Justice, or DOJ, stated that Schedule I controlled substances are “the most dangerous drugs” with “potentially severe psychological or physical dependence.” If the federal government decides to enforce the CSA, those charged with distributing, possessing with intent to distribute, or growing cannabis could be subject to fines of up to $50,000,000 or prison sentences up to life, even if they comply with state law. Further, individuals and entities may violate federal law if they intentionally aid and abet another violator or conspire to do so.
We have not requested or obtained any opinion of counsel or authority ruling to determine whether our operations comply with any state or federal laws or if we are assisting others to violate said laws. If our operations are deemed to violate any state or federal laws or if we are deemed to be assisting others in violating said laws, any resulting liability could cause us to modify or cease our operations until we are able to comply with applicable requirements.
In the light of the conflict between federal and state cannabis laws, in August 2013, under the Obama administration, DOJ Deputy Attorney General James M. Cole issued the Cole Memorandum to U.S. Attorneys providing guidance concerning marijuana enforcement under the CSA. It effectively stated it was not an efficient use of federal resources to direct federal law enforcement agencies to prosecute individuals following state laws that allow medical cannabis. The Cole Memorandum stated that, when states have implemented strong and effective regulatory and enforcement systems to control the cultivation, distribution, sale, and possession of cannabis, conduct in compliance with those laws is less likely to threaten federal priorities, and that state and local law enforcement and regulatory bodies should remain the primary means of addressing cannabis-related activity.
In January 2018, under the Trump administration, the DOJ issued a policy memorandum on federal marijuana enforcement announcing a return to the rule of law and rescinding previous guidance documents, including the Cole Memorandum. In this memorandum, Attorney General Jeff Sessions directed U.S. Attorneys to determine whether to pursue prosecution of cannabis activity based upon the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of crimes on the community. The DOJ claimed this action was a return of trust and local control to federal prosecutors who knew where and how to deploy federal resources most effectively to reduce violent crime, stem the tide of the drug crisis, and dismantle criminal gangs. Mr. Sessions reiterated that the cultivation, distribution, and possession of marijuana continued to be a crime under the CSA, that it was the DOJ’s mission to enforce the laws of the United States, and that all U.S. Attorneys should use previously established prosecutorial principles to disrupt criminal organizations, tackle the growing drug crisis, and thwart violent crime across our country. Notwithstanding the change in guidance, year-end reports on the federal judiciary indicated that federal marijuana prosecutions dropped in both 2018 and 2019, even as the total number of defendants charged with drug crimes increased.
On March 11, 2021, Merrick Garland was sworn in as the new U.S. Attorney General. During his campaign, President Biden stated a policy goal to decriminalize possession of cannabis at the federal level, but he has not publicly supported the full legalization of cannabis. During his February 2021 congressional testimony, Mr. Garland stated that he would reinstitute a version of the Cole Memorandum. In his written responses to the Senate Judiciary Committee, he reiterated the statement that the DOJ under his leadership would not pursue cases against Americans “complying with the laws in states that have legalized and are effectively regulating marijuana.” It is not yet known whether the DOJ under President Biden and Attorney General Garland will readopt the Cole Memorandum or announce a substantive marijuana enforcement policy. Mr. Garland indicated at a confirmation hearing before the United States Senate that it did not seem to him to be a useful use of limited resources to pursue prosecutions in states that have legalized and that are regulating the use of marijuana, either medically or otherwise. It is unclear what impact, if any, the new administration will have on U.S. federal government enforcement policy on cannabis. Nevertheless, the DOJ could decide to strongly enforce the federal laws applicable to cannabis, causing us significant or irreparable financial damage.
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Congress possesses broad authority to change the status of cannabis under the CSA and related federal laws. In each budget cycle since 2014, Congress has passed an appropriations rider known as the “Rohrabacher-Farr Amendment,” barring the DOJ from using taxpayer funds to prevent states from implementing their own laws that authorize the use, distribution, possession, or cultivation of medical marijuana. Because the DOJ memorandums serve as discretionary agency guidance and do not constitute a force of law, cannabis-related businesses have worked to continually renew the Rohrabacher-Farr Amendment that has been included in federal annual spending bills since 2014. This amendment does not change the legal status of cannabis, prevent criminal liability, or effect recreational marijuana. It must be renewed each fiscal year to remain in effect, and if Congress repealed the rider, the DOJ could prosecute CSA violations retroactively while the rider was in effect. The U.S. Court of Appeals for the Ninth Circuit held in 2016 that the Rohrabacher-Blumenauer Amendment, or Rohrabacher-Farr Amendment, also prohibits the DOJ from spending funds from other relevant appropriations acts to prosecute individuals who engage in conduct permitted by state medical-use cannabis laws and who strictly comply with said state laws. This opinion applies only to states within the Ninth Circuit in the western United States.
On March 15, 2022, the amendment was renewed through the signing of the fiscal year 2022 omnibus spending bill and will be effective through September 30, 2022. Notably, the Rohrabacher-Farr Amendment has applied only to medical marijuana programs and has not provided the same protections to enforcement against adult-use activities. If the Rohrabacher-Farr Amendment is no longer in effect, the risk of federal enforcement and override of state marijuana laws would increase.
Under the 2018 Agriculture Improvement Act, hemp, a member of the cannabis family, is no longer considered a Schedule I controlled substance under the CSA if it contains less than 0.3 percent THC. Hemp cultivation is now broadly permitted. It is unknown, however, if other cannabis derivatives will be federally legalized.
If the federal government were to strictly enforce federal law regarding cannabis and its chemically active compounds, we would likely be unable to execute our business plan. Even if our activities do not interfere with any of the enforcement priorities of the DOJ, we could be deemed to violate federal law and be unable to conduct our business.
Local and state regulatory regimes generally prohibit cannabinoid-related activities that are not specifically permitted and frequently address only plant live-grow production. We will need to analyze each individual state’s regulations and collaborate with authorities to adapt regulatory regimes to our plant cell-extraction and replication technology. Some jurisdictions may need to amend or revise their statutes and regulations or revise their administrative and enforcement policies to accommodate our production technologies, and we may need to obtain special clearances from state licensing authorities for our plant cell-extraction and replication processes on behalf of commercial partners. We cannot predict whether or how we can meet any state requirements or the time that might be required to do so.
Financial Transactions and Future Laws
Financial transactions involving cannabis-related proceeds may trigger prosecution under federal money laundering statutes, unlicensed money transmitter statutes, and the U.S. Bank Secrecy Act, or BSA. The penalties for violations of these laws include imprisonment, substantial fines, and forfeiture. With the uncertainty surrounding the Cole Memorandum, the risk remains that federal law enforcement authorities could seek to pursue money laundering charges against entities or individuals engaged in supporting the cannabis industry.
In response to the Cole Memorandum, in February 2014, the Financial Crimes Enforcement Network, a division of the U.S. Department of the Treasury, issued guidance regarding how financial institutions can provide services to cannabis-related businesses consistent with their obligations under the BSA. In August 2014, the DOJ further directed federal prosecutors to consider the federal enforcement priorities in the Cole Memorandum when determining whether to charge institutions or individuals with financial crimes based upon cannabis-related activity. Nevertheless, banks remain hesitant to offer banking services to cannabis-related businesses. Thus, it is difficult for businesses in the cannabis industry to establish banking relationships. Although we do not produce, transport, or sell cannabis or its products, financial institutions may refuse to do business with us based on their conclusion that our activities are intertwined with the cannabis industry. Our inability to maintain our current bank accounts would
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make it difficult for us to operate our business, increase our operating costs, and pose additional operational, logistical, and security challenges that could result in our inability to implement our business plan.
The BSA requires us to report currency transactions over $10,000 to the IRS, including identification of customers by name and tax identification number. The BSA also requires us to report certain suspicious activity, including any transaction over $5,000 that we suspect may involve funds from illegal activity or is designed to evade federal regulations or reporting requirements, and to verify sources of funds. Substantial penalties can be imposed against us if we fail to comply with this regulation, which could have a material adverse effect on our business, financial condition, and results of operations. These BSA requirements may adversely affect us because many of the firms with which we may do business rely on cash transactions because of their inability to establish regular banking relationships.
Federal prosecutors have significant discretion, and we cannot ensure that federal prosecutors in the judicial districts in which we operate will not choose to strictly enforce federal cannabis laws. Any change in the federal government’s enforcement posture respecting state-licensed cultivation of cannabis or its chemical components, including the postures of individual federal prosecutors, may result in our inability to execute our business plan, and we would likely suffer significant losses, which would adversely affect the value of our securities.
Should the federal government legalize cannabis for medical use, it is possible that the U.S. Food and Drug Administration, or FDA, would seek to regulate it under the Food, Drug and Cosmetics Act of 1938. Additionally, the FDA may issue rules and regulations, including requirements to use certified good manufacturing practices related to the growth, cultivation, harvesting, and processing of medical cannabis. Clinical trials may be needed to verify efficacy and safety. It is also possible that the FDA would require that facilities where medical cannabis is grown be registered with the FDA and comply with certain federally prescribed regulations. If these regulations were imposed, we do not know what the impact would be on the cannabis industry generally and on us specifically and what costs, requirements, and prohibitions may be enforced. If our commercial partners are unable to comply with the regulations or registration as prescribed by the FDA, they may be unable to continue to operate their businesses in the U.S. markets.
The U.S. House of Representatives has passed the Secure and Fair Enforcement Act (the “SAFE Banking Act”) six times, most recently in February 2022 as an amendment to the America COMPETES Act. Previously, the SAFE Banking Act, as a standalone bill, passed the House by a vote of 321 to 101 on April 19, 2021, with 106 Republicans voting in support. This bill is currently sitting within the Senate’s Committee on Banking, Housing and Urban Affairs awaiting consideration. Should the SAFE Banking Act pass, it will alleviate many of the financial institutions’ concerns regarding transacting with cannabis-related businesses by providing several protective measures, including generally:
·prohibiting federal banking regulators from restricting, penalizing, or discouraging a financial institution or depository institution from providing banking services to a legitimate cannabis-related business;
·establishing that transactions involving proceeds from legitimate cannabis-related businesses are not considered proceeds of unlawful activities and, thus, not within the purview of anti-money laundering regulations;
·establishing that depository institutions are not, under federal law, liable or subject to asset forfeiture for providing loans or other financial services to legitimate cannabis-related businesses;
·prohibiting a federal banking regulator from requesting or ordering a depository institution to terminate its customer relationship with a protected cannabis-related business unless the agency has a legitimate reason not based on reputational risk; and
·amending the reporting requirements for Suspicious Activity Reports, or SARs, and requiring the Financial Crimes Enforcement Network to issue guidance on transactions related to cannabis-related businesses that is consistent with the purpose and intent of the SAFE Banking Act and does not significantly inhibit the provision of financial services to said businesses.
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The SAFE Banking Act would extend protection to legitimate hemp-related businesses, including CBD businesses. It also requires federal bank regulators to issue annual reports to Congress with: (1) data on availability of access to financial services for minority-owned and women-owned legitimate cannabis-related businesses; and (2) recommendations to further help such businesses access financial services.
If passed, the SAFE Banking Act could pave a path forward for cannabis-related businesses to have ready access to crucial banking and financial services, with federally backed financial institutions being able to work with cannabis companies without fear of incrimination, federal prosecution, and regulatory penalties.
Local and state marijuana laws and regulations are broad in scope and subject to evolving interpretations, which could require us or our commercial partners to incur substantial costs associated with compliance or altering our business plan. Allegations or findings that we have violated these laws could disrupt our business and result in a material adverse effect on our operations. In addition, future regulations may be enacted that are directly applicable to our proposed business. We cannot predict the nature of any future laws, regulations, interpretations, or applications, nor can we determine what effect they may have on our business.
State Border Regulation
Federal law states that cannabis and cannabis products may not be transported across state lines in the United States. As a result, all cannabis consumed in a state must be grown and produced in that same state. To meet this limitation, we intend to enter into commercialization arrangements with third parties that are restricted on a state-by-state basis. Typical cannabis growers cannot import or export crop across state lines to meet product demands. Therefore, excess production capacity in any given state that is not matched by increased demand in that state could exert downward pressure on the retail price for the products. A large number of retail licenses authorized by authorities in any given state could result in increased competition and exert downward pressure on the retail price for cannabinoid products our commercial partners sell.
We initially intend to concentrate our commercialization efforts in the United States. We believe that the value of a potential commercialization of our technology in Canada may be materially lower than in the balance of our territory due to product oversupply and excess production capacity.
Tax Concerns
An additional challenge to cannabis-related businesses is that the provisions of Internal Revenue Code Section 280E are being applied by the U.S. Internal Revenue Service to businesses operating in the medical and adult-use cannabis industry. Section 280E prohibits cannabis businesses from deducting their ordinary and necessary business expenses, forcing them to pay higher effective federal tax rates than similar companies in other industries. The effective tax rate on a cannabis business depends on how large its ratio of nondeductible expenses is to its total revenues. Therefore, businesses in the legal cannabis industry may be less profitable than they would otherwise be.
Overall, the U.S. federal government has specifically reserved the right to enforce federal law regarding the sale and disbursement of medical or adult-use marijuana even if such sale and disbursement is sanctioned by state law. Accordingly, there are several significant risks associated with our business and unless and until the United States Congress amends the CSA respecting medical and/or adult-use cannabis (and we cannot assure the timing or scope of any such potential amendments), there is a significant risk that federal authorities may enforce current federal law, our business may be deemed to be producing, cultivating, extracting, or dispensing cannabis or aiding or abetting or otherwise engaging in a conspiracy to commit such acts in violation of federal law in the United States. We do not intend to produce, transport, market, or sell cannabis products. We are not aware of enforcement determinations or policies under Section 280E targeting software companies, fertilizer companies, greenhouse companies, or similar businesses that provide goods or services to companies that do produce, transport, market, or sell cannabis products.
In the future we may separate components of our business under different subsidiaries in an effort to compartmentalize liability, but we cannot assure that such a strategy will be successful.
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Costs and Effects of Compliance with Environmental Laws
We do not anticipate that our business activities or future business activities will subject us to any environmental compliance regulations. However, our commercial partners may be subject to environmental regulation in the various jurisdictions in which they operate. These regulations mandate, among other things, the maintenance of air and water quality standards and land reclamation. They also set forth limitations on the generation, transportation, storage, and disposal of solid and hazardous waste. The processes and medium formulations that are parts of our licensed technology must be applied, used, and discarded in accordance with these requirements. Environmental legislation is evolving in a manner that will require stricter standards and enforcement, increased fines and penalties for noncompliance, more stringent environmental assessments of proposed projects, and a heightened degree of responsibility for companies and their officers, directors, and employees. We cannot assure that future changes in environmental regulation, if any, will not adversely affect the operations of a commercial partner, which in turn will affect our operations. To address or mitigate environmental compliance concerns, our licensed technology process recycles water, does not use pesticides, and uses compact space.
Government approvals and permits are currently and may in the future be required in connection with the operations of our commercial partners. To the extent such approvals are required and not obtained, our commercial partners may be curtailed or prohibited from production of adult-use or medical cannabis-related products, delaying the development of our operations as currently proposed.
Failure to comply with applicable environmental laws and regulations could subject our commercial partners to regulatory or agency proceedings or investigations and may result in enforcement actions thereunder, including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include damage awards, fines, penalties, or corrective measures requiring capital expenditures or remedial actions. Our commercial partners may be required to compensate those suffering loss or damage by reason of their operations using our technology, and civil or criminal fines or penalties may be imposed for violations of applicable laws or regulations.
Employees
As of the date of this prospectus, we have three employees, which include, Aristotle Popolizio, our Vice President and Secretary, and who is also a director, Juan Carlos Garcia La Sienra Garcia, our Chief Financial Officer, and Michael Hawthorne, our Deputy Chief Executive Officer. We intend to hire additional personnel as we undertake additional laboratory work and launch our commercialization efforts. A significant amount of competition still exists for skilled personnel in the medical cannabis-related industry. Nevertheless, we expect to be able to attract and retain additional employees as necessary, commensurate with the anticipated future expansion of our business. Further, we expect to continue to use consultants, contract labor, attorneys, and accountants as necessary.
Key Consultants
We rely on consultants to provide key technical services in connection with our current laboratory efforts respecting our licensed technology. Key current consultants include:
·Mitch Kahn assists with our technology commercialization effort and long-term strategic planning, based on his experience as a co-founder and chief executive officer of Grassroots Cannabis, which was purchased by Curaleaf Holdings in 2020.
·Chris Ganan assists with our technology commercialization effort and long-term strategic planning, based on his experience as chief strategy officer of Medmen Enterprises Inc.
·Donald Clark is responsible for regulatory compliance and the rollout of full-scale production plants. He has gained regulatory approval for our Research and Development process in California and is working to do the same in other states.
·David Slomczynski, PhD, has over 20 years’ post-doctoral experience in the fermentation and cell culture fields. He is an expert in analysis and experimental design. Dr. Slomczynski initiates and manages cultures and assists with improving our production process.
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·Damien Solomon has substantial cannabis industry plant experience and is advising us regarding product quality and design to meet market trends.
·Sean Akhavan has substantial experience as a chemist in the cannabis industry. He works on product design and quality. He is also an experienced project manager and overseas the management of our research projects.
Each of our consultants has obligations in addition to providing services to us and devotes such time to our company as we may mutually agree.
Our Organization
We were organized in Nevada on April 24, 2008, under the name Planet Resources, Corp., to reprocess mine tailings from previous mining operations. We were not successful in implementing this business plan. Previous management considered various alternatives to ensure our viability and solvency, but those efforts were unsuccessful, and we had no activities between April 2011 and June 2018. To revive our company, a receiver was appointed in a Nevada state court proceeding in August 2015. We were released from receivership in July 2018.
On May 15, 2018, we privately sold 335,000 shares of restricted common stock, which constituted about 56% of our issued common stock, at $1.00 per share to OZ Corporation for consulting services. We subsequently appointed new management and directors. Further, on August 8, 2018, we issued four shares of newly authorized Series A Preferred stock to OZ Corporation in consideration of consulting services. On November 6, 2020, the four shares of Series A Preferred stock were transferred to Cell Science. The Series A Preferred Stock has super voting rights that enable the holder to control the election of our board of directors and, ultimately, our direction.
Following the above change in control, we embarked on a new business plan to license and commercialize cell-extraction and replication technologies, primarily for medical products for pain relief and insomnia. These efforts lead to our initial license agreement with Cell Science in December 2018. As discussed in this prospectus, that original license agreement has since been amended and revised as the Integrated License Agreement.
ITEM 1A. RISK FACTORS
Investment in our common stock involves significant risk. You should carefully consider the information described in the following risk factors, together with the other information appearing elsewhere in this report, before making an investment decision regarding our common stock. If any of the events or circumstances described in these risks factors occur, our business, financial conditions, results of operations, and future growth prospects would likely be materially and adversely affected. In these circumstances, the market price of our common stock could decline, and you may lose all or a part of your investment in our common stock.
Risks Related to Ukrainian Crises
Russia’s recent military intervention in Ukraine and the international community’s response have created substantial political and economic disruption, uncertainty, and risk.
Russia’s military intervention in Ukraine in late February 2022, Ukraine’s widespread resistance, and the NATO led and United States coordinated economic, financial, communications, and other sanctions imposed by other countries have created significant political and economic world uncertainty and contributed to worldwide inflation. There is significant risk of expanded military confrontation between Russia and other countries, possibly including the United States. Current and likely additional international sanctions against Russia may contribute to higher costs, particularly for petroleum-based products. These and related actions, responses, and consequences that cannot now be predicted or controlled may contribute to worldwide economic reversals and inflation. In these circumstances, our efforts to commercialize our technology may be delayed or otherwise negatively impacted.
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Risks Related to our Business
Our entire business relies on the commercial-scale validation of our licensed cell-extraction and replication technology.
Our ability to exploit our licensed cell-extraction and replication technology for the commercial production of cannabinoids through joint ventures, strategic partners, and sublicenses is conditional on satisfactory completion of ongoing process and product refinement and customization, which has not been funded. We cannot predict when or whether we will obtain necessary funding or complete our planned work. We cannot assure that the substantive results of our planned efforts will be accepted by prospective commercial partners. Our commercialization efforts will be dependent on our ability to convince prospective commercial partners that our licensed cell-extraction and replication technology warrants the required commitment of capital, expertise, and other resources in the face of related risks, regulatory hurdles, and competitive factors. Even after a successful completion of planned process and product refinement and customization, there will initially be no established commercially operating facility using this technology successfully to support our commercialization efforts. We cannot assure that any initial costs we incur will be recovered.
We cannot accurately predict when planned further work on our licensed technology will be completed satisfactorily.
We cannot accurately predict when the planned further work related to our licensed technology, which we believe will accelerate our commercialization efforts, can be funded or completed. Any delay in obtaining required funding or completing the planned work could postpone the commencement of our commercialization efforts and our potential for revenue. Our planned laboratory work will require substantial financial, technical, and management resources that have not been arranged, so we cannot predict whether or when the required work will be completed. We expect that the foregoing will require us to obtain additional capital, which we cannot assure that we will be able to obtain on acceptable terms or at all. If required financing and planned work cannot be completed timely, we may have to abandon efforts involving the cell-extraction and replication technology for cannabinoid production and seek other business opportunities or suspend operations. Consequently, we would be unable to recover previous costs related to these abandoned activities. We have no other technology or know-how to exploit commercially.
Our licensed proprietary cannabinoid production technology has only been tested on a limited basis by related parties without qualified third-party replication.
To date the propriety technology that we have licensed has only been tested on a limited basis by our affiliates, Cell Science, which is also the licensor, and OZ Corporation, both of which benefit from favorable test results. Further, the testing was conducted by or under the supervision of Dr. Peter Whitton, the inventor of the licensed technology and our director, who will benefit substantially from the successful test that triggered the release of a large block of our common stock and a one-time payment required under the license agreement under which we acquired our rights. No qualified third party has independently replicated the entire process, results, processes, or procedures. Accordingly, we expect that prospective third-party investors, commercialization partners, investment bankers, and others will want to conduct their own independent tests to confirm the test results to date before transacting business with us. This requirement that potential commercial partners or others commit their own financial, technical, and management efforts to confirm the efficacy, reliability, and predictability of the proprietary technology may be a substantial barrier to commercialization.
Our license from Cell Science may be terminated if we fail to meet certain covenants, which could adversely affect our commercialization program.
Under the Integrated License Agreement through which we were granted our License, we remain obligated to pay certain patent prosecution and other intellectual property protection costs that could be substantial. We do not plan to establish or maintain any deposits or reserves to pay these costs. If we fail to meet these obligations, Cell Science could terminate our license. Under our Integrated License Agreement, Cell Science would then have the right to assume our position in any outstanding commercialization arrangements. If Cell Science assumes outstanding obligations, it would step into our position as commercial partner or sublicensee, precluding us from participating in further revenue from that relationship, notwithstanding our potential continuing liability for our obligations to commercial partners, or from further commercialization efforts. The possibility that Cell Science, a
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foreign entity, may assume our obligations to our commercial partners may be a risk to them that may have a material adverse effect on our commercialization efforts. If Cell Science refuses to assume our obligations under our commercialization arrangements, the rights of our commercial partners may be subject to dispute, which would likely result in claims for damages that our commercial partners would seek to recover from us. The existence of the right of Cell Science to terminate our license on which our commercialization arrangements will be based may be considered a substantial risk to potential commercial partners and correspondingly impair the success of our commercialization efforts.
We are obligated to pay Cell Science a one-time payment of $3.5 million.
We are required to pay Cell Science a one-time payment under a one-year note for $3.5 million due in January 2023. We currently do not have funds with which to pay this amount and have not arranged or obtained commitments for such funding from any source. Potential new providers of financing to the company may preclude or limit such payment from fresh funds.
Our ability to attract and enter joint ventures, strategic alliances, or sublicenses with producers, distributors, and sellers is uncertain.
We will need to identify and attract qualified, interested third parties to commercialize our cell-extraction and replication technology for cannabinoid production. We cannot assure that we will be able to successfully enter any commercialization arrangement. We estimate that a new facility designed to produce about 5,000 pounds of dry plant-derived material per month using our licensed technology will require a capital investment of from $3.9 million to $4.6 million. We expect to encounter third-party reluctance to commit substantial capital to use our technology, which will at least initially be commercially untried by others. Accordingly, we cannot predict when or the pace at which we may be able to enter commercial arrangements to generate revenue. We may be forced to delay planned commercialization efforts, seek other commercialization strategies, or obtain additional capital to continue.
We cannot assure that we will be able to transfer the required technical know-how respecting our licensed technology to enable commercial partners to commercially produce cannabinoids.
Our licensed cell-extraction and replication technology for cannabinoid production is relatively sophisticated and complex and requires scientific expertise in sterile production facility plant construction and operation, particularly as compared to traditional open-grown, greenhouse, or hydroponic production. We cannot assure that the licensed technology transfer and consulting strategies we plan to develop and use will enable our potential commercial partners to produce cannabinoids reliably, economically, and competitively.
Our long-term success will depend on the profitability of our commercialization arrangements, which we cannot control or predict.
Our long-term success will depend on the success of our future commercial partners and their ability to construct and operate commercial cannabinoid production facilities, market their products competitively, and achieve an overall, sustainable profit. The degree of commercial success and profitability of our commercial partners will affect our success in attracting additional commercial partners and the economic terms of our third-party arrangements. We cannot assure that our commercial partners will be successful, which may incentivize us to adjust the terms of our existing or new arrangements to include terms less favorable to us.
Others may challenge the validity and enforceability of the licensed patents, trade secrets, and related intellectual property.
Our future success is dependent on the validity and enforceability of our licensed patents, trade secrets, intellectual property, and related rights. Unauthorized parties may attempt to replicate or otherwise obtain and use the licensed intellectual property granted to us. Policing the unauthorized use of our current or future rights to patents, trade secrets, intellectual property, or licensed rights and enforcing these rights against unauthorized use by others could be difficult, expensive, time-consuming, and unpredictable. Identifying unauthorized use of these rights is difficult because we may be unable to effectively monitor and evaluate whether products being distributed by our competitors were made using our technology, including parties such as unlicensed producers. In addition, in any infringement proceeding, some or all our trademarks, patents, other intellectual property rights, licensed rights, trade
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secrets or other proprietary know-how, or arrangements or agreements that we are seeking to protect may be found invalid, unenforceable, anticompetitive, or not infringed. An adverse result in any litigation or defense proceeding could put one or more of our trademarks, patents, other intellectual property, or licensed rights at risk of being invalidated or interpreted narrowly and could put existing intellectual property applications for patent protection at risk of not being issued. Any or all of these events could materially and adversely affect our business, financial condition, and results of operations.
In addition, other parties may claim that our products infringe on their proprietary and perhaps patent-protected rights. Such claims, whether meritorious or not, may subject us to significant financial and managerial costs and expenses, legal fees, injunctions, temporary restraining orders, or an award of damages. We may need to obtain licenses from third parties that allege that we have infringed on their lawful rights, which may not be available on terms acceptable to us or at all. In addition, we may not be able to use or obtain licenses or other rights for intellectual property that we do not own on terms that are favorable to us or at all.
Under our Integrated License Agreement with Cell Science, we are obligated to defend the licensed technology against third-party infringement. Therefore, we may be obligated to incur substantial legal, expert witness, and related litigation costs in any litigation that may be involved, whether initiated by us or a third party. We cannot assure that we would be able to recover any costs incurred by us.
The markets for cannabinoid products may not grow at the rate projected by industry market data or at all.
We partially base our long-term business model on the anticipated growing demand for cannabis and cannabis-related products in North America, particularly in the United States, because of regulatory liberalization and growing social acceptance and use. We cannot assure that our projections, based on numerous assumptions and projected effects of future events, will materialize. Limitations or slowness in the increase of demand for cannabis and cannabis-related products in the United States would also limit our possible growth. We cannot predict the extent to which some reported local market saturation may affect us.
Consumers may consider our licensed technology will result in a genetically modified organism.
Some consumers may consider our laboratory plant-derived cell production method constitutes genetic modification and resist acceptance of cannabinoids produced by commercial partners.
Subsequent clinical or laboratory research on the characteristics of cannabinoids or their effects could adversely affect public attitudes and consumer perception towards cannabinoids and, ultimately, the commercialization of our licensed technology.
A variety of institutions worldwide are continuing clinical and laboratory research of the use and effects of cannabinoids. Research in the United States and internationally regarding the medical benefits, viability, safety, efficacy, and dosing of cannabis or isolated cannabinoids such as CBD and THC remains in relatively early stages. Future research, studies, and clinical trials may lead to conclusions that dispute or conflict with the current general understanding and belief regarding the medical or recreational benefits, viability, safety, efficacy, dosing, and social acceptance of cannabinoids and the demand for the products produced by our commercial partners.
We believe the cannabinoid industry is highly dependent upon consumer perception regarding the safety, efficacy, and quality of cannabis and related products distributed to consumers. Consumer perception of the products produced by commercial partners using our licensed technology can be significantly influenced by scientific research or findings, regulatory investigations, litigation, media attention, informal social media exchanges, and other publicity regarding the consumption or use of cannabinoid products. We cannot assure that future scientific research, reports, findings, regulatory proceedings, litigation, media attention, or other publicity will be favorable to the cannabis market or products or consistent with earlier publicity. Future research reports, findings, regulatory proceedings, litigation, media attention, informal social media exchanges, or other publicity that is perceived as less favorable than, or that questions, earlier research reports, findings, or publicity could have a material adverse effect on the demand for use of the licensed technology and consequently, our business, results of operations, financial condition, and cash flows. Negative publicity or public opinion may adversely affect consumer demand for cannabinoids produced and sold by our commercial partners, which would also adversely affect our ability to establish new commercial relationships that generate royalty revenues from commercial partners or sublicensees. In
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turn, these adverse effects would have an adverse impact on our business, results of operations, financial condition, and cash flows.
Unfavorable publicity or other media attention regarding the safety, efficacy, and quality of cannabis and related products produced using the licensed technology or associating the consumption of cannabis or related products with illness or other negative effects or events could also have such a material adverse effect. Negative publicity or other media attention could arise even if the adverse effects associated with such products resulted from a commercial partner’s failure to use the licensed technology correctly or a consumer’s failure to consume or use the products appropriately or as directed. The increased usage of social media and other web-based tools to generate, publish, and discuss user-generated content and to connect with other users has made it significantly easier for individuals and groups to communicate and share opinions and views about us, our activities, or our licensed technology, whether true or not. Although we intend to operate in a manner that will be respectful to all stakeholders and protect our image and reputation, we will not be able to control how we are perceived by others. Reputational loss may result in decreased investor confidence, increased challenges in developing and maintaining community relations, and impediment to our overall ability to advance our projects, thereby having a material adverse effect on our financial performance, financial condition, cash flows, and growth prospects.
Third parties may refuse to do business with us if they perceive that we are too closely connected to the cannabis industry.
Although we do not cultivate, produce, manufacture, or sell cannabis-derived products, some firms with which we may want to transact business may find the cannabis industry generally objectionable or determine that they are exposed to reputational risk because they perceive that we are too closely connected to the cannabis industry. As a result, these firms may refuse to deal with us. Failure to establish or maintain business relationships in general could have a material adverse effect on us.
Our connection to the retail cannabis industry may impair our access to the large and lucrative pharmaceutical/biotechnology sector in due course.
Securities broker-dealers, clearing firms, and others in the financial services industry may refuse to handle securities transactions in our stock because of our connections with the cannabis industry.
Risks Related to Significant Regulation
The activities of our potential commercial partners are highly regulated by extensive and complex federal and state regulatory regimes that make maintaining compliance difficult and challenging.
The commercial cannabis industry is a relatively new industry, and we anticipate that regulations will constantly be changing as the federal government and each state monitors the applicable regulatory regime and commercial activity. Our commercial partners will be subject to a variety of laws, regulations, and guidelines relating to the production, manufacturing, management, transportation, disposal, storage, distribution, sales, use, health, and safety of cannabis and derived products and byproducts as well as laws and regulations relating to drugs, controlled substances, health, and safety. In addition, publicly held cannabinoid producers may be subject to other federal and state securities laws and the rules and regulations of self-regulatory organizations such as the exchanges on which their securities are traded.
Laws, regulations, and guidelines generally applicable to the cannabis industry domestically and internationally may change in unforeseen ways. New laws and changes to existing laws or regulatory regimes may adversely affect our commercial partners directly and us indirectly. Regulatory changes could reduce demand for cannabis-derived products and byproducts, which would decrease the potential success of our commercialization efforts, the profitability of potential strategic partners or sublicensees, and the potential for revenue to us, which would adversely affect our financial condition, results of operations, and prospects.
Amendments to current laws, regulations, and permitting requirements, or more stringent application of existing laws or regulations, may have a material adverse effect on our commercial partners or us and our business, resulting in increased capital expenditures or production costs, reduced levels of production, or abandonment or delays in the development of facilities.
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Our ability to commercialize our technology will depend on the compatibility of our plant cell-extraction and replication technology with current regulatory regimes designed to regulate live-grow plant production and the predictability of the nature and extent of further regulation. Further, our business will depend on the ability of our commercial partners to maintain compliance with these laws, regulations, and interpretative and enforcement policies. Delays by our commercial partners in obtaining or failing to obtain and maintain the requisite regulatory approvals may significantly delay or negatively impair our commercialization program.
We may incur ongoing costs and obligations related to regulatory compliance or assisting our commercial partners in their regulatory compliance. Failure to comply with applicable laws and regulations could result in regulatory or agency proceedings, investigations, and enforcement actions, including orders causing operations to cease or be curtailed and levying damage awards, fines, penalties, or corrective measures, all of which would require unanticipated capital expenditures or remedial actions. Parties may be liable for civil or criminal fines or penalties imposed for violations of applicable laws or regulations. The outcome of any regulatory or agency proceedings, investigations, audits, and enforcement actions could harm our commercial partners directly and us indirectly.
We are subject to various state regulations governing the production, transportation, and sale of cannabinoids generally that can severely restrict our ability to execute our business plan.
States that permit the production, transportation, and sale of cannabinoids for either medicinal or recreational purposes have adopted a comprehensive regulatory and taxation regime. The state regulations generally impose stringent record keeping, compliance, reporting, and taxation requirements. State enforcement of applicable laws, regulations, and administrative policies can result in sanctions, fines, license termination and other sanctions against companies producing, transporting, or selling cannabinoids, State compliance requirements will directly apply to our strategic partners and will indirectly require us to adopt compatible policies and practices.
We cannot assure that state and local regulatory regimes will accommodate our plant cell-extraction and replication cannabinoid production technology.
We cannot assure that state and local cannabinoid regulatory regimes that are based on plant live-grow production are compatible with our plant cell-extraction and replication technology. We anticipate that we will need to address the regulatory regimes in each state and local jurisdiction to assure that it is compatible with and will accommodate our plant cell-extraction and replication production technology. Further, we cannot assure that any necessary changes in laws, regulations, or administrative policies or interpretations will be adopted or implemented. Accordingly, we may be limited in or prohibited from establishing commercial partners in certain states.
Strict enforcement of federal laws regarding cannabis would likely severely restrict our ability to execute our business plan.
In the United States, cannabis is largely regulated at the state level. Currently, in the United States, 37 states, the District of Columbia, Puerto Rico, Guam, and the U.S. Virgin Islands have legalized medical cannabis, and 18 states, in addition to the District of Columbia, the Commonwealth of the Northern Mariana Islands, and Guam, have legalized cannabis for recreational purposes or “adult-use.” Notwithstanding the permissive regulatory environment of cannabis at the state level, cannabis continues to be categorized as a controlled substance under the Controlled Substances Act of 1970 (the “CSA”) and as such, cultivation, distribution, sale, and possession of cannabis violates federal law in the United States. The inconsistency between federal and state laws and regulations is a major risk factor. Even in those jurisdictions in which the manufacture and use of medical cannabis has been legalized at the state level, the interstate production, transportation, possession, sale, and use of cannabis remain violations of federal law that are punishable by imprisonment, substantial fines, and forfeiture. Our commercial partners will be directly subject to these laws and regulations. Companies that are not engaged directly in the cultivation, production, manufacturing, or sale of cannabis or cannabis-derived products nevertheless may violate federal law if they intentionally aid and abet another in violating these federal controlled substance laws. Therefore, strict enforcement of federal laws regarding cannabis would likely result in our inability and the inability of our commercial partners to execute our respective business plans.
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Anticipated relaxation of regulatory restraints may not materialize.
Currently, the market for THC cannabinoids in the United States is severely restricted by the federal regulatory position listing cannabis as a Schedule I controlled substance, which prohibits cannabis in interstate commerce, with attendant secondary and tertiary adverse effects. Accordingly, intrastate production, transportation, and sale of cannabis and cannabis-related products are regulated on a state-by-state basis. Although in recent years several states have changed their laws to legalize and tax cannabis and cannabis-related products for medical or recreational use, we cannot predict whether this trend will continue or whether the federal government will take similar action. We expect the disparity between federal and state cannabis legalization and regulation will continue. The continuation of the current regulatory regime may limit the commercialization of our licensed technology.
The Rohrabacher-Farr Amendment may not be renewed.
The Rohrabacher–Farr amendment (also known as the Rohrabacher–Blumenauer amendment) prohibits the U.S. Department of Justice (“DOJ”) from spending funds appropriated by Congress to enforce the tenets of the CSA against the medical cannabis industry in states that have legalized such activity. On March 15, 2022, the amendment was renewed through the signing of the fiscal year 2022 omnibus spending bill and will be effective through September 30, 2022. We cannot assure that the federal government will not seek to prosecute cases involving medical cannabis businesses that are otherwise compliant with state law. Potential proceedings could involve significant restrictions being imposed upon us or our commercial partners, which could have a material adverse effect on us.
We and our commercial partners may have difficulty accessing the services of banks, which may make it difficult to sell our products and services.
Federal and federally insured state banks currently do not do business with companies that grow and sell cannabis products on the stated ground that growing and selling cannabis is illegal under federal law. Financial transactions involving proceeds generated by cannabis-related activities can form the basis for prosecution under certain federal statutes, including the BSA. Guidance issued by the Financial Crimes Enforcement Network, a division of the U.S. Department of the Treasury, clarifies how financial institutions can provide services to cannabis-related businesses consistent with their obligations under the BSA. Furthermore, supplemental guidance from the DOJ directs federal prosecutors to consider the enforcement priorities enumerated in the so-called “Cole Memo,” issued on August 29, 2013, under the Obama Administration, when determining whether to charge institutions or individuals with any of the financial crimes based upon cannabis-related activity. However, in January 2018, under the Trump Administration, the DOJ issued a policy memorandum on federal marijuana enforcement announcing a return to the rule of law and rescinding previous guidance documents, including the Cole Memorandum. In this memorandum, Attorney General Jeff Sessions directed U.S. Attorneys to determine whether to pursue prosecution of cannabis activity based upon the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of crimes on the community. In his February 2021 congressional testimony, then-nominee for U.S. Attorney General, Merrick Garland, stated that he would reinstitute a version of the Cole Memorandum and reiterated the statement that the Justice Department under his leadership would not pursue cases against Americans “complying with the laws in states that have legalized and are effectively regulating marijuana,” in written responses to the Senate Judiciary Committee. However, to date, the DOJ has not taken any formal steps respecting this matter. Therefore, banks remain hesitant to offer banking services to cannabis-related businesses, which continue to encounter difficulty accessing banking services. We cannot assure that we will be able to avoid being considered by financial institutions to be engaged in the cannabis industry, which would adversely affect our banking relationships. Our inability to maintain bank accounts would make it difficult for us to operate our business, increase our operating costs, and pose additional operational, logistical, and security challenges that could result in our inability to implement our business plan.
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We are subject to certain federal regulations relating to currency transactions.
The BSA requires us to report currency transactions of over $10,000, including identification of the customer by name and social security number, to the IRS. This regulation also requires us to report certain suspicious activity, including any transaction that exceeds $5,000 that we know, suspect, or have reason to believe involves funds from illegal activity or is designed to evade federal regulations or reporting requirements, and to verify sources of funds. We may be pressured by commercial partners to accept cash payments in view of the federal regulation of banks that restricts commercial partners’ access to banks. If we fail to comply with these laws and regulations, the imposition of substantial penalties could have a material adverse effect on our business, financial condition, and results of operations. Increasingly, foreign jurisdictions in which we may do business have similar regulatory regimes.
We are subject to risk of civil asset forfeiture.
Because the cannabis industry remains illegal under U.S. federal law, any property owned by participants in the cannabis industry that is either used in conducting such business, or was obtained with the proceeds of such business, could be subject to seizure by law enforcement and subsequent civil asset forfeiture. Even if the owner of the property is never charged with a crime, the property in question could still be seized and subject to an administrative proceeding by which, with minimal due process, it could be subject to forfeiture.
Our commercial partners may be subject to compliance with laws and regulations governing cannabis in foreign jurisdictions.
Our ability to commercialize our licensed technology in foreign jurisdiction within our licensed territory may be contingent, in part, upon our prospective commercial partners obtaining approval and complying with applicable regulatory requirements enacted by those governmental authorities. We cannot predict the effect to our business of foreign compliance regulations on our commercial partners in producing and manufacturing cannabinoids, the length of time to secure appropriate regulatory approvals to use our licensing technology and process, or the extent of testing and documentation that may be required in those jurisdictions. Delays in obtaining, or failing to obtain, regulatory approvals may negatively affect the development of commercialization arrangements with these partners and could have a material adverse effect on our business, financial condition, results of operations, and prospects.
We anticipate that both we and our commercial partners will incur ongoing costs and obligations related to regulatory compliance. Failure by us or our commercial partners to comply with regulations may result in additional costs for corrective measures, penalties, or restrictions on our operations. In addition, changes in regulations, more vigorous enforcement thereof, or other unanticipated events could require extensive changes to our operations, increase compliance costs, or give rise to material liabilities, which could have a material adverse effect on our business, financial condition, results of operations, and prospects.
Prohibitions or restrictions from investing in, or transacting business with, companies in the cannabis industry may have an adverse effect on our operations.
Certain jurisdictions may prohibit or restrict their citizens or residents from investing in, or transacting business with, companies involved in the cannabis industry, even if such companies only conduct business in jurisdictions where cannabis is legal, or the companies are not directly engaged in the cultivation, production, manufacturing, or sale of cannabis-derived products. Similar prohibitions or restrictions may apply in other jurisdictions where cannabis has not been legalized. In the United States, there have been certain instances of the U.S. Customs and Border Protection preventing citizens of foreign countries from entering the United States for reasons related to the cannabis industry.
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We may rely on foreign advisors and consultants respecting local legal, regulatory, or governmental requirements or business practices.
The legal and regulatory requirements in the foreign countries in which we may operate respecting the cultivation, production, manufacturing, and sale of cannabis and cannabis-related products by our intended commercial partners, as well as banking systems and controls and local business culture and practices, are different from those in the United States. Although members of our management may have previous experience working and conducting business in these countries, we may retain and rely on local consultants, advisors, legal counsel, and other expert professionals to keep apprised of legal, regulatory, and governmental developments as they pertain to our business, banking, financing, labor, litigation, and tax matters in these jurisdictions. Any changes in the local legal, regulatory, or governmental requirements or business practices are beyond our control and may adversely affect our business, financial condition, and results of operations.
There remains doubt and uncertainty that we will be able to legally enforce contracts.
It is a fundamental principle of law that a contract will not be enforced if it involves a violation of law or public policy. Because cannabis remains illegal at a federal level, judges in multiple U.S. states have on several occasions refused to enforce contracts relating to the cannabis industry, including for the repayment of money when the loan was used in connection with activities that violate federal law, even if there is no violation of state law. There remains doubt and uncertainty that we will be able to legally enforce contracts we enter, if necessary. We cannot assure that we will have a remedy for breach of contract, which could have a material adverse effect on our business, revenues, operating results, financial condition, and prospects.
We would suffer severe penalties and other consequences if we or our agents are found to be in violation of the Foreign Corrupt Practices Act or anti-bribery laws.
Our business is subject to U.S. laws that generally prohibit companies and personnel from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. In addition, we are subject to the anti-bribery laws of any other countries in which we may conduct business. Even though our policies and procedures mandate compliance with these anti-corruption and anti-bribery laws, our personnel or other agents may, without our knowledge and despite our efforts otherwise, engage in prohibited conduct for which we may be held responsible. We cannot assure that our internal control policies and procedures will always protect us from recklessness, fraudulent behavior, dishonesty, or other inappropriate acts committed by our affiliates, personnel, contractors, or agents. If our personnel or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition, and results of operations.
Our business may be adversely affected by the environmental regulations applicable to the businesses of our commercial partners.
We do not anticipate that our future business activities will subject us to any direct environmental compliance regulations. However, the operations of our commercial partners may be subject to environmental regulation in the various jurisdictions in which they operate. These regulations may mandate, among other things, the maintenance of air and water quality standards and land reclamation. They also set forth limitations on the generation, transportation, storage, and disposal of solid and hazardous waste. The processes and media formulations that are parts of our licensed technology must be applied, used, and discarded in accordance with these requirements. Environmental legislation is evolving in a manner that may require stricter standards and enforcement, increased fines and penalties for noncompliance, more stringent environmental assessments of proposed projects, and a heightened degree of responsibility for companies and their officers, directors, and employees. We cannot assure that future changes in environmental regulation, if any, will not adversely affect the operations of a commercial partners or sublicensees, which in turn will affect our operations.
Government approvals and permits are currently and may in the future be required in connection with the operations of our commercial partners. To the extent such approvals are required and not obtained, our commercial partners may be curtailed or prohibited from production of adult-use or medical cannabis-related products, delaying the development of our operations as currently proposed.
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Failure to comply with applicable environmental laws and regulations could subject our commercial partners to regulatory or agency proceedings or investigations and may result in enforcement actions thereunder, including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include damage awards, fines, penalties, or corrective measures requiring capital expenditures or remedial actions. Our commercial partners may be required to compensate those suffering loss or damage by reason of their operations using our technology and civil or criminal fines or penalties may be imposed for violations of applicable laws or regulations. These events would negatively impact our operations.
We will be subject to Federal Trade Commission and state regulation of business opportunities in connection with our commercialization activities.
We must comply with regulations adopted by the U.S. Federal Trade Commission (the “FTC”) and several state laws that regulate the offer and sale of business opportunities. The FTC and certain state laws require that we furnish prospective commercial partners with a business opportunity disclosure document containing information prescribed by applicable FTC and state laws, rules, and regulations, including, for example:
·whether legal action has ever been taken against us;
·whether there is a cancellation or refund policy for the business transaction;
·any claims that a commercialization partner will earn a specific amount of money through the business opportunity; and
·references for our company.
We cannot assure that any disclosure document that we use will comply with the FTC rules and applicable state disclosure requirements. Our failure to meet applicable business opportunity requirements may expose us to regulatory sanctions, civil liability to commercial partners, and business interruptions while we bring disclosure into regulatory compliance.
Risks Related to our Company
Certain of our officers and directors have been and are subject to substantial conflicts of interest in dealings with Cell Science and others.
Since 2018 until very recently, a majority or all of our directors were or are also affiliates of Cell Science, the licensor of the intellectual property on which our business activities are based, and its affiliates. Accordingly, the terms of the following were not the result of arm’s-length negotiations:
·the Integrated License Agreement;
·the July 2021 reduction in the technical requirements of the efficacy demonstration and the agreement to accept test results to date as warranting release from cancellation of 184,000,000 shares issued under the Integrated License Agreement and the amount of the credits to reduce the amount of the one-time payment note;
·the terms of our office sharing agreement;
·the ownership of improvements to the licensed technology;
·the amounts and repayment terms of certain intercorporate advances; and
·other interpretation and administrative decisions.
These conflicting interest transactions directly and indirectly benefited the affiliates of the directors with a conflict of interest. These conflicts are likely to continue. We do not have policies or procedures in place to resolve any conflicts of interest in our favor. We have no governance policy to preclude or limit decisions with related parties.
Our Code of Ethics may not apply or may be waived.
We have adopted a Code of Ethics that requires our board of directors to refrain from approving any transaction that is not in our best interests and is not on terms at least as favorable to us as could be obtained as a result of arm’s-length negotiations between unrelated parties in a similar situation. We have not adopted any other policy respecting decisions involving conflicts of interest and cannot assure that any such issues will be resolved in
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our favor. We cannot assure that the Code of Ethics has or will apply to all potential conflicts or that its provisions will not be waived.
The impact of the COVID-19 pandemic on our business, financial position, and results of operations continues to be unpredictable and will likely continue to have negative effects on our business and results of operations and commercialization of the licensed intellectual technology.
The impacts of the COVID-19 pandemic continue to be highly unpredictable and volatile in the light of the potential for a resurgence of infection rates or because of future mutations, variants, or related strains of the virus. Recent years have demonstrated the widespread and varying impacts of the pandemic on certain business operations, costs of doing business, supply chain operations, the extent and duration of measures to try to contain the virus (such as travel bans and restrictions, quarantines, shelter-in-place orders, business and government shutdowns, and other restrictions on retailers), and our ability to predict future performance, among other things.
For us, the COVID-19 pandemic substantially delayed efforts to test the commercial efficacy of our licensed technology and resulted in additional costs and delays. These costs and delays continue as we proceed with our engineering and commercialization efforts.
The duration and magnitude of the impacts from the COVID-19 pandemic impacts on our business operations and overall financial performance are unknown at this time and will depend on numerous circumstances outside our control or the ability of anyone to predict accurately. The secondary and tertiary unpredictable adverse economic effects on our business and on the worldwide economy are proving to be ongoing and broad. There are high probabilities of reoccurring widespread or localized outbreaks of existing new virus strains that may continue for many months, that may result in further government-ordered vaccination mandates, lockdowns, stay-home or shelter-in-place orders, social distancing, restrictions on travel, and other extensive measures. Government-approved vaccines have not been accepted by some people and are not widely available in all countries. Effective treatments for those infected by the virus are not always reliable, may not be widely available, and may not be widely accepted. We cannot predict the effect of these circumstances on us and our vendors, suppliers, and potential commercial partners, the global economy and political conditions, and the health of our personnel, consultants, and their families, all of which will affect how quickly and to what extent normal economic and operating activities can resume.
Even if the COVID-19 pandemic subsides, we may continue to experience an adverse effect on our business because of its global economic impact, labor shortages, and supply chain disruptions, as well as the prospect of inflation or a recession. These circumstances will likely exert similar hardships on those with which we deal, such as vendors, shippers, distributors, and potential commercial partners. As a result, we will need to continue to adjust our business and expenditures to correlate our activities with business exigencies, including restrictions on executive and employee travel, hiring freezes or delays, and limitations on marketing. The ultimate financial impact and duration of the foregoing cannot now be predicted and may well exceed our expectations or our ability to cope with them.
The auditor’s reports for the years ended July 31, 2022 and 2021, contain explanatory paragraphs about our ability to continue as a going concern.
We have not generated revenue and have limited capital. We have incurred losses since inception resulting in an accumulated deficit of $43,529,628 as of July 31, 2022. Our auditor stated in its report on our audited financial statements that it has substantial doubt that we will be able to continue as a going concern without further financing. Our ability to continue as a going concern is dependent upon our ability to successfully accomplish our business plan and eventually attain profitable operations and to obtain acceptable financing in the interim period.
We anticipate that any additional funding that we obtain will be in the form of equity financing from the sale of our common stock or debt. However, we cannot assure that we will be able to raise sufficient funding from the sale of our common stock or be able to obtain debt financing. The risky nature of our business enterprise and our lack of revenue may place debt financing beyond the creditworthiness required by most banks or typical investors in corporate debt until such time as we generate recurring revenue from technology commercialization. We do not have any arrangements for any future equity financing. If we are unable to secure additional funding, we will cease or suspend operations. We have no plans, arrangements, or contingencies in place if we cease operations.
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We have identified material weaknesses in our internal control over financial reporting that may cause us to fail to meet our reporting obligations or result in material misstatements of our financial statements.
Our management, which is responsible to establish and maintain internal control over financial reporting, has concluded that our internal controls and procedures were not effective due to the following material weaknesses:
•lack of appropriate segregation of duties;
•lack of control procedures that include multiple levels of supervision and review; and
•lack of full-time executive personnel to oversee financial reporting and controls.
Because of these factors, we have failed to: (i) maintain records that in reasonable detail accurately and fairly reflect our transactions; (ii) provide reasonable assurance that transactions are recorded as necessary for preparation of our financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”) and the receipts and expenditures of company assets are made and in accordance with our management and directors authorization; and (iii) provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use, or disposition of assets that could have a material effect on our financial statements. As a result of these weaknesses, we were unable to file timely our Annual Report on Form 10-K for the year ended July 31, 2021, and have amended our quarterly reports on Form 10-Q for the fiscal quarters ended October 31, 2020, January 31, 2021, and April 30, 2021, and our Annual Report on Form 10-K for the year ended July 31, 2021, to correct the initial filings or add omitted information. We have not implemented curative measures to address these weaknesses.
We have a limited operating history.
We were incorporated in 2008 but had little or no activity until we obtained license rights to cell-extraction and replication technology for commercial cannabinoid production in late 2018. However, we have not completed required planned engineering, so we have not commenced commercialization in this technology to generate revenue. Therefore, we are subject to the risks common to early-stage enterprises, including undercapitalization, few personnel, limited financial and other resources, and lack of revenues. We cannot assure that we will be successful in achieving a return on our stockholders’ investments. Our likelihood of success must be considered in the light of our early stage of operations.
We have not generated any revenue since our inception, and we may never achieve profitability.
We are a development-stage company that has not generated any revenue. If the planned product refinement and customization meets the requirements of prospective partners so we can launch our commercialization effort, our expenses are expected to increase significantly before we can begin generating revenue. Even as we begin to market and commercialize our licensed technology, we expect our losses to continue because of ongoing sales and marketing expenses, technology transfer costs, research and development, and other operational matters. These losses, among other things, have had and will continue to have an adverse effect on our working capital, total assets, and stockholders’ equity. Because of the numerous risks and uncertainties that we will encounter, we are unable to predict if or when we will become profitable. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. If we are unable to achieve and then maintain profitability, our business, financial condition, and results of operations will be negatively affected, and the market value of our common stock will likely decline.
Our ability to successfully implement a commercialization strategy does not ensure our profitability.
We cannot assure that our strategy of commercializing our technology through third-party cannabinoid producers, even if we enter several or multiple arrangements, will generate sufficient revenue to meet related costs and result in a profit. We will incur operating costs in marketing our technology, completing commercialization arrangements, providing technical and operational support to our commercial partners, and otherwise operating our business. We cannot assure that our revenue will offset these costs. We may not be profitable.
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We are a smaller reporting company, which reduces our reporting obligations.
We are currently a “smaller reporting company,” meaning that we are not an investment company, an asset-backed issuer, or a majority-owned subsidiary of a parent company that is not a smaller reporting company, and we have a public float of less than $3.5 million and had annual revenues of less than $50.0 million during the most recently completed fiscal year. Because we are a smaller reporting company, the disclosure required in our SEC filings is less than it would be if we were not considered to be a smaller reporting company. Specifically, smaller reporting companies are able to provide simplified executive compensation disclosures in their filings, are exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that independent registered public accounting firms provide an attestation on the effectiveness of internal control over financial reporting, are required to provide only two years of audited financial statements in annual reports, and have certain other decreased disclosure obligations in their SEC filings. Decreased disclosures in our SEC filings due to our status as a smaller reporting company may make it harder for investors to analyze our results of operations and financial prospects.
Unsolicited takeover proposals may distract management and adversely affect our business.
The review and consideration of any takeover proposal may be a significant distraction for our management and personnel and could require the expenditure of significant time and resources by us. Moreover, any unsolicited takeover proposal may create uncertainty for our personnel that may adversely affect our ability to retain key personnel and to hire new talent. Management and employee distractions related to any such takeover proposal also may adversely impact our ability to optimally conduct our commercialization program and otherwise advance our business and pursue our strategic objectives. An unsolicited takeover proposal may also create uncertainty for our commercial partners, suppliers, and other business partners, which may cause them to terminate, or not to renew or enter, arrangements with us. The uncertainty arising from unsolicited takeover proposals and any resulting costly litigation may disrupt our business, which could result in an adverse effect on our business, financial condition, and results of operations.
We rely on key personnel and consultants.
Our success is dependent upon the ability, expertise, judgment, discretion, and good faith of our executive management and consultants and our ability to continue to attract, develop, motivate, and retain highly qualified and skilled personnel and consultants. We rely on scientific advice from Dr. Peter Whitton, the inventor of the cell-extraction and replication technology on which our business is based, who has numerous other commitments and demands on his attention. Qualified, experienced individuals and cannabis industry consultants, such as our principal technical consultant, are in high demand, and we may incur significant costs to engage them. The loss of the services of our executive management or consultants, or an inability to attract other suitably qualified persons when needed, could have a material adverse effect on our ability to execute our business plan and strategy, and we may be unable to find adequate replacements on a timely basis or at all. We have no key-man life insurance on any of our employees or consultants.
We may incur product liability claims related to the application of the intellectual property we commercialize for cannabinoid production.
Our potential commercial partners producing cannabinoids will face an inherent risk of exposure to third-party product liability claims, regulatory action, and litigation, which would expose us to potential liability if our processes, procedures, or medium formulations are alleged to have caused significant loss or injury. In addition, the sale of products produced by a commercial partner using intellectual property involves the risk of injury to consumers due to product contamination or tampering by unauthorized third parties. Previously unknown adverse reactions could occur resulting from human consumption of such products alone or in combination with other medications or substances. We may be subject to various third-party product liability claims, including claims that the products produced using the licensed technology caused injury or illness, that such products did not include adequate warnings concerning possible side effects or interactions with other substances, or that the use of the licensed technology did not include adequate instructions for use.
Product liability claims or regulatory actions against us could result in increased costs, adversely affect our reputation generally with existing or potentially new commercial partners, and have a material adverse effect on our results of operations and financial condition. Although we are also currently pursuing additional insurance coverage
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for product liability claims, such insurance is expensive, and we cannot assure that we will be able to obtain desired insurance coverage on acceptable terms or at all. Any insurance coverage we maintain will be subject to coverage limits and exclusions and may not be available for the risks and hazards to which we are exposed. Our inability to obtain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims could prevent or inhibit the commercialization of the licensed technology.
Our business could be adversely impacted by failures or interruptions of information technology systems and potential cyber-attacks.
Our business will depend on information technology hardware, software, telecommunications, and other services and systems we obtain from third parties. Therefore, our operations depend, in part, on how well we and our suppliers protect networks, equipment, information technology systems, and software against damage from numerous threats, including damage to physical facilities, capacity limitations, natural disasters, intentional damage and destruction, fire, power loss, hacking, computer viruses, vandalism, and theft. Our operations also depend on the timely maintenance, upgrade, and replacement of networks, equipment, information technology systems, and software, as well as preemptive expenses to mitigate the risks of failures. Any of these and other events could result in information system failures and delays or increased capital expenses. The failure of information systems or a component of information systems could, depending on the nature of any failure, adversely impact our reputation and results of operations.
We may also be subject to cyber-attacks or other information security breaches, and we cannot assure that we will not incur such losses in the future. Our risk and exposure to these matters cannot be fully mitigated because of, among other things, the evolving nature of these threats. As a result, we will prioritize cybersecurity and the continued development and enhancement of controls, processes, and practices designed to protect systems, computers, software, data, and networks from attack, damage, or unauthorized access. As cyber threats continue to evolve, we may be required to expend additional resources to continue to modify or enhance protective measures or to investigate and remediate any security vulnerabilities.
Ongoing domestic and international financial conditions will adversely affect our business and operations, our prospective commercial partners, the cannabinoid industry, and the world generally.
In recent years, global commercial and financial markets have experienced significant reoccurring disruptions, including severely diminished liquidity and credit availability, larger levels of sovereign and individual indebtedness, increased trade tariffs and barriers, supply chain delays or failures, declines in consumer confidence, declines in economic growth, increased unemployment, and uncertainty about economic stability. We cannot assure that significant deterioration in credit and financial markets, prevailing interest rates, international trade, and confidence in economic conditions will not occur in the future. Any economic downturn, volatile business environment, or continued unpredictable and unstable market conditions could have a material adverse effect on our business, financial condition, and results of operations.
Further, global credit and financial markets have displayed arguably increased volatility in response to global economic, pandemic, or political events. Future crises may be precipitated by any number of causes, including natural disasters, geopolitical instability, changes to energy prices, or sovereign defaults. These factors may impact our ability to obtain equity or debt financing in the future, and if obtained, on terms favorable to us. Increased levels of volatility and market turmoil can adversely impact our operations and value, including the price of our common stock.
We cannot assure that we will be able to compete successfully.
We expect significant competition from other companies offering cannabinoid production technologies or producing, transporting, or marketing cannabinoids. We believe that competition in the commercial cannabinoid industry is based primarily on price per unit; predictable and replicable product flavor, aroma, CBD or THC concentration; and ease and predictability of regulatory compliance. Price per unit of production will be based on the cost of amortizing capital expenditures and covering production and operating costs, and we cannot assure that production using our licensed technology will enable commercial partners to compete on these terms. Our potential commercial partners’ principal known competitors have established production, transportation, and marketing
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infrastructure and market recognition in the multiple states in which they operate and are well capitalized with experienced management and technical resources. Numerous companies appear to be applying for cultivation, processing, and sale licenses, some of which may have significantly greater financial, technical, marketing, and other resources than we have. These competitors may be able to devote greater resources to the development, promotion, sale, and support of their products and services, and may have more extensive customer bases and broader customer relationships. We may be at a competitive disadvantage to live-grow plant producers because of the lack of established regulatory accommodation of plant cell-extraction and replication production methods. To the extent that we are not able to market and enter enough commercialization arrangements, our business, financial condition, and results of operations could be materially and adversely affected.
We may not have a competitive price advantage as compared to producers of CBD containing less than 0.3% THC from hemp, which was sanctioned in 2018 under the Agriculture Improvement Act.
Risks Related to our Common Stock
The market for our common stock is volatile.
The market price of our common stock has been volatile and subject to wide fluctuations in price and trading volume in response to numerous factors, many of which are beyond our control. This volatility may affect the ability of holders of our common stock to sell their securities at an advantageous price or at all. There is extremely limited trading volume in our common stock, with no transactions for many consecutive trading days.
Market price fluctuations in our common stock may be due to the quotation or transaction volume our results of operations or public releases failing to meet market expectations, negative news about us or the cannabis industry, adverse changes in general market conditions or economic trends, social media activity outside our control, or other material public announcements by us or others. Financial markets for the stock of smaller capitalized companies historically have experienced significant price and volume fluctuations that have often been unrelated to the operating performance, underlying asset values, or prospects of such companies. Accordingly, the market price of our common stock may decline even if our results of operations, underlying asset values, or prospects improve or do not change. We cannot assure that continuing fluctuations in price and volume of our common stock will not occur. If increased levels of volatility and market turmoil continue, our ability to obtain capital from external sources, the trading price of our common stock, and our operations could be adversely affected.
We will continue to be controlled by our principal stockholders.
Cell Science owns four shares of Series A Preferred Stock, representing 100% of our outstanding Series A Preferred Stock. The super voting rights of the Series A Preferred Stock entitle its holder to voting power equivalent to four times the aggregate voting power of all other outstanding common and preferred stock outstanding, or 1,204,731,932 votes. Cell Science is owned by Inter-M Traders FZ LLE (40%), Mentone Ltd (30%), and The OZ Corporation (30%), and each of the foregoing is deemed to beneficially own the four (4) shares of Preferred Stock owned by Cell Science. Therefore, the holders of the preferred stock now have and will continue to have 80% of all votes on all matters submitted to the stockholders for consideration, voting together as a single class, which enables Cell Science directly, and its controlling stockholders indirectly, to control the election of our directors and the approval or disapproval of all other matters, including mergers, the sale of all or substantially all of our assets, liquidation, and the adoption or amendment of provisions in our articles of incorporation and bylaws.
Inter-M Traders FZ, LLE is currently the beneficial owner of 116,783,555 shares of common stock, representing 38.77% of our outstanding common stock, and as a result of its 40% ownership of Cell Science is deemed to be the beneficial owner of four (4) shares of Series A Preferred Stock.
Mentone Ltd. is currently the beneficial owner of 6,000,000 shares of common stock, representing 1.99% of our outstanding common stock, and as a result of its 30% ownership of Cell Science is deemed to be the beneficial owner of four (4) shares of Series A Preferred Stock. Mentone Ltd. is owned and controlled by Peter Whitton (a director) who is currently the beneficial owner of 23,943,562 shares of common stock, representing 7.951% of our outstanding common stock, Geoffrey Dixon who is currently the beneficial owner of 23,952,188 shares of common stock, representing 7.95% of our outstanding common stock, and Karl Watkin who, through his Company, Menelaus
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Holding FZ LLC, is currently the beneficial owner of 26,952,187 shares of common stock, representing 8.95% of our outstanding common stock.
OZ Corporation is owned and controlled by John R. Munoz. OZ Corporation is currently the beneficial and owner of record of 10,980,994 shares of common stock directly, and John R. Munoz is currently the beneficial owner of 3,168,000 shares of common stock, which in the aggregate represent 5.08% of our outstanding common stock. OZ Corporation, and John R. Munoz as a result of OZ Corporation’s 30% ownership of Cell Science is deemed to be the beneficial owner of four (4) shares of Series A Preferred Stock
We may issue common stock in the future, which may dilute a stockholder’s holdings in our company, including the investors in this offering, or have a negative effect on the market price of our stock.
We may sell equity securities (including convertible securities) in offerings, which may dilute a stockholder’s holdings in our company. Our articles of incorporation grant our board of directors discretion to issue, sell, and determine the price and terms of additional preferred or common stock, including at prices less than the current market price per share. Our stockholders do not have preemptive rights. Moreover, additional common stock will be issued by us on the exercise of options under our stock option plan or warrants. Any transaction involving the issuance of preferred or common stock, or securities convertible into common stock, would result in dilution, possibly substantial, to our security holders, including the investors in this offering.
Sales of substantial amounts of our securities by us or our existing stockholders, or the availability of such securities for sale, could adversely affect the prevailing market prices for our securities and dilute an investor’s per-share earnings, if any. A decline in the market prices of our securities could also impair our ability to raise additional capital through the sale of securities should we desire to do so.
Limited trading volumes for our common stock may limit the ability of our stockholders to obtain liquidity.
Due to the limited trading volume for our common stock, our stockholders may be unable to sell any or large quantities of our common stock into the public trading market without a significant reduction in the price of their common stock. We cannot assure that there will be sufficient liquidity of the common stock on the trading market and that we will continue to meet the listing requirements of any public listing exchange or quotation medium.
We do not anticipate paying dividends.
We do not have earnings from which to pay dividends and have no current intention to declare dividends, even if we were to become profitable. If we were to achieve earnings, any discretionary decision to pay dividends would depend on, among other things, our results of operations, current and anticipated cash requirements and surplus, financial condition, future contractual restrictions and financing agreement covenants, solvency tests imposed by corporate law, and other factors that our board of directors may deem relevant. Rather than pay dividends, we anticipate that we will retain earnings to fund expansion and growth.
The regulated nature of our business may impede or discourage a takeover.
Our business is subject to cannabinoid industry direct and indirect regulatory or licensing requirements that may not necessarily continue to apply to an acquirer of our business following a change of control. These licensing requirements could impede a merger, amalgamation, takeover, or other business combination involving us or discourage a potential acquirer from making a tender offer for common stock, which under certain circumstances could reduce the market price of the common stock.