This Management's Discussion and Analysis of Financial Condition and Results of Operations include several forward-looking statements that reflect management's current views with respect to future events and financial performance. You can identify these statements by forward-looking words such as "may," "will," "expect," "anticipate," "believe," "estimate" and "continue," or similar words. Those statements include statements regarding the intent, belief or current expectations of us and members of management team as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements.
Readers are urged to carefully review and consider the various disclosures made
by us in this report and in our other reports filed with the
The following discussion provides information that management believes is relevant to an assessment and understanding of our past financial condition and plan of operations. The discussion below should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this report.
Overview
The Company was originally incorporated in the
Basis of Presentation
The condensed consolidated financial statements of
Components of Statements of Operations
Revenue
Product revenue consists of sales of 710 Shark filling machines, 710 Captain capping machines, "PreRoll-ER" pre-roll & cone filling machines, cartridges, accessories, warranty, service and freight charges, net of returns, discounts and allowances. Once a sales order is negotiated and received by a sales representative, we generally collect a 50% deposit from the customer. When the product is ready to be shipped, the customer will generally pay the remaining balance. We recognize the revenue when the product leaves the warehouse on the way to the customer.
For the filling and capping machines, training is coordinated with the customers in accordance with their availability but generally completed within a week or two of the shipment. Standard warranties are offered at no cost to customers to cover parts for three years, and labor and maintenance are offered for one year for product defects.
21 Table of Contents Cost of Revenue
Cost of goods sold represents costs directly related to supplies and materials, machines, freight and delivery, commissions, printing, packaging and other costs.
We expect our cost of goods sold per unit to decrease as we continue to scale our operations, improve product designs and work with our third-party suppliers to lower costs.
Operating Expenses
Sales and Marketing. Sales and marketing expenses include costs associated with our business development efforts with our distributors and partners and costs related to trade shows and other marketing programs. We expense sales and marketing costs as incurred. We expect sales and marketing expenses to increase in future periods as we expand our sales and marketing teams and increase our participation in global trade shows and other marketing programs.
General and Administrative. Our general and administrative expenses consist primarily of compensation, benefits, travel and other costs for employees. In addition, general and administrative expenses include third-party consulting, legal, audit, accounting services, and allocations of overhead costs, such as rent, facilities and information technology. In the near term, we expect general and administrative expenses to decrease driven by our cost reduction initiatives. In the long term, we expect general and administrative expenses to increase as we grow our business.
Results of Operations - Three Month Periods
Comparison for the three-month periods ended
Revenue
Total revenue during the three months ended
The increase in sales was due to our customers' strong demand for our products, including our filling machines, capping machines, PreRoll-ER machines, customizable and C-Cell cartridges, and accessories.
Cost of Revenue
Total cost of revenue increased to
Due to a more diversified product portfolio, our gross margin percentage
decreased from 55% for the three months ended
22 Table of Contents Operating Expenses
Operating expenses during the three months ended
Income (loss) from Operations
Total income from operations was
Derivative Gain (loss)
Derivative gain, a non-cash expense, was
Interest Expense
Interest expense, a non-cash expense, increased to
Loss on Conversion of Notes Payable
There was no loss on conversion of notes payable during the three months ended
Gain on Settlement of Notes Payable
There was no gain or loss on settlement of notes payable for the three months
ended
Results of Operations - Nine Month Periods
Comparison for the nine-month periods ended
Revenue
Total revenue during the nine months ended
As described above, the increase in sales was due to our customers' strong demand for our products.
23 Table of Contents Cost of Revenue
Total cost of revenue increased to
As described above, the increase in cost of revenue was driven by increased
sales. Also due to a more diversified product portfolio, our gross margin
percentage decreased from 57% for the nine months ended
Operating Expenses
Operating expenses during the nine months ended
Loss from Operations
Total loss from operations was
As described above, the increased loss from operations was due to increased operating expenses, primarily the one-time expenses in the second quarter of 2021.
Derivative Gain (loss)
Derivative gain, a non-cash expense, was
Interest Expense
Interest expense, a non-cash expense, decreased to
Loss on Conversion of Notes Payable
Loss on conversion of notes payable was
Gain on Settlement of Notes Payable
Gain on settlement of notes payable was
Liquidity and Capital Resources
At
We anticipate that we will need additional financing to continue as an ongoing entity over the next 12 months. Our future capital requirements and the adequacy of available funds will depend on many factors. There can be no assurance we will be able to obtain additional financing on favorable terms, or at all. If we are unable to obtain additional financing, our financial results and business prospects may be materially adversely affected.
24 Table of Contents Operating Activities
We have historically experienced negative cash outflows. Our net cash used in operating activities primarily results from our operating losses combined with changes in working capital components as we have grown our business and is influenced by the timing of cash payments for inventory purchases and cash receipts from our customers. Our primary source of cash flow from operating activities is cash down payments and final payments for our machines. Our primary uses of cash from operating activities are employee-related expenditures and amounts due to vendors for purchased components. Our cash flows from operating activities will continue to be affected principally by our working capital requirements and the extent to which we build up our inventory balances and increase spending on personnel and other operating activities as our business grows.
During the nine months ended
Investing Activities
The Company had no investing activities in either period.
Financing Activities
During the nine months ended
During the nine months ended
Off-Balance Sheet Arrangements
During the nine months ended
COVID-19 Impact
Our business and operating results for 2020 was impacted by the COVID-19 pandemic. However, we have seen improvement in our business and expect it to continue throughout 2021.
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