10-K: Can B Corp. 2023 Annual Report: Focus Shifts to Cannabis Patents Amidst Hemp Division Auction

Can B Corp.'s 2023 annual report highlights a strategic shift towards commercializing newly acquired cannabis patents, following an auction of its hemp division assets and reduced performance in its durable medical equipment business.

Summary

• Can B Corp.'s 2023 annual report details a year of significant changes, including a strategic pivot towards cannabis patents acquired by its subsidiary, Nascent Pharma, valued at $122 million in 2020.
• The company's hemp division assets were auctioned off in March 2024 due to alleged breaches of obligations, resulting in a reduced scale of hemp operations.
• The durable medical equipment business, Duramed, experienced reduced staff and revenues due to decreased support from the hemp division.
• The company's revenue decreased by 67.8% from $6.68 million in 2022 to $2.16 million in 2023, with product sales dropping by 75.8%.
• Operating expenses decreased by 53.3% from $16.78 million in 2022 to $7.85 million in 2023, primarily due to reduced compensation and consulting fees.
• The company reported a net loss of $9.74 million for 2023, compared to a net loss of $14.92 million in 2022.
• As of December 31, 2023, the company had $34,006 in cash and cash equivalents and a negative working capital of $5.75 million.
• The company has $8.9 million in past due notes payable and is seeking extensions or refinancing.
• The company's independent auditor has expressed substantial doubt about its ability to continue as a going concern.

Sentiment

Score: 3

Explanation: The document presents a challenging financial situation with significant revenue decline, losses, and going concern issues. While there are positive aspects like the acquisition of cannabis patents and cost-cutting measures, the overall sentiment is negative due to the company's financial instability and operational challenges.

Positives

• The company has acquired valuable cannabis patents through Nascent Pharma, which could provide significant future revenue streams.
• Operating expenses have been significantly reduced, indicating cost-cutting measures.
• The company is focusing on commercializing the cannabis patents, which could lead to new revenue opportunities.
• The company has transitioned each operating subsidiary to a separate bookkeeping system (QuickBooks) and input data at each operating location on a daily basis.
• The company has a QuickBooks trained person with who inputs data on a real-time basis but not allowed at subsidiary level to access or make certain changes.
• The company has installed for the hemp division companies daily tracking procedures whereby every ounce and pound of raw materials (biomass or crude) is tracked by lot number from input to processing through to finished product.
• The company's accounts receivable tracking system is now tracking by medical device unit number, by doctor, by location, by insurance billing company, and has a far more refined software track and billing system.
• The company has consolidated banking to a master account with its primary bank (M&T Bank) by subsidiary.
• The company has instituted a new procedure for any payables which requires double confirmation to release any funds for any reason.
• The company has changed merchant accounts to a single user to better tie out to bank balances and accounts receivable.

Negatives

• The company's revenue decreased significantly in 2023, indicating a decline in sales.
• The hemp division assets were auctioned off, resulting in a loss of control over those assets.
• The durable medical equipment business is facing challenges due to reduced support from the hemp division.
• The company has a significant amount of past due notes payable, indicating financial distress.
• The company's independent auditor has expressed substantial doubt about its ability to continue as a going concern.
• The company's internal controls over financial reporting are not effective.
• The company is in default of payment obligations under certain promissory notes.
• The company has experienced negative impacts from COVID in the form of reduced sales, delayed operations, inability to effectuate certain business plans, supply chain issues and the like.

Risks

• The company's ability to generate revenue from the cannabis patents is uncertain.
• The company may face challenges in commercializing the cannabis patents.
• The company's reduced hemp operations may impact its overall business.
• The company's financial condition is weak, with significant debt and negative working capital.
• The company may not be able to obtain additional financing on favorable terms or at all.
• The company's stock price may be volatile and subject to fluctuations.
• The company faces intense competition in the CBD and cannabis markets.
• The company could be subject to enforcement action by the FDA and certain state regulatory agencies for its products containing CBD or THC compounds.
• The company's production of Delta-8 THC and Delta-10 THC could subject it to enforcement action by certain federal and state regulatory agencies.
• The Russia-Ukraine and Israel-Hamas wars have disrupted global markets and my adversely impact our ability to obtain financing.

Future Outlook

The company's primary focus will be on protecting and commercializing the cannabis patents recently acquired by Nascent, while continuing hemp and durable medical equipment operations in the near term.

Management Comments

• Management is actively monitoring the impact of the global situation on our financial condition, liquidity, operations, suppliers, industry, and workforce.
• Management believes that the Investors claims are meritless, factually inaccurate, and frivolous.
• Management believes that Arenas claims are without merit and intends to vigorously defend Arenas claims.

Industry Context

The report acknowledges the highly competitive nature of the CBD and cannabis markets, with numerous competitors ranging from small operations to large conglomerates. The company aims to differentiate itself through third-party testing and partnerships with industry specialists.

Comparison to Industry Standards

• The report mentions several large CBD companies, including Elixinol LLC, GW Pharmaceuticals, and Aurora Cannabis, with revenues ranging from $19 million to $37 million, and US companies such as Medical Marijuana, CV Sciences, Gaia Herbs, and Charlottes Web with revenues ranging from $17 million to $59 million.
• Can B Corp.'s revenue of $2.16 million in 2023 is significantly lower than these industry leaders, indicating a need for substantial growth to compete effectively.
• The company's strategic shift towards cannabis patents is a move to potentially gain a competitive edge in the market.

Legal Proceedings

• The company is involved in several legal proceedings, including a commercial legal action by investors, a suit by a vendor, and a product payment trade dispute.
• Arena Special Opportunities Partners I, LP, Arena Special Opportunities Fund, LP and Arena Investors, LP initiated a public auction of certain assets of the Company and its subsidiaries under Article 9 of the Uniform Commercial Code.
• Arena filed a complaint against the company, its subsidiaries and certain officers alleging tortious interference with the auction.

Related Party Transactions

• The company has entered into transactions with related parties for financing, corporate, business development and operational services.
• LI Accounting Associates, LLC, an entity controlled by a relative of the Managing Member PHP, is a vendor of Can B Corp.
• The company has amounts due to a director of the Company of approximately $357,243 which are expected to be repaid in the next twelve months.

Stakeholder Impact

• Shareholders face significant risks due to the company's financial instability and operational challenges.
• Employees may be affected by reduced staffing and potential job losses.
• Customers may experience disruptions in product availability and service.
• Suppliers and creditors face uncertainty regarding payment and future business relationships.

Next Steps

• The company plans to focus on protecting and commercializing the cannabis patents acquired by Nascent Pharma.
• The company will continue its hemp and durable medical equipment operations on a reduced scale.
• The company will seek additional extensions of its notes or refinance the indebtedness.
• The company will seek to improve its internal controls over financial reporting.

Key Dates

Keywords

cannabis patents, hemp division, durable medical equipment, CBD, CBN, CBG, delta-8, delta-10, financial results, going concern, promissory notes, internal controls