THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS, THE NOTES THERETO AND THE OTHER
FINANCIAL INFORMATION APPEARING IN THIS REPORT.
Introduction
The financial data discussed below are derived from the unaudited consolidated
financial statements of the Company as of September 30, 2021, which were
prepared and presented in accordance with United States generally accepted
accounting principles for interim financial statements. These financial data are
only a summary and should be read in conjunction with the unaudited financial
statements and related notes contained herein, which more fully present the
Company's financial condition and operations as at that date, and with its
audited financial statements and notes thereto contained in its Annual Report on
Form 10-K for the year ended December 31, 2020, filed with the SEC on April 16,
2021. Further, the Company urges caution regarding the forward-looking
statements which are contained in this report because they involve risks,
uncertainties and other factors affecting its operations, market growth,
service, products and licenses that may cause the Company's actual results and
achievements, whether expressed or implied, to differ materially from the
expectations the Company describes in its forward-looking statements. The
occurrence of any of the events described in Part II, Item 1A -Risk Factors, or
other events, could have a material adverse effect on the Company's business,
results of operations and financial position.
General Statement of Business
The Company was incorporated under the laws of the state of Florida on September
5, 1997, under the corporate name Synthetic Flowers of America, Inc. It changed
its corporate name to Acology, Inc. on January 9, 2014; on August 28, 2018, to
Medtainer, Inc.; and on October 3, 2020, to its present name.
The Company is in the businesses of (i) selling and distributing hydroponic
containers called "GrowPods" and related products and (ii) designing, branding
and selling proprietary plastic medical-grade containers that can store
pharmaceuticals, herbs, teas and other solids or liquids and can grind solids
and shred herbs, as well as selling other products such as humidity control
inserts, smell-proof bags, lighters, and plastic lighter holders, and providing
private labeling and branding for purchasers of Medtainers and other products.
The Company markets its products directly to businesses through its phone room
and to the retail public through internet sales. The Company also markets
directly to wholesalers and other businesses that resell them to other
businesses and end users.
On October 9, 2020, the Company acquired all of the outstanding shares of
Advanced Container Technologies, Inc., a California corporation ("Advanced"),
from its shareholders pursuant to an Exchange Agreement, dated August 14, 2020,
which was amended on September 9, 2020 (as so amended, the "Exchange
Agreement"), in exchange for 50,000,000 shares of the Company's common stock,
par value $0.00001 per share ("Common Stock"). This exchange resulted in
Advanced's becoming a wholly owned subsidiary of the Company.
The acquisition of Advanced represents a material change in the business
strategy of the Company and an expansion of its product base. Since the
inception of the Company in 2014, its intended growth strategy was to
concentrate on increasing sales of Medtainers, while introducing related
products and services, such as humidity control inserts and printing. This
approach resulted in relatively flat revenues, increasing expenses and a history
of losses. Management believes that this acquisition offers the prospect of
substantially increased revenues, without a comparable increase in expenses, and
offers the Company an opportunity to attain significant profits.
The Company has authorized capital of 100,000,000 shares of Common Stock and
10,000,000 shares of preferred stock, without par value. On March 22, 2019, the
Company combined the outstanding shares of its Common Stock on the basis of one
share for each 100 shares then outstanding and on that date, reduced the number
of authorized shares of Common Stock from 6,000,000,000 to 100,000,000, while
the number of authorized shares of preferred stock remained 10,000,000. On
October 3, 2020, the Company combined the outstanding shares of its Common Stock
on the basis of one share for each 59 shares then outstanding; the number of
authorized shares of Common Stock and preferred stock was unaffected. The
effects of these combinations have been retroactively applied to all periods
covered by this report. The Company has also designated 1,000,000 shares of its
preferred stock as Series A Convertible Preferred Stock ("Series A Preferred")
and, on July 31, 2020, issued them to its chief executive officer in exchange
for 305,085 shares of his Common Stock; these shares, together with the shares
of Common Stock owned by him, confer voting control of the Company on him.
The Company's principal place of business is located at 1620 Commerce St.,
Corona, CA 92880. The Company's telephone number is (951) 381-2555. The Company
has two corporate websites: www.advancedcontainertechnologies.com for GrowPods
and related items and www.medtainer.com for Medtainers and related products and
services. The Common Stock is quoted on the OTC Pink tier of OTC Link, a
quotation system operated by OTC Markets Group Inc., under the trading symbol
ACTX.
14
Going Concern
As indicated in Note 3 of the Notes to Consolidated Financial Statements, there
is substantial doubt as to the ability of the Company to continue as a going
concern. The Company has generated material operating losses since inception and
its ability to continue as a going concern is dependent on the successful
execution of its operating plan, which includes increasing sales of existing
products - and in particular GrowPods and related products - while introducing
additional products and services, controlling cost of goods sold and operation
expenses, negotiating extensions of existing loans and raising debt or equity
financing. No assurance can be given that the Company will be able to do so.
Need for Capital
The Company needs a substantial amount of additional capital to fund its
business, including expansion of its operations, and for repayment of its debts.
See "Liquidity and Capital Resources." No assurance can be given that any
additional capital can be obtained or, if obtained, will be adequate to meet its
needs. If adequate capital cannot be obtained on a timely basis and on
satisfactory terms, the Company's operations could be materially negatively
impacted it may need to take certain measures to remain a going concern, or it
could be forced to terminate operating.
Impact of the Covid-19 Pandemic
To mitigate losses during the Covid-19 pandemic and the ensuing recovery period,
the Company terminated several of the 18 employees that it had in early 2020,
such that it now has 8 employees, including officers, which it believes is the
minimum necessary to maintain its operations. The Company's chief executive
officer has waived current payment of his salary since June 1, 2020; however,
the Company is accruing it and is obligated to pay the deferred amount, which
was $227,500 as of September 30, 2021, at some future time. In addition, the
Company is deferring employer payroll taxes, as permitted by the Coronavirus
Aid, Relief, and Economic Security Act (the "CARES Act"). The Company does not
intend to restore its staffing to pre-pandemic levels, although it may add
personnel depending on demand for GrowPods and related products. The Company is
also purchasing fewer Medtainers than required under the production contract
with their manufacturer; while doing so has enabled the Company to preserve cash
by reducing expenses, it also has subjected it to claims for breach of that
agreement. For additional information regarding the impact of Covid-19 pandemic
on the Company, see "Impact of the Covid-19 Pandemic," in Part II, Item 1A -
Risk Factors.
Results of Operations
Comparison of the Three Months Ended September 30, 2021, and September 30, 2020
The following table sets forth information from the consolidated statements of
operations for the three months ended September 30, 2021, and September 30,
2020.
Three Months Ended
September 30, 2021 September 30, 2020
Revenues $ 1,451,737 $ 671,853
Cost of goods sold (1,061,103 ) (349,087 )
Gross profit 390,634 322,766
Operating expenses 454,292 226,526
Profit (loss) from operations (63,658 ) 96,240
Non-operating income (expense):
Non-operating income 138,567 -
Interest expense (8,297 ) (9,503 )
Net income $ 66,612 $ 86,737
Revenues
Revenues were $1,451,737 and $671,853 for the three months ended September 30,
2021, and September 30, 2020, respectively. The increase was primarily due to a
$712,000 increase in revenues from sales of GrowPods (which the Company did not
sell prior to January 1, 2021), a $124,652 increase in revenues from sales of
lighters, and a $9,283 increase in revenues from sales of plastic lighter
holders. The increase was partially offset by a decrease of $84,854 in humidity
pack inserts and a $10,948 decrease in Medtainer sales.
15
Cost of Goods Sold
Cost of goods sold for the three months ended September 30, 2021, and September
30, 2020, were $1,061,103 and $349,087, respectively. This increase was
primarily due to a $644,500 increase in the cost of GrowPods (which the Company
did not purchase prior to January 1, 2021), a $80,285 increase in the cost of
lighters, an increase of $7,929 in the cost of Medtainers, a $5,176 increase in
the cost of jars and a $4,997 increase in the cost of plastic lighter holders.
This increase was partially offset by a decrease of $62,705 in the cost of
humidity packs. For the three months ended September 30, 2021, gross profit from
sales of Medtainers and related products and services were 44% of revenues and
gross profit from sales of GrowPods and related products were 9% of revenues.
Operating Expenses
Operating expenses for the three months ended September 30, 2021, and September
30, 2020, consisted of the following:
Three Months Ended
September 30, 2021 September 30, 2020
Advertising and marketing $ 31,578 $ 1,428
Bad debt - 862
Depreciation and amortization 69,232 24,787
Professional fees 20,520 38,015
Share-based compensation - -
Payroll 230,313 106,958
General and administrative 102,649 54,476
Total operating expenses $ 454,292 $ 226,526
Operating expenses were $454,292 and $226,526 for the three months ended
September 30, 2021, and September 30, 2020, respectively. The increase in
operating expense was attributable to a $123,355 increase in payroll expense, a
$48,173 increase in general and administrative expenses and a $30,150 increase
in advertising and marketing expenses. This increase was partially offset by a
$17,495 decrease in professional fees.
Profit (Loss) from Operations
Loss from operations decreased from a profit of $96,240 for the three months
ended September 30, 2020, to a loss of $63,658 for the three months ended
September 30, 2021. The loss from operations was primarily due to a $123,355
increase in payroll expenses.
Other Income (Expense)
For the three months ended September 30, 2021, and September 30, 2020, interest
expense was $8,297 and $9,503, respectively. The increase in other income for
the three months ended September 30, 2021, was attributed to the recognition of
gain on debt forgiveness related to the full forgiveness of the Payroll
Protection Program SBA loan and interest in the amount of $138,567.
Net Profit
The net profit for the three months ended September 30, 2021, was $66,612
(including non-cash expense of $69,232 for depreciation and amortization),
versus a net profit of $86,737 (including non-cash expense of $24,787 for
depreciation and amortization) for the three months ended September 30, 2020. As
more fully described above, the principal reason for this difference was the
$139,773 increase in non-operating income and the $123,355 increase in payroll
expense.
Comparison of the Nine Months Ended September 30, 2021, and September 30, 2020
The following table sets forth information from the consolidated statements of
operations for the nine months ended September 30, 2021, and September 30, 2020.
Nine Months Ended
September 30, 2021 September 30, 2020
Revenues $ 4,083,267 $ 1,521,022
Cost of goods sold (3,102,972 ) (767,133 )
Gross profit 980,295 753,889
Operating expenses 1,625,548 1,238,964
Loss from operations (645,253 ) (485,075 )
Non-operating income (expense):
Economic Injury Disaster Loan grant - 10,000
Non-operating income 138,567 -
Interest (21,087 ) (28,510 )
Net loss $ (527,773 ) $ (503,585 )
16
Revenues
Revenues were $4,083,267 and $1,521,022 for the nine months ended September 30,
2021, and September 30, 2020, respectively. The increase was primarily due to a
$2,182,000 increase in revenues from sales of GrowPods (which the Company did
not sell prior to January 1, 2021), a $294,613 increase in revenues from sales
of lighters, a $63,493 increase in revenues from sales of other products, a
$46,787 increase in revenues from sales of plastic lighter holders, and a
$17,390 increase from sales of jars. The increase was partially offset by a
decrease of $42,379 in Medtainer sales and a $39,561 decrease in sales of
humidity pack inserts.
Cost of Goods Sold
Cost of goods sold for the nine months ended September 30, 2021, and September
30, 2020, were $3,102,972 and $767,133, respectively. This increase was
primarily due to a $2,020,030 increase in the cost of GrowPods (which the
Company did not purchase prior to January 1, 2021), a $192,132 increase in the
cost of lighters, an increase of $45,032 increase in the cost of other products,
and a $20,690 increase in plastic lighter holders. This increase was partially
offset by a $32,507 decrease in cost of Medtainers. For the nine months ended
September 30, 2021, gross profit from sales of Medtainers and related products
and services were 43% of revenues and gross profit from sales of GrowPods and
related products were 7% of revenues.
Operating Expenses
Operating expenses for the nine months ended September 30, 2021, and September
30, 2020, consisted of the following:
Nine Months Ended
September 30, 2021 September 30, 2020
Advertising and marketing $ 64,009 $ 12,755
Bad debt - 33,332
Depreciation and amortization 209,056 73,307
Professional fees 148,641 133,425
Share-based compensation 270,000 298,077
Payroll 694,375 516,004
General and administrative 239,467 172,064
Total operating expenses $ 1,625,548 $ 1,238,964
Operating expenses were $1,625,548 and $1,238,964 for the nine months ended
September 30, 2021, and September 30, 2020, respectively. The increase in
operating expenses was attributable to a $178,371 increase in payroll expenses,
a $135,749 increase in depreciation and amortization expense, a $67,403 increase
in general and administrative expenses and a $15,216 increase in professional
fees. This decrease was partially offset by a $33,332 decrease in bad debt
expense and a $28,077 decrease in share-based compensation.
Loss from Operations
Loss from operations increased from a loss of $485,075 for the nine months ended
September 30, 2020, to a loss of $645,253 for the nine months ended September
30, 2021. The increase in loss from operations was primarily due to a $178,371
increase in payroll.
Other Income (Expense)
For the nine months ended September 30, 2020, the Company received an Economic
Injury Disaster Loan grant of $10,000. For the nine months ended September 30,
2021, and September 30, 2020, interest expense was $21,087 and $28,510,
respectively. The increase in other income for the three months ended September
30, 2021, was attributed to the recognition of gain on debt forgiveness related
to the full forgiveness of the Payroll Protection Program SBA loan and interest
in the amount of $138,567.
Net Loss
Net loss for the nine months ending September 30, 2021, was $527,773 (including
non-cash expense of $270,000 for share-based compensation and $209,056 for
depreciation and amortization), versus a net loss for the nine months ended
September 30, 2020, was $503,585 (including non-cash expense of $298,077 for
share-based compensation and $73,307 for depreciation and amortization). As more
fully described above, the principal reason for this difference was the $386,584
increase in operating expenses. This loss was partially offset by a $138,567
increase in non-operating income.
17
Liquidity and Capital Resources
As of September 30, 2021, the Company had $195,563 in cash and accounts
receivable of $177,454. As of September 30, 2021, and December 31, 2020, the
Company had negative working capital of $801,907 and $1,208,780, respectively.
As of September 30, 2021, the Company had no commitments for capital
expenditures. As of that date, the Company had inventory of approximately
103,000 Medtainer products, approximately 283,000 units of other products and
one GrowPod unit.
During the nine months ended September 30, 2021, the Company experienced
negative cash flow from operations of $497,796 and $375,991 of cash flows from
financing activities. During the nine months ended September 30, 2020, the
Company experienced negative cash flow from operations of $66,141 and $258,921
of cash flows from financing activities. Cash used in operating activities was
primarily a result of the Company's net loss, partially offset by the non-cash
items of share-based compensation and amortization, the decrease in operating
liabilities and an increase in operating assets. The Company used $16,000 and
$40,000 in cash from investing activities for the nine-month periods ending
September 30, 2021, and September 30, 2020, respectively. Cash provided from
financing activities increased from $258,921 for the nine-month period ending
September 30, 2020, to $375,991 for the nine-month period ending September 30,
2021.
The increase in cash provided from financing activities was primarily a result
of an increase in proceeds from the issuance of Common Stock.
On May 4, 2020, the Company made a note in favor of Customers Bank in the
principal amount of $137,690 pursuant to the terms of the Coronavirus Aid,
Relief, and Economic Security Act (the "CARES Act")(the "PPP Loan") and pursuant
to all regulations and guidance promulgated or provided by the SBA and other
Federal agencies that are now, or may become, applicable to the loan. On August
5, 2021, the Company was notified that the Paycheck Protection Note and the
interest accrued thereon had been forgiven in full, subject to review by the
SBA. The principal and interest forgiven have been recorded as non-operating
income in the consolidated statement of operations for the quarter ending
September 30, 2021.
In 2020, the Company received $137,690 from the PPP Loan and $210,000 from the
sale of 348,983 shares of Common Stock to two private investors, and in 2021,
the Company has received $615,000 from sales of 485,000 shares of Common Stock
to private investors. The proceeds from these transactions, which total
$962,690, are insufficient to meet the Company's capital needs, inasmuch as it
believes that it will require approximately $1,000,000 in additional funding for
the next 12 months, including approximately $600,000 to repay loans and interest
that are past due, assuming that the Company's operating loss remains at the
same level. The Company is seeking extensions of its past-due loans, and if it
is successful in doing so, the amount of such funding will be reduced, but
assurance can be given as to the extent that it will be successful. The Company
plans to fund its activities principally through the sale of debt or equity
securities to public and private investors and, if attained, its profits. There
is no assurance that such funding will be available on acceptable terms or
available at all, or that the Company will attain profitability. If the Company
is unable to raise sufficient funds when required or on acceptable terms, it may
have to reduce significantly, or discontinue, its operations. To the extent that
funds are raised by issuing equity securities or securities that are convertible
into the Company's equity securities, its stockholders may experience
significant dilution.
The Company intends to devote its manpower and capital resources to increasing
revenues, while working to reduce the cost of goods sold and operating expenses.
Doing so depends on the successful execution of its operating plan, which
includes increasing sales of existing products, introducing additional products
and services, controlling cost of goods sold and operating expenses, negotiating
extensions of existing loans and raising either debt or equity financing.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
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