The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included in this Report. The
forward-looking statements included in this discussion and elsewhere in this
Report involve risks and uncertainties, including those set forth under
" Cautionary Statement About Forward-Looking Statements. " Actual results and
experience could differ materially from the anticipated results and other
expectations expressed in our forward-looking statements as a result of a number
of factors, including but not limited to those discussed in this Item and in
" Item 1A. Risk Factors ."
Plan of Operations
Since execution of the Sublicense Agreement with TMDI in November 2019 (as
discussed in greater detail above under "Item 1. Business"), our plan of
operations has been primarily focused on preliminary activities of marketing and
production planning for our licensed aerosol inhaler product line ultimately
leading to the initial sales of our new products, beginning in early 2020. In
that regard, we have supplemented the proceeds received from the sale of
convertible notes with the private sales of restricted shares of our common
stock to various accredited investors, and completed the recent sale of a
convertible debenture in the aggregate principal amount of $1,941,176 and other
convertible notes, as discussed in greater detail below, to further fund our
operations moving forward.
We plan to grow our operations as discussed in greater detail above under
"Growth Strategy" under "Item 1. Business".
Novel Coronavirus (COVID-19)
In December 2019, a novel strain of coronavirus, which causes the infectious
disease known as COVID-19, was reported in Wuhan, China. The World Health
Organization declared COVID-19 a "Public Health Emergency of International
Concern" on January 30, 2020 and a global pandemic on March 11, 2020. In March
and April 2020, many U.S. states and local jurisdictions began issuing
'stay-at-home' orders. As disclosed above, the Company has recently adopted a
new business strategy focused on developing potential commercial opportunities
which will involve the rapid application of therapeutics using proprietary
metered dose inhaler technology that the Company has recently licensed from a
third party. This strategy includes typical pharmaceutical type marketing
efforts (e.g., marketing directly to doctors) that has been shown to work with
traditional drug product type sales, versus novelty type sales, which currently
include cannabidiols. We are planning on moving away from traditional internet
sales and marketing and believe this transition will benefit the Company going
forward. COVID-19 resulted in the Company being forced to temporarily suspend
its marketing plans as the Company was not able to travel to meet with doctors
directly. Moving forward, the range of possible impacts on the Company's
business in the event the coronavirus pandemic continues to include: (i)
changing demand for the Company's products; (ii) rising bottlenecks in the
Company's supply chain; and (iii) increasing contraction in the capital markets.
At this time, the Company's sales have not been materially affected by the
pandemic (as the Company has had only limited sales to date), and it believes
that it is premature to determine the potential impact on the Company's business
prospects from these or any other factors that may be related to the coronavirus
pandemic; however, it is possible that Covid-19 and the worldwide response
thereto, may have a material negative effect on our operations, cash flows and
results of operations.
Through the date of this Report, we have been able to successfully support our
operations with our cash on hand, through equity sales (which have to date been
completed through private offerings), and borrowings. Moving forward we believe
we will need to raise additional funding to support our operations which funding
we anticipate being available through the sale of equity or debt, similar to our
recently completed sale of a convertible debenture and convertible debt, as
discussed below. We also continue to evaluate our business operations based on
new information as it becomes available and will make changes that we consider
necessary in light of any new developments regarding the pandemic. Additionally,
we anticipate requiring further funds in the future to grow our operations and
produce additional product lines, which funds we anticipate raising through
equity offerings, and if necessary, debt.
The future impact of COVID-19 on our business and operations is currently
unknown. The pandemic is continuously evolving and the full extent to which
COVID-19 will ultimately impact us depends on future
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developments, including the duration and spread of the virus, as well as
potential seasonality of new outbreaks and virus mutations.
Results of Operations
The following discussion pertains to the Company's revenues and expenses for the
year ended December 31, 2021 and the nine-month transition period ended December
31, 2020, as reported in our consolidated financial statements and notes thereto
included herein.
Revenues - The Company commenced limited sales of its inhaler products to
customers, while still in a product development mode, on a trial basis in
January 2020. However, due to the subsequent impact of the COVID-19 pandemic,
as well as other contributing factors, the Company has not sustained a
consistent level of sales thus far. The Company has two different sales channels
as follows:
·Wholesale - designed to capture fairly large, but sporadic, orders received
from wholesale customers, often for substantial quantities with relatively high
profit margins.
·Retail - designed to capture a high volume of small orders received from retail
customers through an online portal, with significantly lower profit margins.
The revenues from such sales on a trial basis in the year ended December 31,
2021 were $534 compared to $130,916 for the nine-month transition period ended
December 31, 2020, consisting mainly of two large wholesale orders. Revenues
from sales of the Company's inhaler and other products, under both sales
channels, are expected to gradually increase in the future, once the current
trial period ends.
Cost of Goods Sold - Cost of goods sold in the year ended December 31, 2021 were
$200 compared to $19,394 in the nine-month transition period ended December 31,
2020. The cost of goods sold reflected the cost of procuring inhalers and
related products and supplies for resale. The cost of goods sold in the year
ended December 31, 2021 was not relevant due to the very low level of sales in
that period, whereas the cost of goods sold in the nine months ended December
31, 2020, resulted in a gross profit margin of $111,522.
General and Administrative Expense - General and administrative expenses in the
year ended December 31, 2021 were $2,114,770 compared to $2,023,379 in the
nine-month transition period ended December 31, 2020. This fluctuation was due
to the increase in certain cash overhead expenses, mostly for payroll, arising
from the adoption of a new business strategy focused on commercial opportunities
involving the rapid application of therapeutics using the RxoidTM MDI
technology, supplemented by the assets acquired from Razor Jacket in late 2020.
Amortization Expense - Amortization expense in the year ended December 31, 2021
was $33,759 compared to $75,000 in the nine-month transition period ended
December 31, 2020. This decrease was largely due to the termination of the
Sublicense Agreement, effective February 9, 2021, under which the Company was
previously obligated to reimburse TMDI in the amount of $200,000 for a license
fee owed by TMDI to EM3, covering the first two years of the Sublicense
Agreement, as discussed in greater detail in the section above, partially offset
by the initial amortization expense recognized on an operating lease asset
beginning in October 2021.
Depreciation Expense - Depreciation expense in the year ended December 31, 2021
was $22,100 compared to $7,255 in the nine-month transition period ended
December 31, 2020. This increase reflects depreciation on the Company's
purchases of property and equipment beginning in September 2020.
Other Income (Expense) - Interest expense in the year ended December 31, 2021
was $1,329,441 compared to $58,009 in the nine-month transition period ended
December 31, 2020. This increase was due to the amortization of the original
issue debt discount and other adjustments to interest expense arising from the
warrant liability recognized from the issuance of common stock warrants issued
in conjunction with a convertible debenture in August 2021, partially offset by
the conversion of certain convertible notes into common stock in August 2020 and
March 2021. Other income (expense) also includes a gain from the change in
valuation of the warrant liability in the year ended December 31, 2021 of
$631,853.
Net Loss - Net loss in the year ended December 31, 2021 was $2,867,883 compared
to $2,052,121 in the nine-month transition period ended December 31, 2020,
representing the net amounts of the various revenue and
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expense categories indicated above. The Company has not recognized any income
tax benefits for these net losses due to the uncertainty of their ultimate
realization.
Liquidity and Capital Resources
Cash flows from Operating activities. Net cash used in operating activities in
the year ended December 31, 2021 was $2,209,131 compared to $1,724,829 in the
nine-month transition period ended December 31, 2020. This net increase was
largely due to the higher level of overhead costs and other working capital
changes following the Company's adoption of a new business strategy in early
2020, as further noted above.
Cash flows from Investing activities. Net cash used in investing activities in
the year ended December 31, 2021 was $292,531 compared to $106,740 in the
nine-month transition period ended December 31, 2020. This increase was due to
the Company's greater level of purchases of property and equipment which began
in September 2020.
Cash flows from Financing activities. Net cash provided by financing activities
in the year ended December 31, 2021 was $2,195,000 compared to $2,194,500 in the
nine-month transition period ended December 31, 2020. Net cash provided by
financing activities in the year ended December 31, 2021 resulted from
$1,650,000 received from the sale of the Debenture in the original principal
amount of $1,941,176, as well as from the private sales of 1,462,500 shares of
restricted common stock to several accredited investors at an offering price of
$0.40 per share for total proceeds of $585,000, partially offset by the net
repayment of various unsecured notes payable in the amount of $40,000. Net cash
provided by financing activities in the nine-month transition period ended
December 31, 2020 reflected the sale of 9,288,750 shares of restricted common
stock in private transactions in the amount of $1,922,500, and the issuance of
new notes payable in the amount of $422,000, partially offset by the payments of
existing notes payable in the amount of $150,000.
Effective August 31, 2020, the Company reached the necessary milestone to
trigger the automatic conversion of certain notes payable issued to the holders
on various dates in 2018 and 2019, as amended, in the total principal amount of
$732,835 into shares of the Company's common stock, subject to a 4.99% ownership
limitation for each beneficial owner of such notes. In conjunction with this
conversion, holders of notes in the principal amount of $404,601, plus an
additional accrued interest amount of $96,536, converted their notes into
10,022,749 shares of common stock.
Effective March 31, 2021, the following additional conversions of the Company's
remaining convertible notes payable occurred: (i) the holders of convertible
notes payable issued in 2018 at a conversion price of $0.13 per share with total
principal and accrued interest balances in the aggregate amount of $410,888
converted their notes into a total of 3,160,684 shares of common stock; and (ii)
the holders of convertible notes payable amended or issued in 2019 at a
conversion price of $0.05 per share with total principal and accrued interest
balances in the aggregate amount of $383,470, the automatic conversion of which
had previously been triggered on August 31, 2020, as discussed above, subject to
each holder's beneficial ownership limitation, converted their notes into a
total of 7,669,381 shares of common stock. As a result of these conversions, a
total of 10,830,065 new shares of common stock were issued and the Company's
outstanding debt obligations were substantially reduced.
On October 15, 2020, the Company entered into a private stock subscription
agreement with an accredited investor whereby the Company agreed to sell the
investor 2,640,000 shares of restricted common stock and warrants to purchase
6,000,000 shares of the Company's common stock at an exercise price of $0.50 per
share and a term of one year, in exchange for a cash payment to the Company in
the amount of $100,000, and the performance of certain other obligations. Based
on previous negotiations between the Company and the investor prior to the
execution of this agreement, the investor had made a provisional payment of
$90,000, which was reflected by the Company as a liability as of September 30,
2020. Upon execution of the agreement, the investor paid the remaining $10,000
to the Company. The resale of the shares held by the purchaser are subject to a
lock-up agreement.
In November 2020, the Company closed an Asset Purchase and Sales Agreement with
Razor Jacket, an Oregon based supplier of isolate and related products, to
acquire all of Razor Jacket's equipment relating to the manufacture of
cannabinoid isolates and related products. As previously noted, the Company paid
$300,000 in cash at closing, and issued 625,000 shares of restricted common
stock to the owners of Razor Jacket, and provided them the right to earn up to
16.5 million shares of Series A Preferred Stock of the Company, convertible for
common stock on a one-for-one basis, subject to certain conditions.
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In order to meet short-term working capital needs in mid-2021, the Company
obtained unsecured cash advances from two of its officers (its Chief Executive
Officer, Donal R. Schmidt, Jr., and Sean Berrier, the Senior Vice President (a
non-executive officer position)) in May through August 2021 in the net amount of
$260,000. Such advances are expected to be repaid out of the proceeds of an
underwritten public offering of the Company's equity securities which the
Company is currently pursuing. However, no assurance can be given that the
Company will be successful in achieving a closing of the underwritten public
offering.
In order to meet longer-term working capital needs in advance of a proposed
underwritten offering, which may not be completed timely, if at all, on August
4, 2021, the Company sold the Debenture and issued the same investor the
Investor Warrants, each discussed in greater detail above under " Item 1.
Business-Prior Material Acquisitions and Transactions ".
The amount owed under the Debenture, including amounts owed upon the occurrence
of an event of default, may be converted, in whole or part, by the holder, into
common stock of the Company, at a conversion price of $0.40 per share (the
"Conversion Price"), provided that the outstanding amount of the Debenture
automatically converts into common stock of the Company upon the closing of a
Qualified Offering, at the lower of (i) the Conversion Price; and (ii) 75% of
the offering price of the Qualified Offering. The conversion of the Debenture is
subject to a beneficial ownership limitation of 4.99%, preventing such
conversion by the holder thereof, if such exercise would result in such holder
and its affiliates, exceeding ownership of 4.99% of our common stock, which
percentage may be increased to up to 9.99%, with at least 61 days prior written
notice by the holder thereof.
The Investor Warrants, which are evidenced by a common stock Purchase Warrant
(the "Warrant Agreement"), have an exercise price of $0.40 per share, and may be
exercised at any time from the grant date of the Investor Warrants until August
3, 2026. The total number of shares of common stock issuable upon exercise of
the warrants equals 100% of the total initial shares of common stock issuable
upon conversion of the Debenture. The Investor Warrants have cashless exercise
rights if when exercised, and following the six-month anniversary of the closing
of the offering, a registration statement registering the shares of common stock
issuable upon exercise thereof, is not effective with the Securities and
Exchange Commission. The exercise of the Investor Warrants is subject to a
beneficial ownership limitation of 4.99%, preventing such exercise by the holder
thereof, if such exercise would result in such holder and its affiliates,
exceeding ownership of 4.99% of our common stock, which percentage may be
increased to up to 9.99% with at least 61 days prior written notice by the
holder thereof. The Investor Warrants contain anti-dilution rights such that if
we issue, or are deemed to have issued, common stock or common stock equivalents
at a price less than the then exercise price of the Investor Warrants, subject
to certain customary exceptions and the sale of up to $1.5 million in private
transactions, the exercise price of the Investor Warrants is automatically
reduced to such lower value, and the number of shares of common stock issuable
upon exercise thereafter is adjusted proportionately so that the aggregate
exercise price payable upon exercise of such Investor Warrants is the same prior
to and after such reduction in exercise price. As a result, the effect of the
anti-dilution right may cause significant dilution to existing shareholders.
Pursuant to a Placement Agent Agreement entered into with Maxim Group LLC (the
"Placement Agent"), who served as placement agent for the offering of the
Debenture and Investor Warrants, we agreed to pay the Placement Agent for the
offering a cash commission of 8% of the gross proceeds received in the offering
($132,000), and to grant the Placement Agent a warrant to purchase 5% of the
total shares issuable upon conversion of the Debenture (242,647), with an
exercise price equal to the same exercise price as the Investor Warrants ($0.40
per share), which have a term of five years and are in substantially similar
form as the Investor Warrants (the "Placement Warrants" and together with the
Investor Warrants, the "Offering Warrants"). We agreed to register the shares of
common stock issuable upon exercise of the Placement Warrants under the
Securities Act.
The Company has been using the proceeds of the offering to meet its short-term
working capital needs in anticipation of closing a qualified listing on a
national exchange and raising capital in connection with an underwritten
offering, provided no assurance can be given that the Company will be successful
in uplisting to a national exchange or achieving a closing of the underwritten
public offering.
As of December 31, 2021, we had a cash balance of $0.2 million and a working
capital deficit of $2.6 million. We have not generated a net profit from the
limited sales of our inhaler products beginning in early 2020 and only generated
minimal revenues during the year ended December 31, 2021. Until such time that
we can generate substantial net profit from operations, if ever, we expect to
finance our operating activities through a combination of equity offerings and
debt financings and we may seek to raise additional capital through strategic
collaborations.
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However, we may be unable to raise additional funds or enter into such
arrangements when needed on favorable terms, or at all, which would have a
negative impact on our financial condition and could force us to delay, limit,
reduce or terminate our operations. Failure to receive additional funding could
cause us to cease operations, in part or in full. Furthermore, even if we
believe we have sufficient funds for our current or future operating plans, we
may seek additional capital due to favorable market conditions or strategic
considerations, which may cause dilution to our existing stockholders.
In the first quarter of 2022 we sold the Suggs Note and the Red Road Note, each
discussed in greater detail above under " Item 1. Business-Prior Material
Acquisitions and Transactions ".
Off-Balance Sheet Transactions
We do not engage in off-balance sheet transactions.
Going Concern
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The Company has generated limited
revenues and has suffered recurring losses totaling $8,521,423 since inception.
These factors, among others, indicate that there is substantial doubt about the
Company's ability to continue as a going concern for a reasonable period of
time. The consolidated financial statements do not contain any adjustments to
reflect the possible future effects on the classification of assets or the
amounts and classification of liabilities that may result should the Company be
unable to continue as a going concern.
Critical Accounting Policies and Significant Judgments and Estimates
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States, or GAAP. The
preparation of these consolidated financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements, as well as the reported expenses incurred during
the reporting periods. Our estimates are based on our historical experience and
on various other factors that we believe are reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
value of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
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