Introduction
This information should be read in conjunction with the interim unaudited
financial statements and the notes thereto included in this Quarterly Report on
Form 10-Q, and the audited financial statements and notes thereto and " Part
II. Other Information - Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations ", contained in our Annual Report
on Form 10-K for the year ended December 31, 2021, filed with the Securities and
Exchange Commission on March 16, 2022 (the "Annual Report").
Certain capitalized terms used below and otherwise defined below, have the
meanings given to such terms in the footnotes to our unaudited consolidated
financial statements included above under " Part I - Financial Information" -
"Item 1. Financial Statements ".
Certain cannabinoid industry terms used in this Report are defined in the
" Glossary of Cannabinoid Industry Terms " included in the
Annual Report and incorporated by reference herein.
Our logo and some of our trademarks and tradenames are used in this Report. This
Report also includes trademarks, tradenames and service marks that are the
property of others. Solely for convenience, trademarks, tradenames and service
marks referred to in this Report may appear without the ®, ™ and SM symbols.
References to our trademarks, tradenames and service marks are not intended to
indicate in any way that we will not assert to the fullest extent under
applicable law our rights or the rights of the applicable licensors if any, nor
that respective owners to other intellectual property rights will not assert, to
the fullest extent under applicable law, their rights thereto. We do not intend
the use or display of other companies' trademarks and trade names to imply a
relationship with, or endorsement or sponsorship of us by, any other companies.
In this Report, we may rely on and refer to information regarding the industries
in which we operate in general from market research reports, analyst reports and
other publicly available information. Although we believe that this information
is reliable, we cannot guarantee the accuracy and completeness of this
information, and we have not independently verified any of it.
Unless the context requires otherwise, references to the "Company," "we," "us,"
"our," "RTSL", refer specifically to Rapid Therapeutic Science Laboratories,
Inc. and its consolidated subsidiary.
In addition, unless the context otherwise requires and for the purposes of this
Report only:
·"Exchange Act" refers to the Securities Exchange Act of 1934, as amended;
·"SEC" or the "Commission" refers to the United States Securities and Exchange
Commission; and
·"Securities Act" refers to the Securities Act of 1933, as amended.
Where You Can Find Other Information
We file annual, quarterly, and current reports, proxy statements and other
information with the SEC. The SEC maintains an Internet site that contains
reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC like us at http://www.sec.gov.
Copies of documents filed by us with the SEC are also available from us without
charge, upon oral or written request to our Secretary, who can be contacted at
the address and telephone number set forth on the cover page of this Report.
Summary of The Information Contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations
Our Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) is provided in addition to the accompanying consolidated
financial statements and notes to assist readers in understanding our results of
operations, financial condition, and cash flows. MD&A is organized as follows:
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·Overview. Discussion of our business and overall analysis of financial and
other highlights affecting us, to provide context for the remainder of MD&A.
·Plan of Operations. Discussion of our strategy moving forward and how we plan
to seek to increase stockholder value.
·Results of Operations. An analysis of our financial results comparing the three
and nine months ended September 30, 2022, and 2021.
·Liquidity and Capital Resources. A discussion of our financial condition,
including descriptions of balance sheet information and cash flows.
·Critical Accounting Policies and Estimates. Accounting estimates that we
believe are important to understanding the assumptions and judgments
incorporated in our reported financial results and forecasts.
Overview
Effective November 15, 2019, the Company and Texas MDI, Inc., a Texas
corporation, which is controlled by Donal R. Schmidt, Jr., the Chief Executive
Officer and Director of the Company ("TMDI"), entered into a sublicense
agreement (the "Sublicense Agreement") whereby the Company acquired a sublicense
from TMDI to use certain technology regarding metered dose inhalers (MDI) that
TMDI had licensed from EM3 Methodologies, LLC ("EM3") and the right to use the
RxoidTM brand name owned by TMDI. TMDI had exclusive rights to research,
develop, make, have made, use, offer to sell, sell, export and/or import and
commercialize, the 'Desirick Procedure', which is a proprietary process owned by
EM3 for producing MDI using hemp (and other) derivatives in the States of Texas,
California, Florida and Nevada (subject to pre-existing licensing rights which
have been provided by EM3 in such jurisdictions; provided that we currently have
no knowledge of any such pre-existing licensing rights), pursuant to an
Exclusive License Agreement dated October 1, 2019, by and between TMDI and EM3
(the "Original EM3 Exclusive License"). Pursuant to the Sublicense Agreement the
Company obtained substantially the same rights that TMDI had under the Original
EM3 Exclusive License, as to the use of the 'Desirick Procedure' for the
manufacturing of pressured MDI's (pMDI) containing hemp extract or hemp isolates
or a combination thereof in any legal jurisdiction in consideration for
5,600,000 shares of the Company's common stock (issued in November 2019). The
Company believes that the Desirick Procedure enables the production of MDI using
hemp derivatives (isolates) through a proprietary formulation process whereby
the interfacial tension and miscibility of aerosol mixture components (hemp
isolates, propellant, regulators, and/or solvents, if any) are determined that
allow creation and disbursement of a controlled liquid droplet size for
inhalation into the alveoli.
With execution of the Sublicense Agreement in November 2019, the Company adopted
a new business strategy focused on developing potential commercial opportunities
involving the rapid application of therapeutics using the RxoidTM MDI technology
then being sublicensed from EM3, with prospective healthcare providers,
pharmacies and other parties in the United States and any foreign jurisdiction
where hemp products are legal. Simultaneously with the entry into the Sublicense
Agreement, the Company exited from its previous operations in the bitcoin mining
business, which had been suspended since the middle of 2018.
The term of the Sublicense Agreement was from November 15, 2019 until the
expiration of the Original EM3 Exclusive License Agreement. Pursuant to an
amendment to the Original EM3 Exclusive License Agreement entered into in June
2020, all improvements to the 'Desirick Procedure' created by TMDI during the
term of such agreement belonged to TMDI, in consideration for 4,000 shares of
the Company's common stock (the "First Amendment").
During the term of the Sublicense Agreement, the Company was required to advance
payments to TMDI that TMDI was required to make to EM3, pursuant to the Original
EM3 Exclusive License. The Company's obligation to make such advancements to
TMDI was conditioned upon TMDI providing the Company with an advance notice
requesting such payments, along with an accounting showing the calculations for
such payments. Accordingly, the Company had an obligation to advance TMDI an
amount of $200,000 as a license fee covering the first two years of the
Sublicense Agreement and to pay an additional $200,000 each 2 years thereafter
(unless at least 100,000 in MDI consumables were purchased from EM3 for use in
such states during the preceding year). The Company partially satisfied this
obligation by making an equipment purchase on behalf of TMDI in the amount of
$135,000, and agreed to pay the remaining license fee of $65,000 in cash within
a 24-month period. The Company recorded the entire $200,000 license fee as an
intangible asset and was amortizing it to expense on a straight-line basis over
a 24-month
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period. The Sublicense Agreement and Original EM3 Exclusive License were
terminated in connection with the parties' entry into the Settlement Agreement
discussed below.
Effective on November 30, 2020, the Company acquired 100% of Rxoid Health
Solutions, LLC ("Rxoid Health"), a Texas limited liability company, pursuant to
a Membership Interest Purchase Agreement entered into with TMDI, which
previously owned such entity, for $100. Rxoid Health owns the right to the
RxoidTM brand name, which as of November 30, 2020, is owned and controlled by
the Company, and no longer licensed from TMDI. TMDI is controlled by Mr.
Schmidt, our Chief Executive Officer and director. RxoidTM Health will be the
holding company which will own all intellectual property of the Company,
including, but not limited to, that being developed under its isolate operations
acquired from Razor Jacket, LLC.
Subsequently, in December 2020, as part of a contemplated liquidation of TMDI,
its owners were distributed all of TMDI's 5,600,000 shares of stock which is
subject to Trading Agreements entered into between the Company and the prior
shareholders of TMDI.
On February 9, 2021, the Company entered into a Settlement and Mutual Release
Agreement dated February 9, 2021 (the "Settlement Agreement") with TMDI, Diamond
Head Ventures, LLC, an entity owned and controlled by Mr. Schmidt and a
predecessor to TMDI ("Diamond Head"), EM3, the owner of EM3, Richard Adams
("Adams") and Holly Brothers Pictures, LLC, an entity co-owned by Mr. Schmidt
and Mr. Adams ("Holly"). The Settlement Agreement was entered into in order to
settle certain disputes which had arisen between the parties relating to the
Sublicense Agreement, Original EM3 Exclusive License, and related agreements.
Pursuant to the Settlement Agreement, the parties agreed to (a) terminate the
Sublicense Agreement, Original EM3 Exclusive License, and a separate Sales and
Licensing Agreement dated November 21, 2018, pursuant to which EM3 agreed to
sell certain consumables to Diamond Head and provide a license to use certain
intellectual property in connection therewith; (b) Adams agreed that the Company
was no longer required to issue him 4,000 shares of the Company's common stock,
which were to be issued to him pursuant to the terms of the First Amendment
(which have not been issued as of such date); (c) EM3 and Adams agreed to enter
into a new Exclusive License Agreement with the Company (discussed below); (d)
each of the parties to the Settlement Agreement, other than the Company, agreed
that the Company was the rightful owner of all improvements to the Licensed IP
(as defined below), which was created by TMDI, Diamond Head or the Company,
prior to, and after the date of the parties' entry into the Settlement
Agreement; (e) Holly Brothers agreed to transfer to Adams ownership of a touring
coach; and (f) each of TMDI, Diamond Head and the Company provided a general
release to EM3 and Adams, and EM3 and Adams provided a general release to each
of TMDI, Diamond Head, and each of their officers, directors and related
parties. As a result of the release, the Company no longer owes TMDI (or EM3)
any license fees under the Sublicense Agreement or Original EM3 Exclusive
License (including, but not limited to the $65,000 previously owed under the
terms of the Sublicense Agreement, which amount was previously accrued).
Also, on February 9, 2021, as a required term and condition of the Settlement
Agreement, the Company, EM3, and Adams entered into a new Exclusive License
Agreement dated February 9, 2021 (the "New EM3 License"). Pursuant to the New
EM3 License, EM3 provided us a royalty-free, perpetual license to use the
Desirick Procedure or any derivation thereof and its application and use,
including, but not limited to, related consumables (cans, valves, and
actuators), filling equipment for pressurized MDIs (pMDIs), and/or plastic
testing vials and training, support or maintenance thereon of any combination
thereof, and all intellectual property of EM3 relating to the foregoing
(collectively, the "Licensed IP"), on an exclusive basis in the states of Texas,
California, Florida and Nevada (subject to pre-existing licensing rights which
have been provided by EM3 in such jurisdictions; provided that we currently have
no knowledge of any pre-existing licensing rights), and on a non-exclusive basis
throughout the rest of the world, in consideration for $10. The New EM3 License
provides our right of ownership of any improvements to the Licensed IP, requires
EM3 to indemnify us against any claims associated with EM3's breach of the
agreement (including in the event any third-party claims to own the Licensed
IP), and contains non-circumvention provisions. The New EM3 License continues in
place until such time, if ever, as we terminate the agreement. In the event we
terminate the New EM3 License, we are provided the non-exclusive license to use
the Licensed IP throughout the world for so long as we continue to manufacture
and distribute products.
As a result of the Settlement Agreement and the New EM3 License, we no longer
owe any obligations to TMDI or EM3 (other than the $10 and other consideration
already paid), and have a royalty-free, perpetual exclusive license applicable
to Texas, California, Florida, and Nevada from EM3 (subject to pre-existing
licensing rights which have been provided by EM3 in such jurisdictions; provided
that we currently have no knowledge of any pre-existing licensing rights) to
research, develop, make, have made, use, offer to sell, contract fill, export
and/or import and
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commercialize the Licensed IP, which enables the production of a so-called
metered dose inhaler using hemp cannabinoid derivatives under the RxoidTM brand
or on a white label basis.
A properly formulated and corrected manufactured MDI is a proven medical
technology which is a complete replacement for vape cartridges and e-cigarettes.
A cannabinoid MDI which is properly developed and manufactured delivers
medication directly to a user's blood stream through the pulmonary tract. MDIs
are generally sterile, stable, will not oxidize and have a long shelf life not
affected by light or temperature. MDIs require neither heat nor batteries. MDIs
are efficient devices to deliver medication to humans whether systemically or
topically. The Company uses only U.S. Food and Drug Administration (FDA) listed
consumables (cans, valves, actuators, and propellant) and equipment in
compliance with cGMP to produce its products. The use of excipients in the
manufacture of inhalants has long been held to be generally recognized as safe
(GRAS). The Company currently has over a dozen proprietary blends of
cannabinoids derived from hemp containing cannabidiol (CBD), cannabigerol (CBG),
cannabinol (CBN) and/or proprietary terpenes (aromatic oils) which customers
often use to help support many common complaints such as pain, inflammation,
anxiety, sleep, exercise, recovery and allergies. Once our products are
available for sale, we expect that they will be sold under our nh?ler brand, and
under the product names, "chill", "focus", and "move". The Company makes no
claims that any of its products have any therapeutic benefits or that they treat
any diseases.
Plan of Operations
Since execution of the Sublicense Agreement with TMDI in November 2019, 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.
However, due to the subsequent impact of the COVID 19 pandemic, as well as
other contributing factors, the Company has currently suspended its
manufacturing and sales.
Moving forward, funding permitting, and upon obtaining any necessary
governmental and/or third party approvals, we intend to finish the build out of
our 8,566 square feet of leased commercial office building space located in
Addison, Texas. This space will our house corporate office as well as our
aerosol filling laboratories and isolate manufacturing facility, beginning in
the fourth quarter of 2022 or early 2023, depending on contractor availability.
Sales to the public of our MDIs are not anticipated in 2022 or 2023 because of
anticipated FDA testing in connection with our planned IND filing with the FDA,
as discussed below. Notwithstanding that, we plan to explore selling
pharmaceutical isolates of CBD, CBG and CBN, after the construction of the
isolate manufacturing facility is complete and the Company is approved for GMP.
At that time, we plan to consider white labeling non-MDI aerosol products such
as oral, nasal or topical sprays using pharmaceutical grade isolates.
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, which may create significant dilution to
existing shareholders.
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.
We presently have plans to pursue a public offering of our securities and are
intending to use the proceeds of such planned offering to fund our current
business operations, gain new regulatory approvals, enhance our current product,
expand our sales and marketing efforts, and continue research into next
generation technology. Our primary activities in the near term will be focused
on working to achieve FDA approval of our CBD inhaler products which are based
on our proprietary blend of isolates, both in crystalline solid and powder form.
We are planning to resume manufacturing and selling of our products only when we
reach this highest level of regulatory acceptance, therefore, gaining FDA
approval of these devices represents the foundational building block of our
current business plans.
Seeking and obtaining FDA approval of our inhalers will be a time consuming and
expensive undertaking and we do not expect to be in position to achieve success
in that regard before the end of 2023, at the earliest. Due to the many
variables that will be involved in our planned FDA application and approval
process, most of which do not lend themselves to being readily measured or
quantified, we are presently unable to project our anticipated funding
requirements with any degree of specificity. We believe it is conceivable that
we could eventually expend a very
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substantial portion of the proceeds of the public offering seeking such
regulatory approvals and/or may need to seek out further funding to complete
such process. Nonetheless, there can be no assurance that the FDA will ever
approve our products.
Assuming the FDA does approve our products, we would expect to resume the
commercial manufacturing and selling of our products to customers following such
approval date, which we do not currently expect being earlier than the beginning
of 2024. We anticipate that, based on our plans for future development, and
funding permitting, we will have the manufacturing capability to deliver a
substantial volume of our inhaler products to the market within only a few
months of securing final FDA approval. In order for us to be positioned to meet
this objective, we will be required to recruit, hire and train additional
personnel in the areas of manufacturing, logistics, sales and administration.
With the efforts of our existing personnel, we have started preliminary
discussions with several prospective institutional customers for our products.
These discussions are ongoing, however, they may not eventually result in any
agreements to purchase our products, if and when, they are approved by the FDA
and available for sale. We may not succeed in the development of any
commercially viable products that will reach a significant level of acceptance
in the marketplace, may not have sufficient funding to obtain FDA approval of
our products, may never obtain FDA approval of our products, and may never
generate significant revenues.
Reverse Stock Split
Effective on January 11, 2022, shareholders holding a majority of our
outstanding voting shares, representing an aggregate of 51.4% of the total
voting shares as of such date, executed a written consent in lieu of a special
meeting of shareholders, approving among other things, the grant of
discretionary authority for our Board of Directors, without further shareholder
approval, to effect a reverse stock split of all of the outstanding common stock
of the Company, by the filing of an amendment to our Articles of Incorporation
with the Secretary of State of Nevada, in a ratio of between one-for-two and
one-for-fifty, with the Company's Board of Directors having the discretion as to
whether or not the reverse split is to be effected, and with the exact exchange
ratio of any reverse split to be set at a whole number within the above range as
determined by the Board of Directors in its sole discretion, at any time before
the earlier of (a) December 31, 2022; and (b) the date of the Company's 2022
annual meeting of shareholders and an amendment to our Articles of
Incorporation to increase the number of our authorized shares of common stock
from 750,000,000 to 800,000,000 (the "Shareholder Authority").
On March 4, 2022, the Board of Directors approved a stock split ratio of
1-for-25 in connection with the Shareholder Authority, provided that such
approval was subject in all cases to approval of such reverse stock split by the
Financial Industry Regulatory Authority (FINRA), and the filing of an amendment
to the Articles of Incorporation of the Company with the Secretary of State of
Nevada. On March 29, 2022, the Company filed a Certificate of Amendment to the
Company's Articles of Incorporation with the Secretary of Nevada to affect the
reverse stock split and the authorized share increase, which became effective at
2:00:01 A.M., Central Standard Time, on March 31, 2022. The effects of the
1-for-25 reverse stock split have been retroactively reflected throughout this
filing.
Our Growth Strategy
Our growth strategy is expected to build on what we believe is a superior
delivery system that delivers a superior Active Pharmaceutical Ingredient (API),
that together increases performance and safety of our products. We plan on
growing our business in six main ways:
·Capturing market share in the hemp space. Via our MDI devices that deliver a
measured amount of aerosolized inhalant in a mist to the lungs, we believe our
products (which we plan to begin manufacturing assuming we receive FDA
approval), provide a faster acting, more accurate dosing and higher value
bioavailability of our ingredients for our customers. As a result, we believe
that we will be able to increase our consumer base and to provide top line
growth for our planned retail and clinic customers. As discussed above, we are
not currently manufacturing or selling any products.
·Increasing penetration of hemp user. There is a decreasing stigma around the
use of hemp products as a result of legal, regulatory and social views are
rapidly evolving. However, there are still some people and physicians unwilling
to use these products, which we believe is largely based on the inability to
achieve accurate and controlled dosing. Our product lines are anticipated to be
meticulously manufactured to ensure an accurate and measured dose with every
actuation. We believe that this will allow us to provide consumers and medical
practitioners with the peace of mind that they can utilize our products safely
and effectively and thus bring new consumers into the category.
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·Expand our product portfolio. We plan to grow our product portfolio by
expanding into areas where we can identify "safe for inhalation" pharmaceutical
biologics which are currently being used in less efficacious delivery methods
and put them into our delivery device.
·Cannabinoids, the FDA, and Clinical Testing. The cannabinoid and hemp
marketplace are still somewhat devoid of medical substantiation. There have
been very few products that have started to undergo medical testing in the hopes
of gaining information around benefits, dosing and potential FDA approval. Our
initial goal was to start to explore the medical opportunity by conducting
voluntary clinical testing on our nh?lerTM branded products. We partnered with a
healthcare group who has a captive patient population to test our nh?lerTM brand
with patients presenting with clinical diagnosis around pain, anxiety, PTSD,
insomnia and long haul COVID-19 problems. This testing is now indeterminate as
we are planning to seek FDA approval and such testing will fall under our
proposed IND. In addition to clinical testing, we have engaged with several FDA
consultants to help us position our manufacturing and formulations with the
future goal of filing a New Drug Application (NDA) with the FDA. We have removed
products sold under the nh?ler brand name from the market because we are
preparing to file this IND (Investigational New Drug Application) with the FDA.
We have hired a law firm to assist in preparation of the application and have
further hired a lobbying firm located in Washington, D.C. to interface with the
FDA on our behalf in the U.S. Congress. We are currently in discussions with
other organizations with significant FDA regulatory experience to provide
oversight of the entire process. These discussions are ongoing and will be
finalized assuming we receive necessary funding. The Company is presently
intending to conduct a pre-IND meeting with the FDA prior to filing the actual
IND application with the FDA. The Company believes the pre-IND meeting and the
IND application will occur in the fourth quarter of 2022, funding permitting. We
anticipate, based upon discussions with outside consultants, an approximate
18-24-month time frame for FDA approval of our CBD MDI, provided some timeframe
may be longer and we may never obtain FDA approval for any of our products.
Finally, we are in late-stage discussions with a major institute of higher
learning to form a collaborative research effort to finish our CBD MDI and to
research other select cannabis compounds. This will in all reasonable
probability involve their medical school with human testing under commercial and
research INDs with the FDA.
·Legal Status. Our products are not FDA approved. However, we plan to file an
IND with the FDA in the fourth quarter of 2022, funding permitting, to conduct
Phase 1 human clinical trials of our flagship metered dose inhaler containing
CBD. We anticipate, based upon discussions with outside consultants, an
approximate 18-24-month time frame for FDA approval of our CBD MDI, provided
some timeframe may be longer and we may never obtain FDA approval for any of our
products. CBD is considered a drug by the FDA and no CBD product, except one
prescription product, is approved by the FDA for use in humans. Nevertheless,
the FDA generally has not interfered in the commercial sale of CBD products to
the public unless a manufacturer or marketer of such products make therapeutic
or false claims about their products. This position has been publicly stated by
the FDA in writing. As such, we make no therapeutic claims whatsoever. In
addition, the FDA does not consider CBD to be a dietary substance and presently
may not be labeled as such. Finally, our MDI is considered a class II medical
device and the FDA considers such devices, when not properly manufactured or if
adulterated, to be potentially dangerous to the public at large. There are
currently ongoing discussions about CBD and cannabinoids with Congress that may
impact the Company's business operations both positively and negatively.
·International Expansion. We plan to expand our marketing and sales to outside
of the United States, funding permitting, and assuming further declines in the
spread of COVID-19. Similar to the growth trends that we are seeing in the U.S.,
we believe there will be a significant opportunity for us to capture market
share internationally with our product offerings in the future. We have no
current time predictions for this activity because we believe our best
opportunity in this area is after FDA approval, as discussed above. Once we
finish construction of our isolate manufacturing facility, we can, if we choose,
begin to market internationally for pharmaceutical grades isolate sales. We
expect this to occur by the end of 2022, funding permitting; however, we do not
intend to market our MDI internationally until the end of our planned Phase 1
studies, because we understand and believe that the FDA has a major effect on
drug sales in all foreign jurisdictions we presently have under consideration.
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Results of Operations and Financial Condition
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, which COVID-19 restrictions have been eliminated. 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 debt 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, 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 developments, including the
duration and spread of the virus, as well as potential seasonality of new
outbreaks and virus mutations.
Results of Operations for the three and nine months ended September 30, 2022
compared to 2021
The following discussion reflects the Company's revenues and expenses for the
three and nine month periods ended September 30, 2022 and 2021, as reported in
our consolidated financial statements included in Item 1.
Three months ended September 30, 2022 versus three months ended September 30,
2021
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 suspended such sales around
December 31, 2021. Prior to this suspension, the Company reported an
insignificant amount of product sales in the three months ended September 30,
2021.
General and Administrative Expense - General and administrative expenses for the
three months ended September 30, 2022 were $345,655 compared to $490,656 in the
three months ended September 30, 2021. This decrease was due to a lower level of
corporate expenses incurred in seeking an uplisting of the Company's common
stock on a national securities exchange as well as various regulatory and other
related expenses incurred in pursuing a new drug application with the FDA and
for certain other clinical-oriented initiatives.
Amortization Expense - Amortization expense for the three months ended September
30, 2022 was $21,259, compared to zero in the three months ended September 30,
2021. This increase was solely due to the amortization
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expense recognized in the three months ended September 30, 2022 on an operating
lease asset beginning in October 2021.
Depreciation Expense - Depreciation expense for the three months ended September
30, 2022 was $5,993, compared to $5,525 in the three months ended September 30,
2021. This increase reflects slightly higher depreciation on the Company's
purchases of property and equipment beginning in September 2020.
Other Income (Expense) - Interest expense for the three months ended September
30, 2022 was $346,171, compared to $658,017 in the three months ended September
30, 2021. This fluctuation 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 in conjunction
with convertible debentures issued in August 2021 and May 2022. Other income
(expense) also includes gains from the change in valuation of the warrant
liability in the three months ended September 30, 2022 and 2021 of $492,002 and
$570,706, respectively.
Net Loss - Net loss for the three months ended September 30, 2022 was $227,076,
compared to $583,442 in the three months ended September 30, 2021, representing
the net amounts of the various revenue and 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.
Nine months ended September 30, 2022 versus nine months ended September 30, 2021
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 suspended such sales around
December 31, 2021. Prior to this suspension, the Company reported an
insignificant amount of product sales in the nine months ended September 30,
2021.
General and Administrative Expense - General and administrative expenses for the
nine months ended September 30, 2022 were $1,208,920 compared to $1,519,857 in
the nine months ended September 30, 2021. This decrease was due to a lower
level of corporate expenses incurred in seeking an uplisting of the Company's
common stock on a national securities exchange as well as to various regulatory
and other related expenses incurred in pursuing a new drug application with the
FDA and for certain other clinical-oriented initiatives.
Amortization Expense - Amortization expense for the nine months ended September
30, 2022 was $63,776, compared to $12,500 in the nine months ended September 30,
2021. This increase was due to the amortization expense recognized in the nine
months ended September 30, 2022 on an operating lease asset beginning in October
2021, which was partially offset by amortization expense recorded in the nine
months ended September 30, 2021 related to the Sublicense Agreement, which was
terminated effective February 9, 2021, under which the Company had been
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 above.
Depreciation Expense - Depreciation expense for the nine months ended September
30, 2022 was $17,979 compared to $16,575 in the nine months ended September 30,
2021. This increase reflects slightly higher depreciation on the Company's
purchases of property and equipment beginning in September 2020.
Other Income (Expense) - Interest expense for the nine months ended September
30, 2022 was $1,825,074, compared to $675,124 in the nine months ended September
30, 2021. 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 in conjunction
with convertible debentures issued in August 2021 and May 2022. Other income
(expense) also includes gains from the change in valuation of the warrant
liability in the nine months ended September 30, 2022 and 2021 of $1,272,084 and
$570,706, respectively.
Net Loss - Net loss for the nine months ended September 30, 2022 was $1,843,665,
compared to $1,653,076 in the nine months ended September 30, 2021, representing
the net amounts of the various revenue and 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.
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Liquidity and Capital Resources
Operating activities. Net cash used in operating activities for the nine months
ended September 30, 2022 was $799,660, compared to $1,657,267 in the nine months
ended September 30, 2021. This net decrease largely occurred due to a lower
level of corporate expenses incurred in seeking an uplisting of the Company's
common stock on a national securities exchange as well as to various regulatory
and other related expenses incurred in pursuing a new drug.
Investing activities. Net cash used in investing activities for the nine months
ended September 30, 2022 was $354,801, compared to $117,172 in the nine months
ended September 30, 2021. This increase was largely due to the amounts paid in
the nine months ended September 30, 2022 on the build out of the Company's new
corporate office and laboratory space located in Addison, Texas, which the
Company is expecting to complete in the fourth quarter of 2022 or early 2023,
pending funding and contractor availability.
Financing activities. Net cash provided by financing activities for the nine
months ended September 30, 2022 was $961,977, compared to $2,195,000 in the nine
months ended September 30, 2021. As further discussed below under "Recent
Material Funding and Other Events," our net cash provided by financing
activities in the nine months ended September 30, 2022 resulted primarily from
new convertible borrowings of $424,250 from previous institutional investor
sources as well as the issuance of two non-convertible notes for new short-term
loans, one of which came from an independent director in the amount of $400,000,
and one of which was from an institutional investor in the net amount of
$175,127, after deducting an original issue discount $21,873. Net cash provided
by financing activities in the nine months ended September 30, 2021 resulted
from the initial convertible borrowing of $1,650,000 from the same institutional
investor as well as from the private sales of 58,500 shares of restricted common
stock to several accredited investors at an offering price of $10.00 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.
In order to meet short-term working capital needs beginning in the summer of
2021, the Company obtained unsecured cash advances from two of its officers (its
Chief Executive Officer, Donal R. Schmidt, Jr., and its Senior Vice President)
in May 2021 through September 2022 in the net amount of $321,100. 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.
We have not generated a net profit from the limited sales of our inhaler
products beginning in early 2020. Due to the subsequent impact of the COVID 19
pandemic, as well as other contributing factors, the Company has currently
suspended such sales. 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. 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.
Recent Material Funding and Other Events
On August 4, 2021, the Company sold an Original Issue Discount Convertible
Debenture in the original principal amount of $1,941,176 (the "Initial
Debenture") and a warrant to purchase up to 194,118 shares of common stock of
the Company (the "Initial Investor Warrants"). The sale of the Initial
Debenture resulted in net proceeds to the Company of $1,650,000, after deducting
the 15% original issue discount. The Initial Investor Warrants had a five-year
term and an exercise price of $10.00 per share, subject to certain anti-dilution
rights, discussed in greater detail below. The amount owed under the Initial
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, from time to time, at a conversion price equal to the lower of:
(a)$10.00 per share, which is equal to 100% of the market price of the Company's
common stock on the day prior to the closing of the offering of the Initial
Debenture, or
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(b)a 25% discount to the offering price of the Company's common stock in a
Qualified Listing (as defined below)((a) or (b), as applicable, the "Conversion
Price").
The amount owed under the Initial Debenture, including amounts owed upon the
occurrence of an event of default, was to automatically convert 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. "Qualified Offering" means a single public offering of common stock
and/or common stock equivalents which results in the listing of the Company's
common stock on a national securities exchange (including Nasdaq).
The Initial Debenture was originally due upon the earlier of (a) May 1, 2022,
and (b) the date of a Qualified Offering (defined above), unless earlier
converted into common stock of the Company, as discussed above, however, due to
unforeseen delays experienced in the Company's planned public offering of common
stock on a national exchange, we reached an agreement with the institutional
investor on May 31, 2022 to extend the maturity date of the Initial Debenture,
until the earlier of (i) within 48 hours of the closing of a Qualified Offering,
(ii) within 48 hours of the date on which the Company's common stock is listed
on a "national securities exchange" as defined in the Exchange Act and (iii)
September 1, 2022. We and the holder of the Initial Debenture also agreed to
amend the Initial Debenture to remove the automatic conversion provisions of the
Initial Debenture. More recently, the unexpected delays in our public stock
offering have continued, therefore, we have reached an agreement in principle
with the institutional investor for a further extension of our borrowings under
this bridge loan in the total amount of $2,352,940, based on terms that are yet
to be formally agreed upon.
Also, pursuant to the same amendment agreement entered into on May 31, 2022, we
and the holder of the Initial Investor Warrants agreed to amend the Initial
Investor Warrants to extend the expiration date thereof from August 3, 2026 to
August 3, 2028, and to extend the anti-dilution rights associated therewith
(discussed below) for a period of 24 months following the date the Company's
common stock is approved for uplisting on a national securities exchange.
At the same time that we amended the Initial Debenture, we sold the holder of
the Debenture a new Original Issue Discount Convertible Debenture in the
principal amount of $411,764 (the "Additional Debenture", and together with the
Initial Debenture, the "Debentures"), for aggregate proceeds of $350,000, which
Additional Debenture has substantially equivalent terms as the Initial
Debenture, as amended. We also granted the holder of the Debentures additional
warrants to purchase 388,236 shares of common stock with an exercise price of
$10.00 per share and a term through August 3, 2028 (the "Additional Investor
Warrants", and together with the Initial Investor Warrants, the "Investor
Warrants").
The conversion of the Debentures 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 Debentures may not
be prepaid without the prior written consent of the holder. The Debentures do
not accrue interest, except upon the occurrence of an event of default, at which
time the amount owed accrues interest at the rate of 18% per annum, until paid
in full.
The Investor Warrants, which are evidenced by Common Stock Purchase Warrants
(the "Warrant Agreements"), have an exercise price of $10.00 per share, and may
be exercised at any time from the grant date of the Investor Warrants until
August 3, 2028. 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
(of which approximately $1.0 million is currently available), 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, which rights continue for a period of 24 months following the date the
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Company's common stock is approved for uplisting on a national securities
exchange. 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
Debentures 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
of the Initial Debenture ($132,000), and to grant the Placement Agent a warrant
to purchase 5% of the total shares issuable upon conversion of the Initial
Debenture (i.e., warrants to purchase 9,706 shares), with an exercise price
equal to the same exercise price as the Investor Warrants ($10.00 per
share),which have a term of five years and are in substantially similar form as
the Initial Investor Warrants (except for an expiration date of August 3, 2026
(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.
On January 18, 2022, the Company entered into a Securities Purchase Agreement
(the "Purchase Agreement"), with Sixth Street Lending LLC, an accredited
investor (the "Purchaser"), pursuant to which the Company agreed to sell, and
the Purchaser agreed to purchase, a Promissory Note (the "January 2022 Note").
The January 2022 Note was purchased for $153,750, and had an initial face amount
of $173,738, when including an original issue discount of $19,988. The January
2022 Note was originally due on January 18, 2023, however, the Company
subsequently paid the January 2022 Note in full, including what was essentially
a prepayment penalty in the amount of $19,459, on March 6, 2022.
On January 28, 2022, we entered into a Securities Purchase Agreement (the "Suggs
Purchase Agreement"), with J. Scott Suggs, a member of our Board of Directors
("Suggs"), pursuant to which the Company agreed to sell, and Suggs agreed to
purchase, a Promissory Note (the "Suggs Note"). The Suggs Note was purchased
for, and has an initial face amount of, $400,000. The Suggs Note accrues
interest at 18% per annum, compounded monthly (at the end of each month), until
the earlier of (i) January 26, 2023 (the "Maturity Date") or (ii) ten days from
the date that the Company's common stock is listed on a national exchange and
that the Company receives funding under any underwritten offering in connection
therewith (the "Pre-Payment Date"), when all accrued interest and outstanding
principal under the Suggs Note is required to be paid in a single lump sum. If
the Pre-Payment Date occurs prior to the Maturity Date, the Company will be
required to pay a prepayment penalty equal to the outstanding principal balance
of the Suggs Note multiplied by 25.44% ($101,760), less the amount of total
accrued interest owed under the Suggs Note as of the Pre-Payment Date (the
"Pre-Payment Penalty"). No Pre-Payment Penalty will be due if the Suggs Note is
repaid on the Maturity Date, provided the Pre-Payment Date has not previously
occurred. Other than on the Pre-Payment Date, the Company has no right to
accelerate payments or prepay the Suggs Note, except with the prior written
approval of Suggs.
The Suggs Note is unsecured. So long as the Company has any obligation under the
Suggs Note, the Company is prohibited from selling, leasing or otherwise
disposing of any significant portion of its assets outside the ordinary course
of business without the prior written consent of the holder of the Suggs Note.
The Suggs Note contains certain customary events of default, including failure
to pay amounts due under the Suggs Note (subject to a five day cure period);
breach of the Company's covenants under the Suggs Note, subject to a 20 day cure
period; breach of the representations and warranties of the Company; the
occurrence of certain bankruptcy related events; the delisting of the Company's
common stock from a national securities exchange or the OTC Markets; failure to
comply with the requirements of the Exchange Act; dissolution, liquidation,
cessation of operations; certain financial statement restatements; replacement
of the Company's transfer agent; and certain cross-defaults of other agreements
entered into with Suggs. Upon the occurrence of an event of default under the
Suggs Note, the Suggs Note becomes immediately due and payable and we are
required to pay Suggs the principal, accrued interest, Pre-Payment Penalty, and
default interest due under the Suggs Note. If such default amount is not paid
within five business days of written notice thereof from Suggs, Suggs can
convert the amount due to Suggs into common stock of the Company as discussed
below.
Upon an event of default under the Suggs Note, the amounts due to the holder of
the Suggs Note may be converted, in whole or part, by the holder, into common
stock of the Company, at a conversion price equal to the greater of (a)
$0.001875 per share (subject to equitable adjustment for stock splits and stock
dividends); and (b) 75% of the average closing bid price of the Company's common
stock, on the principal securities exchange or market where the Company's common
stock is then quoted or traded, for the five trading days immediately prior to
the date of conversion (the "Variable Conversion Rate"). We agreed to reserve
six times the number of shares of common stock then issuable upon conversion of
the Suggs Note, initially equal to a total of 432,552 shares of common stock.
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If we fail to deliver shares of common stock to the holder of the Suggs Note
upon the conversion thereof within three business days, we agreed to pay the
holder $2,000 per day in cash, to the extent such failure is not the result of a
third party. The conversion of the Suggs Note 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.
The closing of the transactions contemplated by the Suggs Purchase Agreement,
including the sale of the Suggs Note, occurred on January 28, 2022.
The Suggs Purchase Agreement included standard and customary representations of
the parties; and included certain positive and negative covenants (including
obligations to indemnify Suggs in certain cases upon breach thereof), which
included the requirement that we use the funds raised through the sale of the
Suggs Note only for working capital, and that we reimburse $3,750 of Suggs'
attorney's fees.
On March 8, 2022, we entered into a Securities Purchase Agreement with an
institutional investor, Red Road Holdings Corporation ("Red Road"), and issued a
Promissory Note payable to Red Road (the "Red Road Note") in order to fund
short-term working capital needs in the amount of $197,000. This note has a
maturity of one year and has substantially the same payment and default
provisions as the Suggs Note, except that we are required to make monthly
principal and interest payments of $21,276, beginning on May 1, 2022.
Effective April 1, 2022, the Company granted a common stock purchase warrant to
a Washington, DC based firm that it has engaged to provide consulting services
relating to certain federal regulatory matters. The warrant will enable the firm
to purchase up to 360,000 shares of the Company's common stock at an exercise
price of $10.00 per share, or the lower of any public offering related
conversion price, for a period of 10 years. The warrant is structured to be
exercisable in six separate tranches of from 160,000 shares to 40,000 shares,
assuming specified performance milestones are met by the firm for each tranche.
The warrant includes cashless exercise rights, a reduction in the exercise price
to $7.75 per share upon a sale, merger, change of control or consolidation of
the Company, automatic cashless exercise triggers, if upon expiration of the
warrant the fair market value of the Company's common stock is above the
exercise price of the warrants, and anti-dilution rights, which are triggered if
the Company makes an offering or sells shares of common stock or common stock
equivalents below the then exercise price, in connection with the uplisting of
the Company's common stock on a securities exchange or Nasdaq, or while listed
on a national securities exchange or Nasdaq, and which reduce the exercise price
of the warrants automatically to such lower exercise price. The closing of an
offering will result in the exercise price of such warrants begin automatically
reduced. The holder of the warrants is subject to a trading agreement, which
prevents the sale or transfer of any warrant shares until April 1, 2023, and
further limiting the sale of any warrant shares to more than 5% of the average
trading volume of the Company's common stock during the period from April 2,
2023 to April 1, 2024, subject to certain other restrictions on trading, which
restrictions expire 120 days after the Company's common stock is uplisted to the
Nasdaq Capital Market or NYSE.
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 $10,365,088 since inception.
These factors, among others, indicate that the Company may be unable 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 Estimates
Our discussion and analysis of our financial condition and results of operations
are based on consolidated financial statements which have been prepared in
accordance with generally accepted accounting principles in the United States.
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. We believe that certain accounting policies affect our more
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significant judgments and estimates used in the preparation of our consolidated
financial statements. See " Note 2. Summary of Significant Accounting
Policies " of the Notes to Consolidated Financial Statements set forth above
and under " Item 8. Financial Statements and Supplementary Data " of our
Annual Report on Form 10-K for the year ended December 31, 2021, as filed with
the SEC on March 16, 2022, for a further description of our critical accounting
policies and estimates.
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