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 Transition Report on Form
10-KT for the nine-month period ended December 31, 2020, filed with the
Securities and Exchange Commission on March 16, 2021 (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 six months ended June 30, 2021, and 2020.
·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 pre-existing licensing rights), pursuant to an Exclusive
License Agreement dated October 1, 2019, by and between TMDI and EM3 (the "EM3
Exclusive License"). Pursuant to the Sublicense Agreement the Company obtained
substantially the same rights that TMDI had under the 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 140,000,000 shares of the Company's
common stock (issued in November 2019).
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 EM3 Exclusive License Agreement. Pursuant to an amendment to
the 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.
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 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 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 period. The Sublicense Agreement and 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
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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 140,000,000 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, EM3 Exclusive License, and related agreements. Pursuant to
the Settlement Agreement, the parties agreed to (a) terminate the Sublicense
Agreement, 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 100,000 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 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 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.
Separately, the Company completed an asset acquisition from Razor Jacket, LLC
("Razor Jacket") and its two owners who were subsequently hired by the Company
in November 2020 (provided that one of such seller's employment with the Company
has since been terminated). The Company purchased all of Razor Jacket's
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equipment relating to the manufacture of cannabinoid isolates and related
products, including, but not limited to, terpenes, and the production of isolate
and related products.
The Company paid $300,000 in cash, and issued 625,000 shares of restricted
common stock to the owners, 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. As of the
date of this filing, the Company fully expects all conditions will have been met
in the near future, which includes the construction of a new facility and
completion of patent applications.
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. 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 amount of $1,941,176, as discussed in
greater detail below, to further fund our operations moving forward.
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 three 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
product offering provides 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 retail and clinic customers.
·Increasing penetration of hemp user. There is a decreasing stigma around the
use of cannabis 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 largely based on the inability to achieve accurate and
controlled dosing. Our product lines are 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.
·Expand our product portfolio. We plan to grow our product portfolio by
expanding into areas where we can identify "safe for inhalation" non-
tetrahydrocannabinol (THC) ingredients which are currently being used in less
efficacious delivery methods and put them into our delivery device.
·Cannabinoids, the U.S. The Food and Drug Administration (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 goal is to start to explore the medical
opportunity by conducting voluntary clinical testing on our nh?lerTM branded
products. We have 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 scheduled to start as soon as our existing products liability
carrier approves the physicians and testing groups involved in the trials as
additional insureds. In addition to clinical testing, we have engaged with a
group of FDA consultants to help us position our manufacturing and formulations
with the future goal of filing a New Drug Application (NDA) with the FDA.
·Legal Status. Our products are not FDA approved. However, we have filed an
Investigative New Drug Application ("IND") with the FDA in June 2021 to conduct
Phase I human clinical trials of our flagship metered dose inhaler containing
CBD. Cannabidiol (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
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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.
·Leveraging the Potential for Pending Legislation Approval. There is a bill
pending in the 117th Congress (United States House of Representatives H.R. 841)
introduced on February 4, 2021 entitled: "Hemp and Hemp-Derived CBD Consumer
Protection and Market Stabilization Act of 2021". The purpose of the bill is to
make hemp, cannabidiol derived from hemp, and any other ingredient derived from
hemp lawful for use under the Federal Food, Drug, and Cosmetic Act, as a dietary
ingredient in a dietary supplement, and for other purposes. Although this bill
is promising, there is no guarantee this bill will pass Congress or be signed
into law by the President or that our products would qualify as dietary
supplements.
·International Expansion. We plan to eventually seek to expand our marketing and
sales to outside of the United States, potentially beginning at the end of 2021,
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.
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 and which marketing
plans the Company plans to resume during the second half of 2021. 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, 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.
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Results of Operations for the three and six months ended June 30, 2021 compared
to 2020
The following discussion reflects the Company's revenues and expenses for the
three and six month periods ended June 30, 2021 and 2020, as reported in our
consolidated financial statements included in Item 1.
Three months ended June 30, 2021 versus three months ended June 30, 2020
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 in trial mode 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 three months ended June 30,
2021, were $424, compared to $129,287, consisting mostly of two large wholesale
orders, in the three months ended June 30, 2020. Revenues from sales of the
Company's inhaler products, under both trial sales channels, are expected to
gradually increase in the future, once the current trial period ends.
Cost of Goods Sold - Cost of goods sold for the three months ended June 30, 2021
were $200 compared to $18,556 in the three months ended June 30, 2020. The cost
of goods sold in both periods reflected the cost of procuring inhalers and
related products and supplies for resale and resulted in gross profit
percentages of revenues of approximately 53% and 85%, for the three months ended
June 30, 2021 and 2020, respectively. The greater gross profit percentage in the
three months ended June 30, 2020 reflected a relatively large portion of sales
to two higher profit wholesale customers.
General and Administrative Expense - General and administrative expenses for the
three months ended June 30, 2021 were $527,278 compared to $629,510 in the three
months ended June 30, 2020. This net decrease of $102,232 consisted of two
components: (i) an increase of $237,352 in 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 recently acquired from
Razor Jacket; and (ii) a decrease of $339,584 in non-cash stock compensation
expenses for restricted stock grants due to the fact that that the initial
grants were made to various consultants in the three months ended June 30, 2020
whereas no such grants were made in the three months ended June 30, 2021.
Amortization Expense - Amortization expense for the three months ended June 30,
2021 was zero compared to $25,000 in the three months ended June 30, 2020. This
decrease was 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
above.
Depreciation Expense - Depreciation expense for the three months ended June 30,
2021 was $5,525, compared to zero in the three months ended June 30, 2020. This
increase reflects depreciation on the Company's initial purchases of property
and equipment beginning in September 2020.
Interest Expense - Interest expense for the three months ended June 30, 2021 was
$3,309, compared to $22,601 in the three months ended June 30, 2020. This
decrease was due to a lower level of outstanding borrowings following the
conversion of certain convertible notes payable into common stock, in August
2020 and March 2021.
Net Loss - Net loss for the three months ended June 30, 2021 was $535,888,
compared to $566,380 in the three months ended June 30, 2020, 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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Six months ended June 30, 2021 versus six months ended June 30, 2020
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 in trial mode 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 six months ended June 30,
2021, were $424, compared to $138,426, consisting mostly of two large wholesale
orders, in the six months ended June 30, 2020. Revenues from sales of the
Company's inhaler products, under both trial sales channels, are expected to
gradually increase in the future, once the current trial period ends.
Cost of Goods Sold - Cost of goods sold for the six months ended June 30, 2021
were $200 compared to $25,711 in the six months ended June 30, 2020. The cost of
goods sold in both periods reflected the cost of procuring inhalers and related
products and supplies for resale and resulted in gross profit percentages of
approximately 53% and 81%, for the six months ended June 30, 2021 and 2020,
respectively. The greater gross profit percentage in the six months ended June
30, 2020 reflected a relatively large portion of sales to two higher profit
wholesale customers.
General and Administrative Expense - General and administrative expenses for the
six months ended June 30, 2021 were $1,029,201 compared to $853,750 in the six
months ended June 30, 2020. This net increase of $175,451 consisted of two
components: (i) an increase of $615,035 in 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 recently acquired from
Razor Jacket; and (ii) a decrease of $439,584 in non-cash stock compensation
expenses for restricted stock grants due to the fact that that the initial
grants were made to various consultants in the six months ended June 30, 2020
whereas no such grants were made in the six months ended June 30, 2021.
Amortization Expense - Amortization expense for the six months ended June 30,
2021 was $12,500 compared to $50,000 in the six months ended June 30, 2020. This
decrease was 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
above.
Depreciation Expense - Depreciation expense for the six months ended June 30,
2021 was $11,050, compared to zero in the six months ended June 30, 2020. This
increase reflects depreciation on the Company's initial purchases of property
and equipment beginning in September 2020.
Interest Expense - Interest expense for the six months ended June 30, 2021 was
$17,107, compared to $86,493 in the six months ended June 30, 2020. This
decrease was due to a lower level of outstanding borrowings following the
conversion of certain convertible notes payable into common stock, in August
2020 and March 2021.
Net Loss - Net loss for the six months ended June 30, 2021 was $1,069,634,
compared to $877,528 in the six months ended June 30, 2020, 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.
Liquidity and Capital Resources
Operating activities. Net cash used in operating activities for the six months
ended June 30, 2021 was $946,449, compared to $369,009 in the six months ended
June 30, 2020. This net increase was largely due to the higher level of overhead
costs and buildup of product inventory levels following the Company's adoption
of a new business strategy in early 2020, as further noted above.
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Investing activities. Net cash used in investing activities for the six months
ended June 30, 2021 was $39,779 compared to zero in the six months ended June
30, 2020. This increase was due to the Company's purchases of property and
equipment which began in September 2020.
Financing activities. Net cash provided by financing activities for the six
months ended June 30, 2021 was $535,000, compared to $457,000 for the six months
ended June 30, 2020. Net cash provided by financing activities in the six
months ended June 30, 2021 reflected 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 $50,000. Net cash
provided by financing activities of $457,000 in the six months ended June 30,
2020 was due to the private sales of 2,060,000 shares of restricted common stock
to various accredited investors at offering prices of between $0.05 to $0.25 per
share for total proceeds of $315,000, plus the receipt of a subscription from
another investor in the amount of $90,000 that was later applied to a private
offering that closed in October 2020, as well as the issuance of new notes
payable of $52,000.
In order to meet short-term working capital needs, the Company obtained
unsecured cash advances from two of its officers (Chief Executive Officer and
Senior Vice President) in May and June 2021 in the total amount of $250,000.
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 our 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 an accredited investor an Original Issue Discount Convertible
Debenture in the original principal amount of $1,941,176 (the "Debenture") and a
warrant to purchase up to 4,852,940 shares of common stock of the Company (the
"Investor Warrants"). The Debenture and the Warrants were purchased for an
aggregate of $1,650,000 (a 15% discount to the principal amount of the
Debenture). The amount owed under the Debenture is due upon the earlier of (a)
May 1, 2022, and (b) the date of a Qualified Offering (defined below), unless
earlier converted into common stock of the Company, as discussed below.
"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 Debenture may
not be prepaid without the prior written consent of the holder. The Debenture
does 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 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
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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 of 1933, as amended.
The Company expects to use 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.
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.
We have not generated a net profit from the limited sales of our inhaler
products beginning in early 2020. 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
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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.
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 $6,723,174 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 financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses. We believe that certain accounting policies affect our more
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 under "Item 8.
Financial Statements and Supplementary Data" of our Transition Report on Form
10-K for the nine months ended December 31, 2020, as filed with the SEC on March
16, 2021, for a further description of our critical accounting policies and
estimates.
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