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
months ended March 31, 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 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).
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.
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 period. The Sublicense Agreement and Original EM3 Exclusive License
were terminated in connection with the parties' entry into the Settlement
Agreement discussed below.
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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 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.
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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
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 25,000 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.
However, due to the subsequent impact of the COVID 19 pandemic, as well as
other contributing factors, the Company has currently suspended such sales. 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 sale of a convertible
debenture in August 2021 in the aggregate principal amount of $1,941,176, as
discussed in greater detail below, to further fund our operations moving
forward.
Reverse Stock Split
On March 31, 2022, the Company completed a Board of Directors approved 1-for-25
reverse stock split. Accordingly, all common stock share and per share amounts
herein and in our consolidated financial statements have been retroactively
adjusted to reflect the reverse stock split. At the same time, the total number
of shares of common stock authorized was increased to 800 million.
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
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 non- tetrahydrocannabinol (THC) 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
designed to be 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-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
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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 timing of this testing is based
on the results of the FDA application process, described below. 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. We have removed products sold under the
nh?ler brand name from the market because we are preparing to file an IND
(Investigational New Drug Application) with the FDA. We have hired a law firm to
prepare 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.
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 second quarter of
2022.
·Legal Status. Our products are not FDA approved. However, we plan to file an
Investigative New Drug Application ("IND") with the FDA in the fourth quarter of
2021 to conduct Phase I human clinical trials of our flagship metered dose
inhaler containing CBD. 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 eventually seek to expand our marketing and
sales to outside of the United States, potentially sometime in 2022, 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. 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
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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 months ended March 31, 2022 compared to 2020
The following discussion reflects the Company's revenues and expenses for the
three-month periods ended March 31, 2022 and 2021, as reported in our
consolidated financial statements included in Item 1.
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 currently suspended such
sales.
General and Administrative Expense - General and administrative expenses for the
three months ended March 31, 2022 were $762,141 compared to $501,923 in the
three months ended March 31, 2021. This increase was due to higher level
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. We expect the level of
both types of expenses to generally rise in comparison to prior year amounts in
the foreseeable future.
Amortization Expense - Amortization expense for the three months ended March 31,
2022 was $21,259, compared to $12,500 in the three months ended March 31, 2021.
This increase was due to the amortization expense recognized in the three
months ended March 31, 2022 on an operating lease asset beginning in October
2021, which was partially offset by amortization expense recorded in the three
months ended March 31, 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 three months ended March 31,
2022 was $5,993, compared to $5,525 in the three months ended March 31, 2021.
This increase reflects the rising depreciation level on the Company's purchases
of property and equipment beginning in September 2020.
Other Income (Expense) - Interest expense for the three months ended March 31,
2022 was $713,313, compared to $13,798 in the three months ended March 31, 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 issued in conjunction with
a convertible debenture in August 2021. Other income (expense) also includes a
loss from the change in valuation of the warrant liability in the quarter ended
March 31, 2022 of $77,045.
Net Loss - Net loss for the three months ended March 31, 2022 was $1,579,751,
compared to $533,746 in the three months ended March 31, 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.
Liquidity and Capital Resources
Operating activities. Net cash used in operating activities for the three
months ended March 31, 2022 was $383,775, compared to $524,370 in the three
months ended March 31, 2021. This net decrease largely occurred because the
full cash impact of the higher level of general and administrative expenses
incurred in the three months ended March 31, 2022 was delayed, as a relatively
large portion of such amounts were only accrued and not paid in the current
quarter.
Investing activities. Net cash used in investing activities for three months
ended March 31, 2022 was $350,851, compared to $19,779 in the three months ended
March 31, 2021. This increase was largely due to the
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amounts paid in the three months ended March 31, 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 second or third quarter of
2022.
Financing activities. Net cash provided by financing activities for three months
ended March 31, 2022 was $575,127, compared to $230,000 in the three months
ended March 31, 2021. Net cash provided by financing activities in the three
months ended March 31, 2022 resulted from the issuance of two promissory notes
for new short-term loans, one of which was 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.
Both of these loans were in the form of unsecured promissory notes bearing
interest at a rate of approximately 8-18% per annum with a maturity of one year.
For the larger note with an independent director, the principal amount and
accrued interest are due at maturity whereas for the smaller note with an
institutional investor, monthly payments of principal and interest of $21,276
are required, beginning on May 1, 2022. Net cash provided by financing
activities in the three months ended March 31, 2021 of $230,000 reflected the
private sales of 53,000 shares of restricted common stock to three accredited
investors at an offering price of $10.00 per share, partially offset by the
repayment of notes payable in the amount of $300,000.
In order to meet short-term working capital needs 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
through August 2021 in the net amount of $260,000. Such advances are expected
to be repaid out of the proceeds of an underwritten public offering of the
Company's equity securities which the Company is currently pursuing. However,
no assurance can be given that the Company will be successful in achieving a
closing of the underwritten public offering.
In order to further 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 194,118 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. Due to unforeseen delays experienced in our planned public
offering of common stock on a national exchange, we recently reached an
agreement in principle with the institutional investor for an extension and
expansion of borrowings under this bridge loan, based on terms that are yet to
be agreed upon.
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 $10.00 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 $10.00 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
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common stock equivalents at a price less than the then exercise price of the
Investor Warrants, subject to certain customary exceptions and the sale of up to
$1.5 million in private transactions, the exercise price of the Investor
Warrants is automatically reduced to such lower value, and the number of shares
of common stock issuable upon exercise thereafter is adjusted proportionately so
that the aggregate exercise price payable upon exercise of such Investor
Warrants is the same prior to and after such reduction in exercise price. As a
result, the effect of the anti-dilution right may cause significant dilution to
existing shareholders.
Pursuant to a Placement Agent Agreement entered into with Maxim Group LLC (the
"Placement Agent"), who served as placement agent for the offering of the
Debenture and Investor Warrants, we agreed to pay the Placement Agent for the
offering a cash commission of 8% of the gross proceeds received in the offering
($132,000), and to grant the Placement Agent a warrant to purchase 5% of the
total shares issuable upon conversion of the Debenture (9,706), 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 Investor Warrants (the "Placement Warrants" and together with the Investor
Warrants, the "Offering Warrants"). We agreed to register the shares of common
stock issuable upon exercise of the Placement Warrants under the Securities Act.
The proceeds of the Debenture offering are being used to meet the Company's
short-term working capital needs in anticipation of ultimately 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 March 31, 2021 and August 31, 2020, the Company reached the necessary
milestones to trigger the conversion of certain notes payable issued on various
dates in 2018 and 2019, as amended, into shares of the Company's common stock,
at conversion prices of $1.25 to $3.25 per share, subject to a 4.99% ownership
limitation for each beneficial owner of such notes. In conjunction with these
conversions, the holders of notes with total principal and accrued interest
balances in the aggregate amount of $794,358 converted their notes into 433,203
shares of common stock, effective March 31, 2021, and the holders of notes with
total principal and accrued interest balances in the aggregate amount of
$501,137 converted their notes into 400,910 shares of common stock, effective
August 31, 2020. As of March 31, 2022, convertible notes payable in the amount
of $174,685, plus accrued interest in the amount of $41,141, remain outstanding
and are available to be subsequently converted into 172,661 shares of common
stock, subject to the ownership limitation
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 105,600 shares of restricted common stock and warrants to purchase
240,000 shares of the Company's common stock at an exercise price of $12.50 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 25,000 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. 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
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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 $10,101,174 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 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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