Bakhu Holdings, Corp. - Quarter Report: 2020 October (Form 10-Q)

The accompanying notes are an integral part of these financial statements.

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BAKHU HOLDINGS CORP.

Notes to Financial Statements

October 31, 2020

(unaudited)

NOTE 1 - ORGANIZATION AND BUSINESS OPERATIONS

The Company was incorporated under the laws of the State of Nevada, on April 24, 2008 under the name Planet Resources, Corp.  In May 2009, the Company also began to look for other types of business to pursue that would benefit the shareholders. In order to pursue businesses that may not be in the mining industry the name of the Company was changed with the approval of the Directors and Shareholders to Bakhu Holdings, Corp. on May 4, 2009 (“Bakhu, or the “Company”).

The Company has not generated any revenue to date and consequently its operations are subject to all risks inherent in the establishment of a new business enterprise. For the period from inception, April 24, 2008 through October 31, 2020 the Company has accumulated losses of $15,910,153.

On August 9, 2019, the Company formed Cell Science CBD International, Inc., a California corporation as a wholly owned subsidiary.  On November 26, 2019, the name of the subsidiary was changed to CBD Biotech, Inc., (“CBD”).  On January 5, 2020, the Company entered into a Sublicense Agreement with CBD wherein the Company granted a sublicense of the Licensed Science as it relates to the production and manufacturing of cannabis and their byproducts which have measurable tetrahydrocannabinol (THC) concentration potency less than 3% on a dry weight basis.  CBD had no active operations as of October 31, 2020.  

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America and are presented in US dollars.

Going Concern

The financial statements have been prepared on a going concern basis which assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. The Company has incurred losses since inception resulting in an accumulated deficit of $15,910,153 as of October 31, 2020 and further losses are anticipated in the development of its business raising substantial doubt about the Company’s ability to continue as a going concern.

Cash and Cash Equivalents

The Company considers all highly liquid instruments with a maturity of three months or less at the time of issuance to be cash equivalents.

Use of Estimates and Assumptions

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Foreign Currency Translation

The Company’s functional currency and its reporting currency is the United States dollar.

Financial Instruments

The carrying value of the Company’s financial instruments approximates their fair value because of the short maturity of these instruments.

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BAKHU HOLDINGS CORP.

Notes to Financial Statements

October 31, 2020

(unaudited)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Stock-based Compensation

Stock-based compensation is accounted for at fair value in accordance with ASC 718. To date, the Company has not adopted a stock option plan and has not granted any stock options.

Income Taxes

Income taxes are accounted for under the assets and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.

Basic and Diluted Net Loss per Share

The Company computes net loss per share in accordance with ASC 105, “Earnings per Share.” ASC 105 requires presentation of both basic and diluted earnings per share (EPS) on the face of the income statement.

Basic EPS is computed by dividing net loss available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all potentially dilutive common shares outstanding during the period. Diluted EPS excludes all potentially dilutive shares if their effect is anti-dilutive.

Professional fees

Substantially all professional fees presented in the financial statements represent accounting fees, audit fees and legal fees associated with the filing of reports with the Securities and Exchange Commission.  Also included in professional fees are fees paid to the stock transfer agent.  The fees are expensed as incurred.

Fiscal Periods

The Company’s fiscal year end is July 31.

Recently Issued Accounting Pronouncements

We have reviewed accounting pronouncements issued during the past two years and have adopted any that are applicable to the Company.  We have determined that none had a material impact on our financial position, results of operations, or cash flows for the periods presented in this report.  

NOTE 3 - PREFERRED AND COMMON STOCK

On August 8, 2018, the Board of Directors of the Company approved the amendment and restatement of the Company’s Articles of Incorporation. The purpose of the amendment and restatement of the Articles of Incorporation was to:

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BAKHU HOLDINGS CORP.

Notes to Financial Statements

October 31, 2020

(unaudited)

NOTE 3 - PREFERRED AND COMMON STOCK (continued)

The preferred and common stock has a par value of $0.001 per share.

On August 8, 2018, the Company issued 4 shares of Series A Preferred Stock to the Company’s controlling shareholder, The OZ Corporation, a California corporation.

On December 20, 2018, the Company entered into a License Agreement with Cell Science, Ltd. (CSH”). Pursuant to the License Agreement, the Company is being granted an exclusive license by CSH with respect to certain patents and intellectual property for the production of phytocannabinoids for use in medical treatments and in exchange for 210,000,000 shares of common stock of the Company. On February 14, 2019, the stock was issued and recorded as consulting fees valued at $10,500,000.

On April 7, 2019, the Company issued 7,000,000 shares of common stock for the conversion of convertible notes payable and accrued interest in the amount of $10,199.

On March 9, 2020, the Company issued 11,061,816 restricted shares of Common Stock to the OZ Corporation, in consideration of ongoing consulting and advisory services provided to the Company, on terms as previously agreed to the Company and the OZ Corporation.  The securities were issued pursuant to an exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933. The OZ Corporation is intimately acquainted with the Company’s business plan and proposed activities at the time of issuance and possessed information on the Company necessary to make an informed investment decision. The estimated fair value of the stock was $99,556 and has been expensed and included in “Consulting fees” in the three and six months ended April 30, 2020.

NOTE 4 - INCOME TAXES

As of October 31, 2020, the Company had net operating loss carry forwards that may be available to reduce future years’ taxable income through 2030. Future tax benefits which may arise as a result of these losses have not been recognized in these financial statements, as their realization is determined not likely to occur and accordingly, the Company has recorded a valuation allowance for the deferred tax asset relating to these tax loss carry-forwards.

NOTE 5 - RELATED PARTY TRANSACTIONS

At various times, the Company’s Receiver extended short term financing to the Company at an interest rate of 15%. Due to the nature of the Receiver’s business, sometimes the accrued interest due to the Receiver is not reimbursed. As of July 31, 2019, and July 31, 2018 the Company’s Receiver had extended $0 and $8,829, respectively, in short term borrowings to the Company. These borrowings were incurred to help the Company pay for certain expenses associated with the Company’s Receivership status. During the three months ended April 30, 2019, the principal amount of $8,829 and accrued interest of $1,370 was replaced by convertible promissory notes and immediately converted into 7,000,000 shares of common stock.  

NOTE 6 - NOTES PAYABLE

On August 1, 2019, the Company executed a promissory note in favor of Company’s controlling shareholder, The OZ Corporation, to evidence monies loan to the Company from December 26, 2018 through July 31, 2019 in the amount of $147,513, and to evidence any additional amounts that may be loaned to the Company thereafter.  Pursuant to the terms of the promissory note, the principal and unpaid accrued simple interest at the rate of 6.0% per annum shall be due and payable on or before December 31, 2019.  The promissory note also provides that the Company may extend the maturity date for an additional 12 months, until December 31, 2020, by paying an extension fee of 1.00% of the outstanding principal loan balance, which may at the lenders’ option be advanced and added to the then outstanding principal balance.  The principal amount of the promissory note shall be increased by the amount of any additional advances of funds made by The OZ Corporation to the Company, from time to time,

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BAKHU HOLDINGS CORP.

Notes to Financial Statements

October 31, 2020

(unaudited)

from the date of such advance.  Under the terms of the promissory note, The OZ Corporation, at its option may, at any time, convert all or any portion of the then unpaid principal balance and any unpaid accrued interest into shares

NOTE 6 - NOTES PAYABLE (continued)

of the Company’s common stock.  The number of shares of common stock to be issued upon such conversion shall be equal to the quotient obtained by dividing (i) the then unpaid principal balance and any unpaid accrued interest of the promissory note being converted by (ii) 80% of the average closing price of the common stock of the Company, for the ninety (90) trading days before the conversion date, rounded up to the nearest whole share.  The principal balance and accrued interest due on the note was $529,278 and $21,326, respectively as of October 31, 2020.  

The Company did not assign any value to the conversion feature of the Note because the 80% of the common stock of the Company had a negative book value of as of October 31, 2020 and continues to have a negative book value.  Furthermore, the company has not generated any revenue to date.  

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RESULTS OF OPERATIONS 

The following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act relating to future events or our future performance. The following discussion should be read in conjunction with our consolidated financial statements and notes to our financial statements included elsewhere in this report. This discussion contains forward-looking statements that relate to future events or our future performance. Although management believes that the assumptions made and expectations reflected in the forward-looking statements are reasonable, we cannot assure that the underlying assumptions will, in fact, prove to be correct or that actual results will not be different from expectations expressed in this report.

Business Overview

 We were organized in Nevada on April 24, 2008, under the name Planet Resources, Corp., to reprocess mine tailings from previous mining operations. We were not successful in implementing this business plan. Various alternatives were considered to ensure our viability and solvency, but we had no activities between April 2011 and June 2018. In order to revive our company, a receiver was appointed in a Nevada state court proceeding in August 2015. On May 15, 2018, we privately sold 335,000 shares of restricted common stock, which constituted about 56% of our issued common stock, at $1.00 per share to OZ Corporation, which appointed new management and directors. We were released from receivership in July 2018.

Following the above change in control, we embarked on a new business plan to license and commercialize cell-extraction and replication technologies, primarily for medical products for pain relief and insomnia.

On December 20, 2018, we entered into Patent and Technology License Agreement, which was amended and restated effective December 31, 2019, which in turn was further amended on September 22, 2020 (the “Amended Restated License”) to license, with the right to sublicense, the described cell-extraction and replication technology and related proprietary equipment, processes, and medium formulations to be used in a commercially-sized bioreactor laboratory to produce, manufacture, and sell cannabis-related byproducts—sometimes referred in the industry as cannabinoids—exclusively in North and Central America, including the Caribbean for medical, food additive, and recreational uses. As consideration for the grant of the license, we issued 210,000,000 shares of common stock, subject to adjustment, and agreed to a one-time payment of $3.5 million, less amounts paid in the interim to Dr. Peter Whitten, the inventor, upon completion of the Efficacy Demonstration achieving target results. As a result of the issuance of these shares, Cell Science Holdings Ltd. (“Cell Science”) became our largest stockholder.

Under the Amended Restated License, we have an exclusive right to sublicense, on such terms as may be acceptable to us, the technology and the methods and processes, whose practice or use is covered by any of the valid claims set forth in a valid, unexpired patent for: (a) producing and manufacturing cannabinoids from a particular subspecies of cannabis plants and their byproducts for sale for food additives, edibles, and hemp variations; (b) cannabis-related research, teaching, and education for medical and recreational uses; and (c) all medical uses and applications. Cell Science retained the rights to publish scientific findings from our research, use the licensed science of medical care and research, and use the technology outside North America. We are obligated, either directly or through sublicensees, to use reasonably diligent efforts to produce, distribute, and sell cannabinoids using the licensed technology.

Since entering into the Amended Restated License, we have not generated revenue and have devoted our limited management, technical, and financial resources to pay general and administrative expenses in order to position us to be able to commercially exploit the licensed technology after completion of the efficacy testing required to demonstrate its commercial viability, organize our corporate structure, and seek substantial amounts of additional capital required to implement our business plan.

General and administrative expenses have been comprised of administrative wages and benefits; occupancy and office expenses; outside legal, accounting and other professional fees; travel and other miscellaneous office and

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administrative expenses. Selling and marketing expenses include selling/marketing wages and benefits, advertising and promotional expenses, as well as travel and other miscellaneous related expenses.

Because we have incurred losses, income tax expenses are immaterial. No tax benefits have been booked related to operating loss carryforwards, given our uncertainty of being able to utilize such loss carryforwards in future years. We anticipate incurring additional losses during the coming year.

Results of Operations

Following is management’s discussion of the relevant items affecting results of operations for the three months ended October 31, 2020 and 2019.

Revenues. The Company generated no net revenues during the three months ended October 31, 2020 and 2019. We expect revenues to increase as we continue to pursue funding through investment and the application for lines of credit with financial institutions.

Consulting Fees. Consulting fees were $58,725 and 2,671 for the three months ended October 31, 2020 and 2019, respectively.  Most of the consulting fees incurred during the three months ended October 31, 2020 were associated with Amended Restated License with Cell Science as described above.  

Professional Fees. Professional fees were $97,575 and $28,663 for the three months ended October 31, 2020 and 2019, respectively.  Legal fees have increased due to the Amended Restated License with Cell Science as described above.  

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $22,585 and $973 for the three months ended October 31, 2020 and 2019, respectively. The Company expects SG&A expenses will increase commensurate with an increase in our operations and as a result of the Amended Restated License with Cell Science.

Other Income (Expenses). The Company had net other expenses of $6,590 for the three months ended October 31, 2020 compared to net other expense of $2,425 for the three months ended October 31, 2019. Other expenses incurred were comprised of interest expenses related to notes payable of the Company.

Net Loss. The Company had a net loss of $185,475 for the three months ended October 31, 2020 compared to $34,732 for the three months ended October 31, 2019. The increase in net loss was mainly due to the higher expenses incurred during the three months ended October 31, 2020 associated with the Amended Restated License.

Liquidity And Capital Resources

As of October 31, 2020, our primary source of liquidity consisted of $858 in cash and cash equivalents. Since inception, we have financed our operations through a combination of short and long-term loans, and through the private placement of our common stock.

We do not believe that the Company’s current capital resources will be sufficient to fund its operating activity and other capital resource demands during the next year. Our ability to continue as a going concern is contingent upon our ability to obtain capital through the sale of equity or issuance of debt, and ultimately attaining profitable operations. We expect that any financing we receive will be similar to what we have heretofore received over the previous two years to enable us to operate, which financing consists of long-term loans at negotiated rates of interest. We cannot assure you that we will be able to successfully complete any of these activities.

We are presently seeking additional debt and equity financing to provide sufficient funds for payment of obligations incurred and to fund our ongoing business plan. We expect to generate revenue pursuant to our new business plan. We cannot assure you, however, that any such financings will be available or will otherwise be made on terms acceptable to us, or that our present shareholders might suffer substantial dilution as a result.

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For the three months ended October 31, 2020, cash decreased $18,896 from $19,754 at July 31, 2020 to $858 at October 31, 2020.

Net cash used in operating activities was $173,896 during the three months ended October 31, 2020, with a net loss of $185,475, an increase in accounts payable of $4,989 and an increase in accrued liabilities of $6,590.

During the three months ended October 31, 2020, the Company had no net cash flows from investing activities.

During the three months ended October 31, 2020, the Company had $155,000 in net cash provided by financing activities which consisted solely of proceeds from notes payable – related parties.

Critical Accounting Pronouncements

Our financial statements and related public financial information are based on the application of generally accepted accounting principles in the United States (“GAAP”). GAAP requires the use of estimates, assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use

of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.

Our significant accounting policies are summarized in Note 2 of our financial statements included in our July 31, 2020 Form 10-K. While all of these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates. Our management believes that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause a material effect on our results of operations, financial position or liquidity for the periods presented in this report. 

Recent Accounting Pronouncements

See Note 2 in the Notes to the Financial Statements. We have reviewed accounting pronouncements issued during the past two years and have adopted any that are applicable to the Company. We have determined that none had a material impact on our financial position, results of operations, or cash flows for the periods presented in this report.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities” (“SPE”s).

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

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Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by our company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Our management carried out an evaluation under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 ("Exchange Act"). Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures were effective as of October 31, 2020.

Changes in Internal Controls

  There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended October 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II - OTHER INFORMATION

We are not a party to any pending legal proceeding. No federal, state or local governmental agency is presently contemplating any proceeding against the Company. No director, executive officer or affiliate of the Company or owner of record or beneficially of more than five percent of the Company's common stock is a party adverse to the Company or has a material interest adverse to the Company in any proceeding.

Notwithstanding that we are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this Item 1A, in light of the current COVID-19 pandemic, the Company is including the following Risk Factor in its Quarterly Report.

The COVID-19 global pandemic has had an adverse effect on our operations and the potential commercialization of the licensed intellectual property.

On March 11, 2020, the World Health Organization characterized COVID-19 as a global pandemic. We are monitoring the situation closely and our response to the COVID-19 pandemic continues to evolve. Our current principal responsive measures include implementing a mandatory work from home policy when possible, restricting airplane travel, rescheduling inspections and clearances for required regulatory clearances and permits at the commercialization laboratory, delaying sublicense marketing efforts, and updating our planning for future events in recognition of the fact that potential sublicensees are likely experiencing similar operating difficulties. We are also evaluating the impact of the pandemic on required equipment, components, and supplies that we and potential sublicensees will require. We actively monitor COVID-19-related developments and may take further actions that alter our business operations as may be required by federal, state, or local authorities or that we determine are in the best interests of our personnel, sublicensees, vendors, and stockholders. The effects of these operational modifications will be reflected in current and future reporting periods.

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For us, the COVID-19 pandemic substantially delayed the efforts to put the Efficacy Testing laboratory in full service as we worked to complete regulatory inspections and clearances, obtain necessary equipment and supplies, and assemble required international technical expertise, consultants, and personnel. These delays resulted in additional costs and delays in completing the planned testing and, in turn, submitting applications for required regulatory approvals. We are unable to launch our sublicensing program until the Efficacy Demonstration as required under the Amended Restated License is substantially complete and required regulatory clearances are obtained.

Even after the COVID-19 pandemic has subsided, we may continue to experience an adverse effect on our business as a result of its global economic impact, including any resulting and ongoing recession. All of these circumstances likely exert similar hardships on those with which we deal, such as vendors, shippers, distributors, and sublicensees. As a result, we have made adjustments to, and will need to continue to adjust, our business and expenditures in an effort to correlate our activities with business exigencies, including restrictions of executive and employee travel, hiring freezes or delays, and limitations on marketing. The ultimate financial impact and duration of all of the foregoing cannot now be predicted and may well exceed our expectations or our ability to cope with them.

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1. Financial Statements.   

·The unaudited Consolidated Balance Sheet as of October 31, 2020 and the audited balance sheet as of July 31, 2020; 

·the unaudited Consolidated Statements of Operations for the three-month periods ended October 31, 2020 and 2019; 

·the unaudited Consolidated Statements of Cash Flows for the three-month periods ended October 31, 2020 and 2019; and 

·the unaudited Consolidated Statement of Stockholders’ Equity (Deficit) for the three-month periods ended October 31, 2020 and 2019, together with 

·the notes thereto, are included in this Quarterly Report on Form 10-Q. 

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⁽¹⁾Previously filed on Form 8-K on August 22, 2018 

⁽²⁾Previously filed on Form 8-K on December 27, 2018 

⁽³⁾Previously filed on Form 8-K on January 14, 2020 

⁽⁴⁾Previously filed on Form 8-K on April 27, 2020 

⁽⁵⁾Previously filed on Form 8-K on June 12, 2020 

⁽⁶⁾Previously filed on Form 8-K on October 1, 2020 

⁽⁷⁾ Filed herewith

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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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