Rapid Therapeutic Science Laboratories, Inc. - Annual Report: 2021 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C., 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 2021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-55018
Rapid Therapeutic Science Laboratories, Inc.
(Exact name of registrant as specified in its charter)
Nevada |
| 46-2111820 |
(State or other jurisdiction of incorporation) |
| (I.R.S. Employer Identification No.) |
5580 Peterson Lane, Suite 120 Dallas, TX |
| 75201 |
(Address of principal executive offices) |
| (zip code) |
Registrant’s telephone number, including area code: (800) 497-6059
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods as the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ NO ☐
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Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (check one)
Large accelerated filer | ☐ |
| Accelerated filer | ☐ |
Non-accelerated filer | ☒ |
| Smaller reporting company | ☒ |
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| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404 (b) of the Sarbanes-Oxley Act (15 U.S.C. 7262 (b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ☐ NO ☒
The aggregate market value of the registrant’s voting and non-voting equity held by non-affiliates of the registrant, computed by reference to the price at which the common stock was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $50,343,000. For purposes of calculating the aggregate market value of shares held by non-affiliates, we have assumed that all outstanding shares are held by non-affiliates, except for shares held by each of our executive officers, directors and 5% or greater stockholders. In the case of 5% or greater stockholders, we have not deemed such stockholders to be affiliates unless there are facts and circumstances which would indicate that such stockholders exercise any control over our company, or unless they hold 10% or more of our outstanding common stock. These assumptions should not be deemed to constitute an admission that all executive officers, directors and 5% or greater stockholders are, in fact, affiliates of our company, or that there are no other persons who may be deemed to be affiliates of our company. Further information concerning shareholdings of our officers, directors and principal stockholders is included or incorporated by reference in Part III, Item 12 of this Annual Report on Form 10-K.
The number of shares of the registrant’s common stock outstanding as of March 16, 2022 was 193,666,921.
Auditor Firm ID: 6686 | Auditor Name: PWR CPA, LLP | Auditor Location: Texas |
DOCUMENTS INCORPORATED BY REFERENCE
None.
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Table of Contents
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (this “Report”) contains certain statements that constitute “forward-looking statements”, including within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. The words “believe,” “may,” “will,” “potentially,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “expect” and the negative and plural forms of these words and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. Those statements appear in this Report, particularly in the sections titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations“ and “Risk Factors,” and include statements regarding the intent, belief or current expectations of the Company and management that are subject to known and unknown risks, uncertainties and assumptions. Examples of forward-looking statements include statements relating to macroeconomic conditions; our expectations regarding future growth, including future revenue and earnings increases; our expectations regarding new products and market acceptance of current and new products; anticipated changes in regulations and market acceptance of our products and industry; our growth plans and opportunities, including our strategies for future acquisitions, future product expansion, potential client marketing and targeting and potential geographic expansion; estimated returns on future acquisitions; and other statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, the competitive landscape for our products, plans or intentions relating to acquisitions and developments and other information that is not historical information, and our assumptions underlying these expectations.
Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Forward-looking statements speak only as of the date of this Report or the date of any document incorporated by reference in this Report, as applicable. Except as required by applicable law, including the securities laws of the United States and the rules and regulations of the SEC, we do not plan to publicly update or revise any forward-looking statements contained herein after we distribute this Report, whether as a result of any new information, future events or otherwise.
You should not rely upon forward-looking statements as predictions of future events. We are under no duty to update any of these forward-looking statements after the date of this Report to conform our prior statements to actual results or revised expectations, and we do not intend to do so, except as otherwise provided by law.
You should read the matters described in “Risk Factors“ and the other cautionary statements made in this Report, as being applicable to all related forward-looking statements wherever they appear in this Report.
This information should be read in conjunction with the audited financial statements and the notes thereto included in this Report.
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.
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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.
GLOSSARY OF CANNABINOID INDUSTRY TERMS
The following are abbreviations, acronyms and definitions of certain terms used in this document, which are commonly used in the cannabinoid industry:
“API” means active pharmaceutical ingredients.
“Bronchospasm” occurs when the airways (bronchial tubes) go into spasm and contract. This makes it hard to breathe and causes wheezing.
“Bioavailability” means the proportion of a drug which enters the circulation system when introduced into the body.
“Cannabinoids” mean compounds found in cannabis sativa L., and when used throughout this Report, refer to compounds found in the hemp plant which do not contain THC.
“CBD” or cannabidiol is an active ingredient in cannabis derived from the hemp plant. CBD is a non-psychoactive oxidative degradation product of THC.
“CBG” or cannabigerol is an active ingredient in cannabis derived from the hemp plant.
“CBN” or cannabinol is a cannabinoid derived from the hemp plant.
“CMDICB” means the Cannabinoid MDI Certification Board, which was established to ensure manufacturers producing cannabinoid based metered dose products understand the potential public health and safety risks associated with delivering a medication in an aerosolized, inhalable format.
“cGMP” means current good manufacturing practice regulations promulgated by the FSA under the authority of the FFDCA. These regulations, which have the force of law, require that manufacturers, processors, and packagers of drugs, medical devices, some food, and blood take proactive steps to ensure that their products are safe, pure, and effective.
“CSA” means the Controlled Substances Act, the statute establishing federal U.S. drug policy under which the manufacture, importation, possession, use, and distribution of certain substances is regulated.
“DEA” means the U.S. Drug Enforcement Administration, a United States federal law enforcement agency under the United States Department of Justice, tasked with combating drug trafficking and distribution within the United States.
“FDA” means The U.S. Food and Drug Administration, which is a federal agency of the United States Department of Health and Human Services. The FDA is responsible for protecting the public health by ensuring the safety, efficacy, and security of human and veterinary drugs, biological products, and medical devices; and by ensuring the safety of U.S. food supply, cosmetics, and products that emit radiation.
“FFDCA” means the Federal Food, Drug and Cosmetic Act, which is a set of U.S. laws passed by Congress in 1938 giving authority to the FDA to oversee the safety of food, drugs, medical devices, and cosmetics.
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“FTC” means the U.S. Federal Trade Commission, which is an independent agency of the United States government whose principal mission is the enforcement of civil U.S. antitrust law and the promotion of consumer protection.
“GAD” means general anxiety disorder, an ongoing anxiety that interferes with daily activities.
“ISO level” means International Organization for Standardization, an independent, non-governmental, international organization that develops standards to ensure the quality, safety, and efficiency of products, services, and systems, certification level.
“Isolate” is a crystalline solid or powder that contains cannabinoids.
“Laryngospasm” refers to a sudden spasm of the vocal cords.
“Lipoid pneumonia” is a rare disease that occurs when oil or fat enters the lungs.
“MDI” means metered dose inhaler, which is a device that delivers a specific amount of inhalant (which may include medicine) to the lungs, in the form of a short burst of aerosolize inhalant, that is usually self-administered via inhalation.
“non-THC cannabinoids” means cannabinoids which do not contain THC.
“NPC” means non-psychoactive cannabinoids.
“Pharmaceutical-grade” means any active or inactive drug, biologic, reagent, etc., manufactured under GMP which is approved, conditionally approved, or indexed by the FDA or for which a chemical purity standard has been written or established by a recognized compendia (e.g., United States Pharmacopeia-National Formulary (USP/NF) or British Pharmacopeia (BP)).
“Phytocannabinoids” mean cannabinoids that occur naturally in the hemp plant.
“Phytoextracts” mean plant extracts.
“pMDI” means pressurized metered dose inhaler, which is a form of metered dose inhaler which includes a propellant under high pressure, which releases the inhalant when the canister/container is pushed down.
“PTSD” means post-traumatic stress disorder, a disorder in which a person has difficulty recovering after experiencing or witnessing a terrifying event.
“Pulmonary route of administration” means the inhalation of drugs through the mouth and the further deposition of inhaled pharmacological agents in lower airways.
“Terpenes” are aromatic compounds found in many plants. Cannabis plants contain high concentrations of terpenes. These aromatic compounds create the characteristic scent of many plants, such as cannabis, pine, and lavender, as well as fresh orange peel.
“THC” means tetrahydrocannabinol, which is the principal psychoactive constituent of cannabis.
“USDA” means the U.S. Department of Agriculture, which is the U.S. federal executive department responsible for developing and executing federal laws related to farming, forestry, rural economic development, and food.
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PART I
ITEM 1. BUSINESS
Change in Fiscal Year End
On February 16, 2021, our board of directors approved a change in our fiscal year end from March 31 to December 31. As a result of this change, we filed a Transition Report on Form 10-K for the nine-month transition period ended December 31, 2020 and this Report includes our results of operations for the year ended December 31, 2021 and the nine months ended December 31, 2020.
Board Approval For Reverse Stock Split
Effective on January 11, 2022, the Company’s majority shareholders voted 51.4% of the outstanding shares of the Company’s common stock, pursuant to a written consent in lieu of a special meeting of shareholders, to approve, among other things, the grant of discretionary authority for the Company’s Board of Directors, without further shareholder approval, to effect a reverse stock split of all of the outstanding common stock of the Company, by the filing of an amendment to the Company’s Articles of Incorporation with the Secretary of State of Nevada, in a ratio of between one-for-two and one-for-fifty, with the Company’s Board of Directors having the discretion as to whether or not the reverse split is to be effected, and with the exact exchange ratio of any reverse split to be set at a whole number within the above range as determined by the Board of Directors in its sole discretion, at any time before the earlier of (a) December 31, 2022; and (b) the date of the Company’s 2022 annual meeting of shareholders (the “Shareholder Authority”).
The Company filed a Definitive Information Statement on Schedule 14C (the “Information Statement”) in connection with the shareholder approval described above with the SEC on January 14, 2022, and subsequently mailed notice of such Information Statement to the Company’s shareholders. Pursuant to the rules of the SEC (and specifically Section 14(c) of the Exchange Act), the actions approved by the majority shareholders could not become effective any earlier than forty days after notice of the availability of the Information Statement was first sent to shareholders, which date was on or around February 28, 2022.
On March 4, 2022, the Board of Directors approved a 1-for-25 reverse stock split of the Company’s outstanding common stock, pursuant to the Shareholder Authority.
Notwithstanding such Board of Directors approval, the reverse stock split is subject to approval thereof by Financial Industry Regulatory Authority, Inc. (FINRA), which approval has not been received yet, and may not be received on a timely basis, if all. The Board of Directors approved the reverse stock split in an effort to increase the trading price of the Company’s common stock to a level sufficient to allow an uplisting of the Company’s common stock on the Nasdaq Capital Market. Because FINRA has not yet approved the reverse stock split and the Company has not formally affected the reverse stock split, none of the outstanding share amounts set forth below have been adjusted for such Board of Directors approved reverse stock split. The Board of Directors reserves the right to adjust the ratio of the reverse stock split, terminate its authority for such reverse stock split and/or instead move forward with a shareholder approved reverse stock split, in the future.
Overview
We are an innovative biotech company specializing in aerosol delivery of non-psychoactive cannabinoids (NPC)1 to the blood stream though the pulmonary route of administration. We were founded to identify new ways to leverage aerosol devices known as pressurized meter dose inhalers, otherwise referred to as pMDI or just MDI, in our daily lives, which create effective delivery systems for many types of phytocannabinoids (cannabinoids that occur naturally in the hemp plant).
The Company’s founders believed that hemp phytoextracts (extracts from the hemp plant) specifically, but not limited to, NPCs, could possibly help individuals find a new way to manage or support the treatment of chronic pain, post-traumatic stress disorder (PTSD), insomnia, surgery recovery, and a wide range of other ailments. What started as an idea of using an inhaler to deliver a potential pain reliever CBD, has grown into a company that
1 NPCs include, but are not limited to, cannabidiol (CBD), cannabigerol (CBG), cannabichromene (CBC), and cannabinol (CBN).
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produces many different NPCs and/or blends thereof, which can safely, efficiently, and cost effectively, be delivered to consumers. None of the Company’s products use tetrahydrocannabinol (THC).
We use the highest quality ingredients and manufacturing practices to ensure consumers get the purest possible product that is produced according to good manufacturing practices, otherwise known as GMP. The Company recognized very early that aerosol manufacturing, in combination with new unique proprietary technology and formulations, would meet the needs of consumers looking for a better way to utilize hemp products.
New and more effective delivery systems for active pharmaceutical ingredients (“API”) or supplements have been a growth engine for brands and companies for years. In this vein, we believe that providing consumers with safer, faster and more efficient ways to deliver NPCs will drive the growth of our business.
At the heart of our mission is ensuring that we are constantly striving to maintain the highest level of quality and compliance in our formulations and manufacturing practices so that we can ensure a long-term sustainable pipeline of products that will benefit our customers and consumers.
Our product lines focus on safe, legal and effective API. The Company exclusively uses APIs consisting of our proprietary blend of isolate (crystalline solid or powder) derived NPCs. We have named our NPC blend N-PsicanTM. As a result of a recently completed vertical acquisition, we own the process and extraction method we believe will result in the highest pharmaceutical grade NPCs available now and in the future. This ability to source, manufacture and sustain our own API ingredients is expected to result in lowering costs and providing a consistent and measured dose for consumers. In addition, we anticipate that this will allow for a higher degree of safety because we will control the entire manufacturing process. However, we are not actively selling any products now due to our pending application with the FDA as further discussed below.
As such, we have the capacity to manufacture our own pharmaceutical grade NPCs which are ultra-pure and unadulterated. As such, using our own NPCs derived from our proprietary processes which we control quality and purity of to an extreme degree, and which we have filed a patent applications for, which is currently pending.
Using our own NPCs as the API, we have historically manufactured our own branded MDI under the nhālerTM brand name (provided that we removed our nhālerTM products from the market in early 2021, because we are preparing to file an IND (Investigational New Drug Application) with the FDA in connection therewith) using our proprietary blends. NPCs and their substrates are legal for manufacturing and human consumption in Texas under House Bill 1325 (discussed below). None of our products contain any psychoactive cannabinoids or THC compounds of any amount.
The Company believes it is unique in the emerging hemp industry in that it does not use “full spectrum” oil, nor does it use compressed air as a propellant. Full spectrum oil is an industry term that means the composite hemp plant crude extract has been liquified using a solvent. The amounts and quantity of any API in full spectrum oil is not readily ascertainable, nor is the consumer usually aware of what solvents are used to liquify the extracts. Accordingly, we do not believe that it is possible to manufacture a safe MDI using full spectrum oil as the product could be adulterated or even toxic, depending upon how the extracted crude is handled and prepared. Any impurity, contaminants, or solvents used in full spectrum oil can endanger a consumer and cause any number of ailments, including laryngospasms, bronchospasms, or lipoid pneumonia. The Company has identified these issues and has consistently worked to avoid any toxicity, impurities, or contaminants in its products.
In furtherance of our commitment to safety and purity, the Company’s MDI have been made using U.S. Food and Drug Administration (FDA) listed cans, valves, actuators, propellant and excipients following GMP. All of these parts are manufactured under GMP in accordance with each manufacturer’s requirements which are listed in master drug files with the FDA. We purchase these parts and inert ingredients directly from one or two of the largest suppliers of FDA listed consumables in the world. We also only use cGMP HFA-134a propellant which is listed with the FDA and approved for humans in our products. The technology we use is safe if properly applied and has been researched over more than 70 years with hundreds of drugs. At no time does the Company use THC in its products. The Company is certified by the Cannabinoid MDI Certification Board (CMDICB) with respect to manufacturing of its MDI; provided that we believe this organization has since ceased operations as a result of COVID-19.
We believe we are the only company in the world that is capable of manufacturing an MDI with an NPC API safe for human consumption. To this end we have hired an experienced pharmaceutical industry veteran (Dr.
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Duane Drinkwine, our Chief Science Officer (a non-executive position)), who has years of experience with companies such as GlaxoSmithKline, Pfizer and Bayer manufacturing APIs for prescription inhalers. Dr. Drinkwine brings over a decade of isolate API production experience to the Company and provides expertise in manufacturing, oversight of safety and compliance related to prescription medication.
The Company has test marketed its MDI products directly to pharmacies and physicians who treat a wide range of ailments including, but not limited to, general anxiety disorder (GAD), post-traumatic stress disorder (PTSD) and pain management. During this period, we collected feedback and suggestions for product enhancement and consumer satisfaction.
Consistent with the entire hemp space, none of our products are approved by the FDA or under the Federal Food, Drug and Cosmetic Act (FFDCA). We always encourage consumers to do their own research regarding all cannabinoids and our products. We make no claims about therapeutic benefits of our products. None of our products are intended to diagnose, treat, cure or prevent any disease. We recommend any consumer always consult a physician prior to using any cannabinoid product. Any consumer who uses hemp products might have an adverse reaction and/or a drug interaction with another medication and if so, should stop use immediately and seek appropriate medical attention.
Early cannabinoid MDIs introduced to the marketplace and to our knowledge, certain of those of our current competitors, caused side effects such as irritation of the throat, vocal cords and esophagus, which consumers have not reported in connection with our MDIs.
Our core business model includes a new marketing and sales approach to the medical community that is primarily based upon tried and proven sales techniques used in the pharmaceutical industry. We applied these sales techniques and found that they initially worked well with our product. We plan on expanding our use of these sales techniques and believe they will be successful in the future. Unfortunately, this marketing and sales campaign was interrupted in December 2019 when a novel strain of coronavirus, which causes the infectious disease known as COVID-19, was first 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. As a result, in March and April 2020, many U.S. states and local jurisdictions began issuing ‘stay-at-home’ orders. When this occurred, our ability to access physicians’ and other health care providers’ offices was negatively affected. However, we pivoted to product research and development and began successfully seeking acquisition of an isolate manufacturer that could produce a secure supply of high-quality pharmaceutical grade NPCs, which acquisition we completed in November 2020 (see “Prior Material Acquisitions and Transactions”, below). In addition, during this time we took the opportunity to adjust our formula to eliminate any and all possible adulteration from our products and to reduce the possibility of any adverse side-effects associated with the use of our MDI.
From day one we have placed great emphasis on manufacturing a product that meets cGMP. “cGMP” means current good manufacturing practice regulations promulgated by the FSA under the authority of the FFDCA. These regulations, which have the force of law, require that manufacturers, processors, and packagers of drugs, medical devices, some food, and blood take proactive steps to ensure that their products are safe, pure, and effective. This goal of being fully compliant is being pursued at a high rate and we apply appropriate measures to reduce risk of non-compliance. Our new filling facility or MDI laboratory is expected to be certified to ISO 13485 after complying with all ISO requirements. The new facility was planned and engineered to be able to meet this certification standard. ISO 13485 is one of the standards for manufacturing FDA approved medical products. .
As such, with a product offering that is pure, safe and efficient, we expect to begin a renewed marketing and sales campaign in the second quarter of 2022, as COVID-19 begins to wind down, and with vaccines making it safer for our sales team to meet with our primary marketing targets, we plan to focus on the marketing of safe, legal and effective NPCs as the API. We believe that the ability to source and sustain our own ingredients will result in lowering our costs and providing a consistent and measured dose for consumers.
Our Products
We plan to offer MDIs as our primary product. MDIs are devices that deliver a measured amount of aerosolized inhalant in a mist to the lungs that is usually self-administered by the user via inhalation. As secondary products, we also offer a sublingual oral spray device and water-soluble CBD and CBG isolates.
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Our MDIs contain an API of a proprietary NPC isolate including, but not limited to, CBD and/or CBG. The products are sold under the nhālerTM brand name (provided that we have removed those products from the market because we are preparing to file an IND (Investigational New Drug Application) with the FDA in connection therewith).
The API is delivered to a user in a mist when inhaled. The droplet size of the liquid solution in the mist is engineered through a proprietary process to be of a size that the individual droplet can be absorbed directly into the blood stream through the cellular wall of the alveoli (the tiny air sacs of the lungs) and its surrounding blood vessels. This process is known as the pulmonary route of administration. If the droplet size is too large to enter the alveoli it is considered topical in nature and is of lower bioavailability and efficacy. If the droplet size is too small, the droplet is not heavy or dense enough to be absorbed and will be exhaled, thereby lowering bioavailability and efficacy. As such, the proprietary knowledge needed to engineer an appropriate droplet size is crucial to manufacturing an effective MDI. We are presently working closely with contractors of large international aerosol manufacturing companies to help us with a droplet formulation process that will meet FDA standards.
Our cans, valves, actuators and filling equipment are all on file with the FDA. We further attempt to fully comply with all GMP requirements followed by the manufacturers of our consumables and equipment except for the API.
Our pharmaceutical grade propellant and CBD isolate are considered non-toxic by the FDA. We use a small amount of medical inhalation grade ethanol. Further, with our MDI, there is no smell and it has been shown to keep working even if submerged in water.
Finally, bioavailability (the proportion of a drug or other substance which enters the circulation when introduced into the body and is able to have an active effect) is very high in a properly designed and formulated MDI, such as ours. As bioavailability decreases, a consumer must consume more of the substance to achieve the desired amount in the blood stream. Accordingly, lower bioavailability means more of the substance is lost and therefore more must be purchased and consumed. Our bioavailability is generally believed to exceed any other route of administration of NPC in the hemp market.
Our MDI is engineered, formulated and manufactured using the strictest aerosol device standards and GMP guidelines to ensure efficacy and quality. Our API is derived from high quality pharmaceutical grade cannabinoid isolates. Our API is made on custom fabricated equipment that is exclusive to our Company, which we have filed a patent application in connection with.
Our product’s main positioning is planned to focus on the superior delivery system of the MDI (ultra-high bioavailability) and the quality of the NPC API.
Our nhālerTM MDI provides:
·100 metered doses.
·5mg of our proprietary API pure cannabinoid isolate blend of NPC known as N-PsicanTM.
·500mg of API per MDI.
·Zero THC.
Our recently created sublingual oral spray device (which is applied via a spray into the mouth) utilizes essentially the same manufacturing technology and equipment that is used in our MDI’s. However, for those users who would prefer oral or sublingual routes of administration, it delivers a uniform mist of a consistent dosage inside the mouth which is easily absorbed in the tissues of the mouth and gums or swallowed. We developed this new product through our own recent research efforts as a way to eliminate potential discomfort associated with the delivery of pharmaceutical grade isolate through an inhaler. We anticipate our sublingual spray will be available for sale to the public in mid-2022. We are currently evaluating this market to determine how and if we should begin sales and marketing.
Our proprietary pharmaceutical isolate is expected to be available to be purchased by manufacturers of non-competing product lines that use CBD. However, we cannot market or sell any isolate until our new manufacturing facility is completed in mid to late 2022.
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Finally, as previously mentioned, we are developing another new secondary product offering in the form of water-soluble CBD isolates. This new product is expected to consist of isolates which are extracted using our proprietary technology resulting in an NPC that is dissolvable in a water-based solution, thus offering a much higher absorption rate and which does not require a solvent. This technology is related to nano particles of NPC combined with other well-known safe organic chemicals used in the pharmaceutical space.
We plan to offer these new isolate products in conjunction with the anticipated startup of our new manufacturing facility in Addison, Texas, which is planned to go live in the third or fourth quarter of calendar 2022.
Our Competitive Strengths
We believe our business has, and our future success will be driven by, the following competitive strengths:
·Emphasis on Precision, Quality and Consistency in our Manufacturing. While most companies in the space have focused on getting low-cost low quality CBD products to market in an effort to turn a quick profit, our focus has been on our science and manufacturing practices. We built ISO 6 and 7 control rooms to ensure our manufacturing practices, product development and safety protocol all follow GMP. We believe that our acquisition of assets from Razor Jacket, LLC (“Razor Jacket”, as discussed below) ensures that our products will contain some of the highest quality NPC APIs available in the CBD and hemp market places.
·Differentiated Business Model. In our experience, most companies in the cannabinoid industry only focus on direct to consumer and potentially store/dispensary sales. We have built our business more in line with those of true pharmaceutical and consumer product brands. Our plan is to focus our MDI sales efforts in more direct sales models, such as the following:
·Doctor detailing
·Healthcare Group and Clinic Direct Sales
·Traditional Retail Sales
·Direct to Consumer (with professional recommendation)
As an aerosol business we also have plans to extend our product lines to leverage other “safe for inhalation” APIs in the future. We expect that this ability to provide a new, better delivery system to established supplements and medications will drive our growth.
·Superior Delivery System with Proven Efficacy History. MDIs have been in use for over 70 years and we believe they are the best way to get safe to use inhalants into a user’s blood stream outside of an IV. We have spent substantial time and resources perfecting the technology to ensure that our devices operate as designed. This involves ensuring the parts and machines are pharmaceutical grade, our lab is up to GMP standards, our dosing is accurate and measured and we believe our API are the highest medical quality. In short, the MDI we build are believed to be safe and unadulterated.
·Proprietary Active Pharmaceutical Ingredients (API). The acquisition of assets from Razor Jacket is anticipated to allow the Company to bring the production of medical grade API production in-house. Our now in-house production of isolate was developed by experienced industry professions exclusively for MDI use.
·Long Term Supplier Relationships. We are invested in long term relationships with our pharmaceutical providers for cans, valves, actuators and technical equipment. We believe this will allow us to be able to expand our manufacturing capacity quickly and scale up to meet customer demand. One of our affiliates (an entity controlled by Mr. Schmidt, our Chief Executive Officer and director) is also the only authorized dealer of medical/pharmaceutical grade propellant in the hemp space, meaning that we will anticipate being able to always have access to one of the main ingredients to ensure our devices work properly.
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·Market Knowledge and Understanding. With over 30 years combined experience in the development of NPC API, our team has a high level of industry knowledge. Our team has vast experience and extensive industry contacts to assist in the procurement of raw materials in the hemp space. Our leadership team has experience building, scaling and taking businesses public. We also have extensive technical expertise in the manufacturing of API and metered dose inhalers. In addition, we are experienced in consumer deliverables and training.
·Pursuing FDA approval. The Company has engaged several consultants to assist with this process under various arrangements. In addition, these consultants are overseeing implementation of the Company’s quality control system in both manufacturing of MDI and production of isolates in moving towards certified laboratories. The Company is not aware of other companies pursuing the same business strategy.
·Clinical Trials. The Company expects to begin the process of clinic trials of its MDI, second or third quarter of 2022. It will be testing the product’s effects related to pain, PTSD, anxiety, insomnia, inflammation and recovery related to long haul effects of COVID-19, following approval of its IND.
Competitive Landscape
The Company believes its MDI is unmatched in the current CBD product marketplace. The combination of our proprietary NPC API and our unique MDI delivery system allow the Company to create a suite of products that are highly differentiated from any other product on the market. To our knowledge, at the current time, we do not have any direct competitors who offer the same type of product.
However, there are other so-called cannabinoid inhalers offered in the marketplace, and there is an abundance of other cannabinoid products available. We face competition from manufacturers of other cannabinoid inhalers.
The market for the sale of CBD and other non-THC-based cannabis products is fragmented and intensely competitive. We plan to compete based upon the quality of our products and method of delivery and eventually on our brand name recognition. We expect that the quantity and composition of the competitive environment will continue to evolve as the industry matures and new customers enter the marketplace.
Our Targeted Customers
We plan to focus our sales and marketing efforts towards three types of target customers:
1)Medical Providers, and licensed professionals. We plan to hire a team of direct sales representatives to target both local clinics and national medical chains, leveraging their previous relationships to facilitate business directly to their patients/customers. Our efforts will be directed toward a broad group of licensed medical professionals, including physicians (doctor of medicine’s (MD’s) and doctors of osteopathic medicine (DO’s)), medical technologists, chiropractors, physical therapists and others. The Company’s primary marketing focus will be on this sales channel, as we strive to have these types of licensed medical providers endorse our products to their patients/customers.
2)Pharmacies and specialty retailers. We anticipate a secondary sales team will be hired to target pharmacies which include regional and local chains as well as walk-in compounding pharmacies for behind the counter sales of MDI. Next, this same team is expected to target specialty retailers such as CBD shops, smoke shops, convenience stores, country club pro shops and gyms and/or work out facilities with our new oral spray.
3)Business to Consumer (“B2C”). We plan to hire a marketing team to create consumer response and direct impressions to our online marketplace where consumers will go to purchase our nhālerTM (provided that we have removed our nhālerTM products from the market because we are preparing to file an IND with the FDA in connection therewith) and other products. We plan to target these consumers through direct-to-consumer digital campaigns as well as through physician recommendations. We have hired a consultant to oversee the strategy, and oversee hiring, training,
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and implementation to facilitate our sales and marketing efforts for our target customers, which is subject to the Company raising adequate funds.
Marketing
Our plans are to employ a three-pronged marketing approach: (1) generate leads for our direct sales team in the medical space, (2) generate consumer interest in our products to purchase MDI at pharmacies and/or oral sprays online, or through flex stores and specialty retailers, and (3) achieve customer retention and build upon the nhālerTM brand (provided that we have removed our nhālerTM products from the market because we are preparing to file an IND with the FDA in connection therewith).
Direct sales team leads, direct consumer sales, branding, and customer retention are expected to predominantly be generated through the use of both inbound and outbound marketing and are planned to include: industry organizations, trade shows, public relations, paid advertising, online presence, search engine optimization, social media, email database marketing, and customer relationship management (CRM).
Search Engine Optimization (SEO) will be a high priority of ours to ensure that certain selected search engine keywords will direct online users to our family of websites. SEO is planned to be achieved through the use of proper meta tags, title tags, keyword density, keyword frequency, and every other aspect as recognized by the major search engines. We also plan to internally employ a team of SEO programmers in the future to work to ensure that our websites are, to the extent possible, listed near the top of the first page of major search engines when selected keywords are requested in a consumer search.
Our Growth Strategy
Our growth strategy is expected to build on what we believe is a superior delivery system that delivers a superior 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 expected product offerings provide a faster acting, more accurate dosing and higher value bioavailability of our ingredients for our customers. As a result, we believe that we will be able to increase our consumer base and to provide top line growth for our retail and clinic customers.
·Increasing penetration of hemp user. We believe that there is a decreasing stigma around the use of cannabis products as a result of legal, regulatory and social views that 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 planned to be meticulously manufactured to ensure an accurate and measured dose with every actuation. We believe that this will allow us to provide consumers and medical practitioners with the peace of mind that they can utilize our products safely and effectively and thus bring new consumers into the category.
·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 devices.
·Cannabinoids, the FDA, and Clinical Testing. The cannabinoid and hemp marketplace are still somewhat devoid of medical substantiation. There have been very few products that have started to undergo medical testing in the hopes of gaining information around benefits, dosing and potential FDA approval. Our goal is to start to explore the medical opportunity by conducting voluntary clinical testing on our nhālerTM branded products. We have partnered with a healthcare group who has a captive patient population to test our nhālerTM brand with patients presenting with clinical diagnosis around pain, anxiety, PTSD, insomnia and long haul COVID-19 problems.. 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 nhālerTM brand name from the market because we are preparing to file an IND with the FDA. We have hired a law firm to prepare the
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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 currently anticipates that the pre-IND meeting will occur in the second or third quarter of 2022, and pending the outcome of such meeting, the Company plans to submit the IND application in the second quarter of 2022.
·Legal Status. Our products are not FDA approved. However, we plan to file an IND with the FDA in the second quarter of 2022, pending the outcome of a planned pre-IND meeting with the FDA, 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 beginning 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 is a significant opportunity for us to capture market share internationally with our product offerings.
Scale-Up Manufacturing
Our lease at our former manufacturing facility expired December 31, 2021. We believe that our new manufacturing facility will give us the ability to significantly increase our production capacity by an estimated factor of 5 times previous volumes for MDI. Our isolate manufacturing ability will increase an estimated 10 times. If sales and demand for our products outpace our new facility’s capacity under construction, we believe we can increase production, funding permitting, by:
·Increasing manufacturing shifts to two and then three in our current manufacturing laboratory per day.
·Increasing the amount of manufacturing equipment and employees.
·Expanding on the size of a new facility which incorporates semi-robotic filling equipment.
Presently, our isolate manufacturing laboratory can produce more API than we can utilize for our MDI.
CBD Industry Market Overview
According to a report published in December 2019, by Grand View Research, entitled “Cannabidiol Market Size, Share & Trends Analysis Report By Source Type (Hemp, Marijuana), By Distribution Channel (B2B, B2C), By End Use, By Region, And Segment Forecasts, 2019 - 2025”, “[t]he global cannabidiol market was valued at USD 4.6 billion in 2018 and is expected to grow at a compound annual growth rate (CAGR) of 22.2% from 2019 to 2025.” The Company operates in the cannabidiol market (which includes edibles, inhalants such as vapes, topical and sublingual products-we compete against the makers of all products other than topical products), marketing its pMDI’s as a delivery method for cannabidiols. The Company competes in the market with other pMDI makers and other producers of alternative cannabidiol delivery systems, such as oral, nasal, or topical.
CBD is driving the recent hemp boom, and that trend is expected to continue for the next several years, according to the 2021 Annual Hemp & CBD Industry Factbook, published by Hemp Industry Daily (the “Factbook”). According to the Factbook, this rise is caused by an increased acceptance of CBD as a dietary supplement as consumers are searching for products thought to boost wellness and immunity and enhance relaxation a result of COVID-19. The Factbook projects that hemp’s 2020 sales of $1.9 billion will increase to $6.9 billion in
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2025, a threefold increase over five years. The Factbook also projects that U.S. sales of inhalable CBD (such as the MDI we plan to offer) will increase from $267 million in 2020 to $793 million in 2025 (an increase of 197%).
Intellectual Property
Our intellectual property includes the content of our websites, our registered domain names, our registered and unregistered trademarks, and certain trade secrets. We believe that our intellectual property is an essential asset of our business and that our registered domain names and our technology infrastructure will give us a competitive advantage in the marketplace. We plan to rely on a combination of patent, trademark, copyright, trade secret, including federal, state and common law rights in the United States and other countries, nondisclosure agreements, and other measures to protect our intellectual property. To date, we have filed three provisional patents for pharmaceutical grade CBD and CBG. These provisional patent applications have been accepted by the United States Patent and Trademark Office. The Company has instructed its patent attorneys to begin the process of converting the provisional patent applications to utility patents. In addition, the Company is preparing additional patents for submission as non-provisional patents for new isolates.
We require our employees, consultants, and advisors to execute confidentiality agreements and to agree to disclose and assign to us all inventions conceived under their respective employment, consultant, or advisor agreement, using our property, or which relate to our business. Despite any measures taken to protect our intellectual property, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Our business is affected by our ability to protect against misappropriation and infringement of our intellectual property, including our trademarks, service marks, patents, domain names, copyrights and other proprietary rights.
Our primary web properties are:
·www.nhaler.com, and
·www.rtslco.com
Patent Applications
Moving forward, we plan to file additional patent applications for other processes and manufacturing methods, provided there can be no assurance that any future patent applications will be approved or granted.
Trademarks and Copyrights
Although we have not sought copyright registration for our technology or works to date, we rely on federal or statutory common law copyright and trade secret protections in relation to our nhālerTM MDI (provided that we have removed our nhālerTM products from the market because we are preparing to file an IND with the FDA in connection therewith) and our N-PsicanTM API, as well as our RxoidTM.
In addition, while we believe that our current product and service capabilities are highly novel and compelling, we do not intend to be complacent. We plan to continue to learn from our customers and from the market, and if there is an opportunity to deploy a new and improved version of one of our offerings or if we decide there is room in the market for a new type of solution, we fully intend to diligently explore those possibilities to augment our existing business and grow our reach.
Property, Employees and Human Capital Resources
As of the date of this Report, we have eight full-time employees in Dallas, Texas. Our CFO works remotely from Houston, Texas. We have numerous outside consultants that have exclusive agreements with us for their professional services including physicians. From November 15, 2019 to June 30, 2021, our corporate and executive offices were located in an office space in Dallas, Texas, provided by the Company’s Chief Executive Officer at no cost or commitment to the Company. Effective June 30, 2021, the Company relocated to a new office that was leased from a third party, but was previously being utilized by us solely as a laboratory, for the remaining term of the lease agreement, which expired on December 31, 2021. Effective October 1, 2021, the Company entered into a 63-month lease agreement with a landlord to lease 8,566 square feet of commercial office building space located in Addison, Texas. The base monthly rent of this space is $7,852 per month escalating annually over the lease term to $9,279 per month. As of the date of this Report, the Company is in the process of building out this space with the
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intention of utilizing it as its corporate office as well as its aerosol filling laboratories and isolate manufacturing facility, beginning in the second quarter of 2022. Pending completion of the build out of the new office and lab space in Addison, Texas, the Company relocated back to the office space in Dallas, Texas, provided by the Company’s Chief Executive Officer at no cost or commitment to the Company, effective as of December 31, 2021.
The labs at the new facility will significantly increase our production capacity. These new labs will be constructed such that they are capable of being certified to ISO 6 and ISO 13485 specifications. We may also pursue additional warehousing capabilities. We presently use short-term storage for warehousing.
None of our employees are subject to collective bargaining agreements. We consider our relationship with our employees to be good.
Our human capital resources objectives include, as applicable, identifying, recruiting, retaining, incentivizing and integrating our existing and new employees, advisors and consultants. In that regard, the main objective of our compensation program will be to provide a compensation package that will attract, retain, motivate and reward superior employees who must operate in a highly competitive and technologically challenging environment. We plan to seek to do this by linking annual changes in compensation to overall Company performance, as well as each individual’s contribution to the results achieved. The emphasis on overall Company performance is intended to align the employee’s financial interests with the interests of shareholders.
Corporate History
We were incorporated on February 22, 2013 as PowerMedChairs, a Nevada corporation. Since the time of our incorporation, and until February 2018, our plan of operation was to rebuild primarily electric/power wheelchairs in disrepair. On June 2, 2017, we changed our name to Holly Brothers Pictures, Inc. In February 2018, we ceased this business and commenced a blockchain mining business through our acquisition of Power Blockchain, LLC (“Power Blockchain”), described below. We have since ceased all electric/power wheelchair and blockchain mining operations, and no longer hold any of the prior assets associated with such businesses. No agreements or operations exist relating to our prior business operations as of the date of this Report.
On February 1, 2018, we entered into an exchange agreement pursuant to which we acquired 100% of the equity interests in Power Blockchain from the two owners of that company in exchange for the issuance of convertible notes in the aggregate principal amount of $2.2 million (none of such convertible notes remained outstanding as of December 31, 2021). Upon consummation of the exchange agreement, Power Blockchain became our wholly-owned subsidiary. This transaction resulted in the transition from the Company’s business of repairing and selling wheelchairs to a new business of mining crypto-currency. On February 14, 2018, we were granted permission from the Kingdom of Lesotho in Africa to conduct crypto-currency mining operations in that country. Shortly thereafter, we acquired and shipped a total of 70 crypto-currency miners to Lesotho in order to commence crypto-currency mining operations there. However, due to the rapidly declining economic and market conditions in that business, we were never able to commence any mining operations and suspended our mining operations in the middle of 2018 and our miners were abandoned after the Company exited the crypto-mining business.
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 has licensed from EM3 Methodologies, LLC (“EM3”) and the right to use the RxoidTM brand name owned by TMDI. TMDI had exclusive rights to research, develop, make, have made, use, offer to sell, sell, export and/or import and commercialize, the “Desirick Procedure”, which is a proprietary process owned by EM3 for producing MDI using hemp (and other) derivatives in the States of Texas, California, Florida and Nevada (subject to pre-existing licensing rights which have been provided by EM3 in such jurisdictions; provided that we currently have no knowledge of any such pre-existing licensing rights), pursuant to an Exclusive License Agreement dated October 1, 2019, by and between TMDI and EM3 (the “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). The Company believes that the Desirick Procedure enables the production of MDI using hemp derivatives (isolates) through a proprietary formulation process whereby the interfacial tension and miscibility of aerosol mixture components (hemp isolates, propellant, regulators, and/or solvents, if any) are determined that allow
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creation and disbursement of a controlled liquid droplet size for inhalation into the alveoli (the tiny air sacs of the lungs).
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, in consideration for 100,000 shares of the Company’s common stock (the “First Amendment”).
During the term of the Sublicense Agreement, the Company was required to advance payments to TMDI that TMDI was required to make to EM3, pursuant to the EM3 Exclusive License Agreement. 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 are 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 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 had 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
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(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.
A properly formulated and corrected manufactured MDI is a proven medical technology which is a complete replacement for vape cartridges and e-cigarettes. A cannabinoid MDI which is properly developed and manufactured delivers medication directly to a user’s blood stream through the pulmonary tract. MDIs are generally sterile, stable, will not oxidize and have a long shelf life not affected by light or temperature. MDIs require neither heat nor batteries. MDIs are efficient devices to deliver medication to humans whether systemically or topically. The Company uses only U.S. Food and Drug Administration (FDA) listed consumables (cans, valves, actuators, and propellant) and equipment in compliance with cGMP to produce its products. The use of excipients in the manufacture of inhalants has long been held to be generally recognized as safe (GRAS). The Company currently has over a dozen proprietary blends of cannabinoids derived from hemp containing cannabidiol, CBD, CBG, cannabinol and/or proprietary terpenes (aromatic oils) which customers often use to help support many common complaints such as pain, inflammation, anxiety, sleep, exercise, recovery and allergies. These are sold under our nhᾱlerTM brand (which we have taken off the market while we prepare to file an IND), and under the product names, “chill”, “focus”, and “move”. The Company makes no claims that any of its products have any therapeutic benefits or that they treat any diseases.
With execution of the Sublicense Agreement in November 2019, the Company adopted a new business strategy focused on developing potential commercial opportunities which will involve the rapid application of therapeutics using the RxoidTM MDI technology that is being licensed 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.
Prior Material Acquisitions and Transactions
In November 2020, the Company completed its acquisition of Razor Jacket, LLC and the hiring of its owners, Frank Gill (“Gill”) and Ryan Johnson (“Johnson”). The Company purchased all of Razor Jacket’s equipment and all of its know-how 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 Gill and Johnson (the “Closing Shares”), 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 Report, Gill has complied with a portion of the conditions under the Razor Jacket acquisition and the Company expects the majority of the remaining conditions will have been met by June 30, 2022, which includes the construction of a new facility and completion of patent applications. However, Mr. Johnson has, as of the date of this Report, been terminated for cause and will not receive any shares previously contingently issuable to Mr. Johnson.
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In addition, Gill and Johnson executed an Assignment of Intellectual Property Agreement in favor of the Company, assigning all of their and Razor Jacket’s intellectual property and rights associated with the process of converting raw hemp or cannabis crude into distinct isolates of NPC, THC2, and all other minor cannabinoids and/or associated terpenes including, but not limited to, the modification of existing commercial or specialty equipment fabricated and assembled to work in conjunction with Razor Jacket’s processes.
In connection with the closing, Gill entered into a Trading Agreement with the Company dated November 16, 2020 (the “Common Trading Agreement”), which restricts Gill’s ability to transfer or sell the Closing Shares (and any other shares of Company common stock which he may obtain during the term of such agreement), until October 31, 2023, provided that between October 31, 2021, and October 31, 2023, Gill may sell not more than 10% of the average daily aggregate trading volume of the Company’s common stock over the preceding 30 day rolling period, subject to certain other requirements.
Also in connection with the closing, Gill entered into a separate Trading Agreement dated November 16, 2020 (the “Preferred Trading Agreement”), which restricts his ability to transfer or sell any of the shares of common stock issuable upon conversion of the Series A Preferred Stock (and any other shares of Company common stock which he may obtain during the term of such agreement), until October 31, 2025, provided that between October 31, 2022, and October 31, 2025, each may sell not more than 10% of the average daily aggregate trading volume of the Company’s common stock over the preceding 30-day rolling period, subject to certain other requirements.
Subsequently, the Company hired Dr. Duane Drinkwine, Ph.D. on January 26, 2021 to oversee all laboratory operations for the Company. Dr. Drinkwine has more than 30 years of experience in the pharmaceutical industry. Most importantly, he has significant experience in isolate crystallization, and he has perfected NPC crystallization for human consumption and ultimately for use in application to the FDA. He has significant experience in compliance with cGMP practices, OSHA and EPA lab regulations, and of course, FDA new drug applications.
Dr. Drinkwine was the lead engineer in designing the crystallization equipment for Razor Jacket's isolate extraction facility prior to the acquisition of Razor Jacket’s intellectual property by the Company.
As of March 11, 2021, we have formulated a new active pharmaceutical ingredient (“API”) for our MDI that we believe substantially reduces, or in most cases, completely eliminates any irritation of the nose, throat, larynx or bronchial tubes of the lungs. Irritation by inhalation of CBD has been identified as a primary problem of MDI by industry participants and the FDA. We plan to explore patenting this new API moving forward.
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.
2 The Company does not presently have any plans to process hemp for the production of any THC. Although the Company acquired proprietary rights to the methodologies to manufacture THC from Razor Jacket, this is not part of its business model.
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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 (of which approximately $1.0 million is currently available), the exercise price of the Investor Warrants is automatically reduced to such lower value, and the number of shares of common stock issuable upon exercise thereafter is adjusted proportionately so that the aggregate exercise price payable upon exercise of such Investor Warrants is the same prior to and after such reduction in exercise price. 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.
On January 28, 2022, we entered into a Securities Purchase Agreement (the “Suggs Purchase Agreement”), with J. Scott Suggs, a member of our Board of Directors (“Suggs”), pursuant to which the Company agreed to sell, and Suggs agreed to purchase, a Promissory Note (the “Suggs Note”).
The Suggs Note was purchased for, and has an initial face amount of, $400,000. The Suggs Note accrues interest at 18% per annum, compounded monthly (at the end of each month), until the earlier of (i) January 26, 2023 (the “Maturity Date”) or (ii) ten days from the date that the Company’s common stock is listed on a national exchange and that the Company receives funding under any underwritten offering in connection therewith (the “Pre-Payment Date”), when all accrued interest and outstanding principal under the Suggs Note is required to be paid in a single lump sum. If the Pre-Payment Date occurs prior to the Maturity Date, the Company will be required to pay a prepayment penalty equal to the outstanding principal balance of the Suggs Note multiplied by 25.44% ($101,760), less the amount of total accrued interest owed under the Suggs Note as of the Pre-Payment Date (the “Pre-Payment Penalty”). No Pre-Payment Penalty will be due if the Suggs Note is repaid on the Maturity Date, provided the Pre-Payment Date has not previously occurred. Other than on the Pre-Payment Date, the Company has no right to accelerate payments or prepay the Suggs Note, except with the prior written approval of Suggs.
The Suggs Note is unsecured. So long as the Company has any obligation under the Suggs Note, the Company is prohibited from selling, leasing or otherwise disposing of any significant portion of its assets outside the ordinary course of business without the prior written consent of the holder of the Suggs Note.
The Suggs Note contains certain customary events of default, including failure to pay amounts due under the Suggs Note (subject to a five day cure period); breach of the Company’s covenants under the Suggs Note, subject to a 20 day cure period; breach of the representations and warranties of the Company; the occurrence of certain bankruptcy related events; the delisting of the Company’s common stock from a national securities exchange or the OTC Markets; failure to comply with the requirements of the Exchange Act; dissolution, liquidation, cessation of operations; certain financial statement restatements; replacement of the Company’s transfer agent; and certain cross-defaults of other agreements entered into with Suggs. Upon the occurrence of an event of default under the Suggs Note, the Suggs Note becomes immediately due and payable and we are required to pay Suggs the principal, accrued interest, Pre-Payment Penalty, and default interest due under the Suggs Note. If such default
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amount is not paid within five business days of written notice thereof from Suggs, Suggs can convert the amount due to Suggs into common stock of the Company as discussed below.
Upon an event of default under the Suggs Note, the amounts due to the holder of the Suggs Note may be converted, in whole or part, by the holder, into common stock of the Company, at a conversion price equal to the greater of (a) $0.000075 per share (subject to equitable adjustment for stock splits and stock dividends); and (b) 75% of the average closing bid price of the Company’s common stock, on the principal securities exchange or market where the Company’s common stock is then quoted or traded, for the five trading days immediately prior to the date of conversion (the “Variable Conversion Rate”). We agreed to reserve six times the number of shares of common stock then issuable upon conversion of the Suggs Note, initially equal to a total of 10,813,793 shares of common stock. If we fail to deliver shares of common stock to the holder of the Suggs Note upon the conversion thereof within three business days, we agreed to pay the holder $2,000 per day in cash, to the extent such failure is not the result of a third party. The conversion of the Suggs Note is subject to a beneficial ownership limitation of 4.99%, preventing such conversion by the holder thereof, if such exercise would result in such holder and its affiliates, exceeding ownership of 4.99% of our common stock.
The closing of the transactions contemplated by the Suggs Purchase Agreement, including the sale of the Suggs Note, occurred on January 28, 2022.
The Suggs Purchase Agreement included standard and customary representations of the parties; and included certain positive and negative covenants (including obligations to indemnify Suggs in certain cases upon breach thereof), which included the requirement that we use the funds raised through the sale of the Suggs Note only for working capital, and that we reimburse $3,750 of Suggs’ attorney’s fees.
On March 8, 2022, we entered into a Securities Purchase Agreement with an institutional investor, Red Road Holdings Corporation (“Red Road”), and issued a Promissory Note payable to Red Road (the “Red Road Note”) in order to fund short-term working capital needs in the amount of $197,000. This note has a maturity of one year and has substantially the same payment and default provisions as the Suggs Note, except that we are required to make monthly principal and interest payments of $21,276, beginning on May 1, 2022.
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 resumed 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 debt borrowings. Moving forward we believe we will need to raise additional funding to support our operations which funding we anticipate being available through the sale of securities which may be accomplished through public and/or private offerings or debt, similar to our recently completed sale of a convertible debenture and convertible notes, 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 future 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.
Regulation
The Controlled Substances Act (CSA), which became effective on May 1, 1971, is the statute establishing federal U.S. drug policy under which the manufacture, importation, possession, use, and distribution of certain substances is regulated. Under the CSA, drugs are placed into five ‘schedules’, based on varying qualifications. Two federal agencies, the Drug Enforcement Administration (DEA) and the Food and Drug Administration (FDA), determine which substances are added to or removed from the various schedules, provided that Congress can also amend the schedules through legislation.
Cannabis (cannabis sativa L.) generally falls within one of two categories under federal law: marijuana or hemp. Cannabis formally fell under Schedule I of the CSA. Schedule I drugs are those that have the following characteristics according to the DEA: (1) the drug or other substance has a high potential for abuse; (2) the drug or other substance has no currently accepted medical treatment use in the U.S.; and (3) it has a lack of accepted safety for use under medical supervision.
Notwithstanding the above, on December 20, 2018, the Farm Bill went into effect, which regulates agricultural programs ranging from income support to rural development. The Farm Bill also legalized hemp cultivation and declassified hemp as a Schedule I controlled substance. The Farm Bill defines “hemp” as any part or derivative of the cannabis sativa L. plant containing less than 0.3 percent THC by weight. This definition includes hemp plants that produce the concentrated liquid extract known as cannabidiol (or CBD) oil. CBD oil is currently legal in a significant number of states and has gained market acceptance as a wellness and anti-inflammation product.
Subsequent to the passage of the Farm Bill, the FDA made clear that although hemp is no longer an illegal substance under federal law, the FDA continues to regulate hemp products under the FFDCA as well as other federal statutes. Therefore, any hemp product marketed with a claim of therapeutic benefit, regardless of whether it is hemp-derived, must be approved by the FDA before it can be sold.
Separately, various states have recently begun changing their laws to allow for hemp-related activities in compliance with such new state laws, which nonetheless still violate the CSA, which makes cannabis use and possession illegal as discussed above. To our knowledge, as of the date of this Report, approximately 47 states have changed their laws to permit the use of CBD for all purposes, for medical purposes and/or for certain restricted uses provided that to our knowledge, CBD is still illegal in Idaho, Iowa, and South Dakota, and is restricted for use in certain other states.
The State of Texas legalized the manufacturing, consumption and export of legal hemp products containing hemp extracts including, but not limited to, cannabidiol under Texas House Bill 1325 signed by Governor Abbott on June 10, 2019. The Company has obtained a license under Texas House Bill 1325 for Consumable Hemp Products (License Number 176). A Consumable Hemp Product License is required if: consumable hemp products (like the Company’s products) are manufactured. Manufacturing includes the following activities: preparing, compounding, processing, packaging, repackaging, labeling and relabeling. The Company’s Consumable Hemp Product License expires (subject to renewals granted by the State of Texas; which we have no reason to believe will not be approved) on March 31, 2022.
As described above, all of the Company’s products are made up of non-THC cannabinoids. While we believe our operations are compliant with applicable federal and state law, there are risks that our operations violate the CSA or other federal laws or state laws.
Additionally, as of the date of this Report, and based upon publicly available information, while, to our knowledge the FDA has not taken any enforcement actions against CBD companies that do not make therapeutic
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claims, the FDA has sent warning letters to and brought enforcement actions against companies demanding they cease and desist from the production, distribution, or advertising of CBD products, relating to instances that such CBD companies have made misleading and unapproved label claims.
Presently there are quota restrictions on global warming gas including our primary pharmaceutical propellant HFA-134a. This could raise the price we pay for this propellant or eventually make it unavailable. We presently do not expect to be impacted by this at our current level of anticipated production in the next two years. Regardless, if we receive FDA approval of our MDI device as a medical product, which may not be approved, we will be exempt from this quota restriction and US allowed production of HFA-134a is very large for the medical space. Further, the FDA is working with the industry to approve new propellants that do not contribute to the potential of global warming. We have taken steps to secure these new propellants and will be working to revise our formulations to work with these propellants, as necessary. Finally, we believe our isolates will also work in dry powder inhalers which require no propellant. We have just initiated these investigations.
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 https://www.sec.gov. Our SEC filings are also available for download, free of charge, soon after such reports are filed with or furnished to the SEC, on the “Investors” “SEC Filings” page of our website at https://www.rtslco.com. 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. Our website address is https://www.rtslco.com. The information on, or that may be accessed through, our website is not incorporated by reference into this Report and should not be considered a part of this Report.
ITEM 1A. RISK FACTORS
Summary Risk Factors
Our business is subject to numerous risks and uncertainties, including those described in this “Risk Factors” section below. These risks include, but are not limited to, the following:
·Our history of operating losses and limited operating history;
·Our need for significant additional financing to grow and expand our operations, the availability and terms of such financing, and potential dilution which may be caused by such financing, if obtained through the sale of equity or convertible securities;
·Going concern issues raised by our independent auditor, as well as material weaknesses identified in our controls and procedures and internal control over financial reporting;
·Risks relating to our ability to compete against competitors and successfully grow our operations;
·Negative trends in the market for, the consumer acceptance of, and changes in public opinion associated with, cannabidiols and other cannabis-based products;
·Scrutiny we may face due to prior changes in our business strategy and as a result of previously operating in certain scrutinized industries;
·Risks associated with COVID-19, the spread of the virus, governmental responses thereto, and potential recessions and/or declines in economic activity and consumer spending caused thereby;
·The potential long-term health effects associated with cannabis-based products such as cannabidiols and our other products, product recalls and product liability associated therewith;
·Public opposition to the cannabis industry in general, and adverse changes in rules, laws and enforcement of rules and laws, which may have a negative effect on our operations and ability to operate in the cannabis industry;
·The regulation of our operations, sales and manufacturing;
·Our ability to obtain and maintain required licenses and permits;
·Our ability to legally advertise our products;
·Claims relating to alleged violations of intellectual property rights of others and our ability to maintain our intellection property rights;
·Risks relating to implementing our acquisition strategies;
·The need for additional financing;
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·Our growth strategy and our ability to manage our growth;
·Changes in laws or regulations relating to our operations;
·Dependence on current management;
·We could be subject to hackers or ransomware.
·Certain anti-dilution rights associated with outstanding warrants;
·The lack of a market for our securities and the volatility in the trading prices thereof caused thereby;
·The concentrated ownership of our common stock;
·Dilution caused by convertible securities and certain anti-dilution rights associated therewith;
·The sale of our MDI and CBD (isolate, oral sprays or other products using our CBD) are regulated by the FDA. At any time the FDA could pronounce rules that could lead to our products being removed from the market;
·Our products are currently legal under Texas law; however, Texas could move to regulate our products at any time; and
·Other risks disclosed below.
The following risks and uncertainties should be carefully considered in addition to the other information included in this Report. If any of the following occurs, our business, financial condition or operating results could be materially harmed. An investment in our securities is speculative in nature, involves a high degree of risk and should not be made by an investor who cannot bear the economic risk of its investment for an indefinite period of time and who cannot afford the loss of its entire investment.
Risks Relating to Our Business
Our business, financial condition and results of operations are subject to various risks and uncertainties, including those described below and elsewhere in this Report. This section discusses factors that, individually or in the aggregate, we think could cause our actual results to differ materially from expected and historical results, and consequently, could cause the value of our securities to decline in value. Our business, financial condition or results of operations could be materially adversely affected by any of these risks. It is not possible to predict or identify all such factors. Consequently, the following description of Risk Factors is not a complete discussion of all potential risks or uncertainties applicable to our business.
We are subject to risks in connection with FDA Regulations.
Our MDI parts and CBD are all regulated by the FDA. Prior to the removal of our MDI from the marketplace to pursue FDA approval for our MDI containing CBD, we sold our products to the public under what is commonly termed “safe harbor” provisions. These provisions essentially state that although CBD is a regulated drug under FDA rules, companies can sell to the public if they do not make any therapeutic claims and do not sell an adulterated or toxic product. We will continue to sell CBD products to the marketplace under this safe harbor provision; however, we will not sell a metered dose product to deliver CBD to the lungs as we are seeking FDA approval to sell this product only on an OTC or prescription bases. Regardless, at any time, the FDA could change its position and seek to remove all CBD products from the US marketplace for all manufacturers. Based upon the stated legislative intent of the 2018 Farm Bill, our lobbyist’ advise, pending legislation in the US Congress, and on statements posted by the FDA on www.fda.gov, the Company does not expect this to happen.
Our planned FDA Investigative New Drug Application (IND) is subject to risks.
The Company made the decision to seek approval from the FDA under what is known as an Investigative New Drug Application for its MDI containing only CBD. Although the Company is making best efforts to achieve success of an FDA approval, there is no assurances the FDA will ever approve any new drug application including our MDI containing CBD. The IND application is a process to seek FDA approval of a drug for treatment of newly discovered therapeutic applications. This is a time-consuming expensive process. There is no firm timeline for how long this may take and there is no guarantee the Company will be able to meet the long-term cost of yet unknown FDA requirements. The Company has not yet filed an IND or met with the FDA regarding such planned IND. Further, there is no guarantee that at any time in the IND process the FDA will refuse to approve the application for any purpose or even allow further testing on humans. In short, the FDA could order us to stop testing at any time and to never sell the product to the public again.
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We have a history of operating losses, and we may not be able to achieve or sustain profitability; we have recently shifted to an entirely new business and may not be successful in this new business.
We are not profitable and have incurred an accumulated deficit of $8,521,423 since our inception. Our revenues from sales on a trial basis for the years ended December 31, 2021 and the nine months ended December 31, 2020, were $534 compared to $130,916, consisting mostly of two large wholesale orders, in the nine months ended December 31, 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. We expect to continue to incur losses for the foreseeable future, and these losses could increase as we continue to work to develop our business. We were previously engaged in pursuing the business of bitcoin mining and digital currency and were not successful in that business. In November 2019, we adopted a new business strategy focused on developing potential commercial opportunities involving the rapid application of therapeutics using inhaler technology that the Company has licensed for its use. We have yet to commence profitable operations in that business and have generated only minimal revenues in connection with such new business strategy; therefore, the Company is continuing to incur operating losses. We may not generate significant revenues in the future, may not be able to sustain our operations with the revenue that we generate in the future, and even if we achieve profitability, we may not be able to sustain profitability in subsequent periods.
We have a limited operating history and our business is in a relatively new consumer product segment, which is difficult to forecast.
The Company has a limited operating history, which can make it difficult for investors to evaluate our operations and prospects and may increase the risks associated with investment into the Company. Our business plan is subject to all business risks associated with new business enterprises, including the absence of any significant operating history upon which to evaluate an investment. The likelihood of our success must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered in connection with the formation of a new business, the development of new strategy and the competitive environment in which the Company will operate. It is possible that the Company will incur losses in the future. There is no guarantee that the Company will be profitable.
Additionally, our industry segment is relatively new, and is constantly evolving. As a result, there is a lack of available information with which to forecast industry trends or patterns. There is no assurance that sustainable industry trends or preferences will develop that will lead to predictable growth or earnings forecasts for individual companies or the industry segment as a whole. We are also unable to determine what impact future governmental regulation may have on trends and preferences or patterns within our industry segment.
We require additional financing, and we may not be able to raise funds on favorable terms or at all.
We anticipate requiring further funds in the future to grow our operations and produce additional product lines. The sources of additional capital are expected to be from sales of our securities including equity, equity linked and convertible debt and potentially notes payable. Any future sales of our securities will result in dilution to existing shareholders. Furthermore, we may incur debt in the future, and may not have sufficient funds to repay our future indebtedness or may default on our future debts, jeopardizing our business viability.
We may not be able to borrow or raise additional capital in the future, on favorable terms, if at all, to meet our needs or to otherwise provide the capital necessary to expand our operations and business, which might result in the value of our securities decreasing in value or becoming worthless. Additional financing may not be available to us on terms that are acceptable. Consequently, we may not be able to proceed with our intended business plans. Obtaining additional financing contains risks, including:
·additional equity financing may not be available to us on satisfactory terms and any equity we are able to issue could lead to dilution for current shareholders;
·current or future laws or regulations may make it impossible, or more difficult for the Company to raise funding, due to the fact that it operates in the cannabinoid industry;
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·loans or other debt instruments may have terms and/or conditions, such as interest rate, restrictive covenants and control or revocation provisions, which are not acceptable to management or our directors;
·the current environment in capital markets combined with our capital constraints may prevent us from being able to obtain adequate debt financing; and
·if we fail to obtain required additional financing to grow our business, we would need to delay or scale back our business plan, reduce our operating costs, or reduce our headcount, each of which would have a material adverse effect on our business, future prospects, and financial condition.
Additionally, we may have difficulty obtaining additional funding, and we may have to accept terms that would adversely affect our shareholders. For example, the terms of any future financings may impose restrictions on our right to declare dividends or on the manner in which we conduct our business. Additionally, lending institutions or private investors may impose restrictions on a future decision by us to make capital expenditures, acquisitions or significant asset sales. If we are unable to raise additional funds, we may be forced to curtail or even abandon our business plan.
Our independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern.
Our historical financial statements have been prepared under the assumption that we will continue as a going concern. Our independent registered public accounting firm has issued a report on our financial statements for the nine months ended December 31, 2020 and the year ended December 31, 2021, that includes an explanatory paragraph referring to our recurring operating losses and expressing substantial doubt in our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to obtain additional equity financing or other capital, attain further operating efficiencies, reduce expenditures, and, ultimately, generate revenue. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. However, if adequate funds are not available to us when we need it, we will be required to curtail our operations which would, in turn, further raise substantial doubt about our ability to continue as a going concern. The doubt regarding our potential ability to continue as a going concern may adversely affect our ability to obtain new financing on reasonable terms or at all. Additionally, if we are unable to continue as a going concern, our stockholders may lose some or all of their investment in the Company.
Because our business is dependent upon continued market acceptance by consumers, any negative trends will adversely affect our business operations.
We will be substantially dependent on continued market acceptance and proliferation of consumers of hemp related products-including our current products and any new products we offer. We believe that as hemp and hemp-derived cannabidiol becomes more accepted, the stigma associated with these sectors will diminish and as a result consumer demand will continue to grow. While we believe that the market and opportunity in the hemp space continues to grow, we cannot predict the future growth rate and size of the market. Any negative outlook on the industry will adversely affect our business operations. Additionally, the failure of the market to accept our current and any future products will have a material adverse effect on our revenues and prospects.
We may not succeed in growing our sales and creating a viable market for our products, and our failure to do so would have a material adverse effect on our business, prospects, financial condition and operating results.
We are a new business operating in a relatively new market sector. As is typical in a new and rapidly evolving industry, demand and market acceptance for recently introduced products and services are subject to a high level of uncertainty and risk. Because the market for our products is new and evolving, it is difficult to predict with any certainty the size of this market and its growth rate, if any. A market for our products may not develop and/or demand for our products may not emerge or be sustainable. If the market fails to develop, develops more slowly than expected or becomes saturated with competitors, our business, financial condition and operating results would be materially adversely affected.
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Changes in public opinion and perception could negatively affect our business operations.
Government policy changes or public opinion may also result in a significant influence over the regulation of the hemp industry in the United States or elsewhere. Public opinion and support for hemp and hemp products has traditionally been inconsistent and varies from jurisdiction to jurisdiction. While public opinion and support appears to be rising for legalizing hemp and hemp products, it remains a controversial issue subject to differing opinions surrounding the level of legalization. A negative shift in the public’s perception of hemp and hemp products in the United States or any other applicable jurisdiction could negatively affect current or future legislation or regulation.
Our change in our business strategy and name could subject us to increased SEC scrutiny.
We previously were engaged in the business of crypto-currency mining under our former corporate name. In November 2019, we adopted a new business strategy focused on developing potential commercial opportunities involving the rapid application of therapeutics using inhaler technology that the Company has licensed from a third party. In January 2020, we changed our corporate name to more closely reflect this new business strategy. The SEC has announced that it is scrutinizing public companies that change their name or business model in a bid to capitalize upon the hype surrounding new and emerging technologies, and has suspended trading of certain of such companies. As a result, we could be subject to substantial SEC scrutiny that could require devotion of significant management and other resources and potentially have an adverse impact on the trading of our stock.
The current outbreak of the novel coronavirus, or COVID-19, has caused severe disruptions in the global economy and may have an adverse impact on our performance and results of operations.
The current outbreak of the novel coronavirus, or COVID-19, which has been declared by the World Health Organization (WHO) to be a “pandemic”, has spread across the globe and is impacting worldwide economic activity. COVID-19 has severely restricted the level of economic activity around the world. A public health epidemic, including COVID-19, or the fear of a potential pandemic, poses the risk that we or our employees, contractors, suppliers, and other partners may be prevented from conducting business activities for an indefinite period of time, and our customers may be prevented from purchasing our products, due to shutdowns, “stay at home” mandates or other preventative measures that may be requested or mandated by governmental authorities. The governments of many countries, states, cities and other geographic regions have taken such preventative or protective actions, such as imposing restrictions on travel and business operations and advising or requiring individuals to limit or forego their time outside of their homes. Temporary closures of businesses have previously been ordered and numerous other businesses have been forced to temporarily close. Such actions have created a disruption in global supply chains, and adversely impacted many industries. To date, the only effect of the pandemic on our operations, which have been fairly minor, is that the pandemic prevented us from traveling to making sales calls on our primary client groups of physicians and other health and wellness providers, which has delayed our marketing plans. The outbreak could have a continued adverse impact on economic and market conditions and trigger a period of global economic slowdown, which could affect the future sales of our products, which have been minimal to date.
If the pandemic persists, closures or other restrictions on the conduct of business operations of our third-party manufacturers, suppliers or vendors could disrupt our supply chain. Additionally, the increased global demand on shipping and transport services may cause us to experience delays in the future which could impact our ability to obtain materials or deliver our products in a timely manner. These factors could otherwise disrupt our operations and could have an adverse effect on our business, financial condition and results of operations-which disruptions, as discussed above, have been only minor to date.
There is a possibility that COVID-19 will negatively affect our results of operations. If Government-mandated closures continue or increase, we may be unable to market our product as planned, which could negatively affect our revenues, growth and ability to raise capital. The global impact of COVID-19 continues to evolve rapidly, and the extent of its effect on our operational and financial performance will depend on future developments, which are highly uncertain, including the duration, scope and severity of the pandemic, the actions taken to contain or mitigate its impact, and the direct and indirect economic effects of the pandemic and related containment measures, among others.
Even after the pandemic subsides, our business could also be negatively impacted should the effects of COVID-19 lead to changes in consumer behavior, including as a result of a decline in discretionary spending.
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Moreover, future events could cause global financial conditions to suddenly and rapidly destabilize, and governmental authorities may have limited resources to respond to such future crises. Future crises may be precipitated by any number of causes, including natural disasters, geopolitical instability, changes to energy prices or sovereign defaults. Any sudden or rapid destabilization of global economic conditions could negatively impact our ability to obtain equity or debt financing. If increased levels of volatility in the business community continue including, but not limited to, short supplies of raw materials, shipping prices, or restrictions on propellants which contain propellant grade HFC 134a/P (“HFC”). Presently, the EPA has issued public notice regarding this, but no apparent action has occurred. See EPA-HQ-OAR-2021-0669; FRL-9116-01-OAR: Phasedown of Hydrofluorocarbons: Notice of 2022 Allowance Allocations for Production and Consumption of Regulated Substances under the American Innovation and Manufacturing Act of 2020, or if there is a rapid destabilization of global economic conditions or a prolonged recession resulting from the pandemic, it would likely materially affect our business and the value of our securities.
The long-term health impacts associated with use of hemp derivative products are unknown.
Although there is a long history of human consumption of hemp, there is little in the way of studies on the long-term effects of hemp products use on human health. As such, there are inherent risks associated with using the Company’s hemp products. Previously unknown or unforeseeable adverse reactions arising from human consumption of hemp products may occur and consumers should consume hemp products at their own risk or in accordance with the direction of a health care practitioner. Such adverse reactions could lead to litigation involving the Company, and the Company could ultimately face significant damages and liability in certain cases in connection with such litigation and/or may have to expend significant resources defending itself against claims associated with its products and/or the health effects thereof.
Our products may be subject to recalls for a variety of reasons.
Manufacturers and distributors of products, such as those of the Company, are sometimes subject to recall or return orders for a variety of reasons, including product defects, such as contamination, unintended harmful side effects or interactions with other substances, packaging safety and inadequate or inaccurate labeling disclosure. If any of the products produced by us are recalled due to an alleged product defect or for any other reason, we could be required to incur the unexpected expense of the recall and any legal proceedings that might arise in connection with the recall. We may lose a significant number of sales and may not be able to replace those sales at an acceptable margin or at all. In addition, a product recall may require significant management attention. There can be no assurance that any quality, potency or contamination problems will be detected in time to avoid unforeseen product recalls, regulatory action or lawsuits, whether frivolous or otherwise. Additionally, if any of the products produced by us were subject to recall, the reputation and goodwill of that product and/or us could be harmed. A recall for any of the foregoing reasons could lead to decreased demand for our products and could have a material adverse effect on our business, financial condition and results of operations. Additionally, product recalls may lead to increased scrutiny of our operations by regulatory agencies, requiring further management attention, increased compliance costs and potential legal fees, fines, penalties and other expenses. Furthermore, any product recall affecting the hemp industry more broadly could lead consumers to lose confidence in the safety and security of our products, which could have a material adverse effect on our business, financial condition and results of operations.
We are subject to product liability regarding our products, which could result in costly litigation and settlements.
As a distributor of hemp products, the Company faces an inherent risk of exposure to product liability claims, regulatory action and litigation if its products are alleged to have caused significant loss or injury. In addition, the sale of our products involves the risk of injury to consumers due to tampering by unauthorized third parties or product contamination. Previously unknown adverse reactions resulting from human consumption of our products alone or in combination with other medications or substances could occur. We may be subject to various product liability claims, including, among others, that our products caused injury or illness, include inadequate instructions for use or include inadequate warnings concerning possible side effects or interactions with other substances. A product liability claim or regulatory action against the Company could result in increased costs, could adversely affect our reputation with our clients and consumers generally, and could have a material adverse effect on our results of operations and financial condition of the Company.
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The hemp industry faces strong opposition.
The Company believes it is possible that large, well-funded businesses may have a strong economic opposition to the hemp industry. The hemp industry could face a material threat from the pharmaceutical industry, should hemp cannabinoids displace other drugs or encroach upon the pharmaceutical industry’s products. The pharmaceutical industry is well funded with a strong and experienced lobby that has greater funding than the hemp industry. Any inroads the pharmaceutical industry could make in halting or impeding the hemp industry would harm our business, prospects, results of operation and financial condition.
The results of future clinical research may negatively impact our business.
Research in the U.S. and internationally regarding the medical benefits, viability, safety, efficacy, dosing and social acceptance of hemp isolated cannabinoids (such as CBD or CBG) remains in the early stages. There have been relatively few clinical trials on the benefits of hemp extracts or isolated cannabinoids (such as CBD and CBG). Future research studies and clinical trials may reach negative conclusions regarding the medical benefits, viability, safety, efficacy, dosing, social acceptance or other facts and perceptions related to hemp, which could have a material adverse effect on the demand for our products with the potential to lead to a material adverse effect on our business, financial condition, results of operations or prospects.
The lack of reliable data on the hemp industry may negatively impact our results of operations.
As a result of recent and ongoing regulatory and policy changes in the hemp industry, the market data available is limited and unreliable. Until the passage of the 2018 Farm bill, hemp manufacturing was illegal at the Federal level which prevented market research. Therefore, market research and projections by the Company of estimated total retail sales, demographics, demand, and similar consumer research, are based on assumptions from limited and unreliable market data, and generally represent the personal opinions of our management team as of the date of this Report.
Hemp companies are subject to recent SEC investor fraud alerts and have been under greater scrutiny by the SEC than companies in other industries.
The SEC has issued an investor alert cautioning investors that scam artists often exploit “hot” industries to trick investors, including by making false promises of high returns with low risks, and that the SEC regularly receives complaints about marijuana-related investments. Consequently, such companies and offerings are often subject to heightened regulatory scrutiny. In the United States, regulators in various states have requested additional information on hemp company financings and in some cases have issued subpoenas for additional information. Due to these concerns, the Company may face more scrutiny than it would if the Company was in another industry, and may become subject to proceedings, fines, and penalties in the future.
We may be unable to obtain our cleanroom ISO levels, which may lead to contamination of our products.
Our planned filling facility or MDI laboratory and isolate production lab is expected to be certified to ISO 13485 standards for manufacturing of medical devices. This standard is one that FDA approved products are commonly manufactured in and allows us to formulate and manufacture our products in a sterile environment. In the event we fail to maintain certain cleanroom or GMP standards, we may be unable to prevent contaminants from being introduced into our mixing or filling processes. Such contaminants may cause our products to be adulterated, which would be a violation of food and drug safety requirements for purity, and which in turn could cause an adverse reaction in end users of our products, which could result in claims for damages and product safety, fines, damages, losses, and a negative effect on our brand name, any one of which could cause the value of our securities to decrease.
We are dependent upon our current management, who may have conflicts of interest.
We are dependent upon the efforts of our current management. The majority of our officers and directors have duties and affiliations with other companies, Such involvement of our officers and directors in other businesses may therefore present a conflict of interest regarding decisions they make for the Company or with respect to the amount of time available for the Company. The loss of any of our officers or directors and, in particular, Mr. Donal R. Schmidt, Jr., our Chief Executive Officer, or Mr. D. Hughes Watler, Jr., our Chief Financial Officer, could have a
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materially adverse effect upon our business and future prospects. We do not have key man life insurance upon the life of any of our officers or directors.
We could be subject to hackers or ransomware.
We work with sensitive pharmaceutical information including, but not limited to, trade secrets, pending patents and potentially patentable intellectual property rights. This makes us a potential target for hackers and malware or ransom ware. We employee the most up to date practices we can afford to account for this type of risk. We maintain two (2) outside consultants to regularly review and monitor our systems. With respect to online sales, we rely on large vendors to provide security as most organizations due. We have special corporate rules for management of our IP as it is developed and transmitted to our attorneys in the patent areas including not being connect to the internet.
Risks Related to Our Financial Statements
We have identified material weaknesses in our disclosure controls and procedures and internal control over financial reporting. If not remediated, our failure to establish and maintain effective disclosure controls and procedures and internal control over financial reporting could result in material misstatements in our financial statements and a failure to meet our reporting and financial obligations, each of which could have a material adverse effect on our financial condition and the trading price of our securities.
Maintaining effective internal control over financial reporting and effective disclosure controls and procedures are necessary for us to produce reliable financial statements. As reported in this Report, we have determined that our disclosure controls and procedures and our internal control over financial reporting were not effective at the reasonable assurance level, primarily due to a lack of segregation of duties in financial reporting, as of December 31, 2021, and continue to be ineffective. Separately, management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021, and determined that such internal control over financial reporting was not effective as a result of such assessment; and further have not been effective since prior to March 31, 2020.
Additionally, in connection with the most recent year end audit, the Company’s independent auditors recommended that management improve their processes and identified certain material weaknesses in inventory control. The Company plans to address such material weaknesses and auditor recommendations once the Company has raised additional funding and is able to better segregate duties of personnel.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. Accordingly, a material weakness increases the risk that the financial information we report contains material errors. A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis.
Maintaining effective disclosure controls and procedures and effective internal control over financial reporting are necessary for us to produce reliable financial statements and the Company is committed to remediating its material weaknesses in such controls as promptly as possible. However, there can be no assurance as to when these material weaknesses will be remediated or that additional material weaknesses will not arise in the future. Any failure to remediate the material weaknesses, or the development of new material weaknesses in our internal control over financial reporting, could result in material misstatements in our financial statements and cause us to fail to meet our reporting and financial obligations on a timely and accurate basis. If our financial statements are not accurate, investors may not have a complete understanding of our operations or may lose confidence in our reported financial information. Likewise, if our financial statements are not filed on a timely basis as required by the SEC, OTC Markets, any stock exchange or The NASDAQ Capital Market (“NASDAQ”), as applicable, we could face severe consequences from those authorities. In any of these cases, it could result in a material adverse effect on our business, on our financial condition or have a negative effect on the trading price of our securities. Further, if we fail to remedy this deficiency (or any other future deficiencies) or maintain the adequacy of our disclosure controls and procedures and our internal controls, we could be subject to regulatory scrutiny, civil or criminal penalties or shareholder litigation against us or our management.
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We can give no assurance that the measures we have taken and plan to take in the future will remediate the material weakness identified or that any additional material weaknesses or restatements of our financial statements will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting or circumvention of those controls.
Further, in the future, if we cannot conclude that we have effective internal control over our financial reporting, or if our independent registered public accounting firm is unable to provide an unqualified opinion regarding the effectiveness of our internal control over financial reporting, investors could lose confidence in the reliability of our financial statements, which could lead to a decline in our stock price. Failure to comply with reporting requirements could also subject us to sanctions and/or investigations by the SEC, OTC Markets, any stock exchange or NASDAQ, as applicable, or other regulatory authorities.
In addition, even if we are successful in strengthening our controls and procedures, those controls and procedures may not be adequate to prevent or identify irregularities or facilitate the fair presentation of our financial statements or our periodic reports filed with the SEC.
Regulatory, Licensing and Related Risks
We operate in highly regulated industries where the regulatory environments are rapidly developing and we may not always succeed in complying fully with applicable regulatory requirements in all jurisdictions where we carry on business.
Our business and activities are heavily regulated and are subject to various laws, regulations and guidelines by governmental authorities (including, in the U.S., the Food and Drug Administration (FDA), the United States Department of Agriculture (USDA), Drug Enforcement Administration (DEA) and the Federal Trade Commission (FTC) and analogous state agencies, including, but not limited to, the Texas Department of State Health Services), relating to, among other things, the manufacture, marketing, management, transportation, storage, sale, pricing and disposal of hemp-based products, and also including laws, regulations and guidelines relating to health and safety, insurance coverage, the conduct of operations and the protection of the environment (including relating to emissions and discharges to water, air and land, the handling and disposal of hazardous and non-hazardous materials and wastes). Our products are not approved by the FDA or under the Federal Food Drug and Cosmetics Act (FFDCA), or the state of Texas (or any other state). Our operations may also be affected in varying degrees by government regulations with respect to, but not limited to, price controls, export controls, controls on currency remittance, increased income taxes, restrictions on foreign investment and government policies rewarding contracts to local competitors or requiring domestic producers or vendors to purchase supplies from a particular jurisdiction. Laws, regulations and guidelines, applied generally, grant government agencies and self-regulatory bodies broad administrative discretion over our activities, including the power to limit or restrict business activities as well as impose additional disclosure requirements on our products and services.
Achievement of our business objectives is contingent, in part, upon compliance with regulatory requirements enacted by these governmental authorities and obtaining all necessary regulatory approvals for the production, storage, transportation, sale, import and export, as applicable, of our products. The hemp industry is still a new industry. The effect of relevant governmental authorities’ administration, application and enforcement of their respective regulatory regimes and delays in obtaining, or failure to obtain, applicable regulatory approvals which may be required may significantly delay or impact the development of markets, products and sales initiatives and could have a material adverse effect on our business, financial condition and results of operations. For example, in the U.S., registered federal trademark protection is only available for goods and services that can be lawfully used in interstate commerce; and the U.S. Patent and Trademark Office (USPTO) is not currently approving any trademark applications for hemp, or certain goods containing U.S. hemp-derived CBD.
The regulatory environment for our products is rapidly developing, and the need to build and maintain robust systems to comply with different and changing regulations in multiple jurisdictions increases the possibility that we may violate one or more applicable requirements. While we endeavor to comply with all relevant laws, regulations and guidelines, any failure to comply with the regulatory requirements applicable to our operations could subject us to negative consequences, including, civil and criminal penalties, damages, fines, the curtailment or restructuring of our operations, asset seizures, revocation or imposition of additional conditions on licenses to operate our business, the denial of regulatory applications (including, in the U.S., by other regulatory regimes that rely on the positions of the DEA, FDA and USDA in the application of their respective regimes), the suspension or expulsion from a particular market or jurisdiction or of our key personnel, or the imposition of additional or more
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stringent inspection, testing and reporting requirements, any of which could materially adversely affect our business and financial results. In the United States, failure to comply with FDA and USDA requirements (and analogous state agencies, including the requirements of the Texas Department of State Health Services) may result in, among other things, injunctions, product withdrawals, recalls, product seizures, fines and criminal prosecutions. The outcome of any regulatory or agency proceedings, investigations, audits, and other contingencies could harm our reputation, require us to take, or refrain from taking, actions that could harm our operations or require us to pay substantial amounts of money, harming our financial condition. Increasingly, communication and coordination among regulators has led in other industries to coordinated responses to regulatory and licensure applications. To the extent that regulators coordinate responses to license applications and regulatory conditions, limitations or denials of licenses in one jurisdiction may lead to denials in other jurisdictions. There can be no assurance that any pending or future regulatory or agency proceedings, investigations and audits will not result in substantial costs or a diversion of management’s attention and resources, negatively impact our future growth plans and opportunities or have a material adverse impact on our business and financial condition.
The State of Texas legalized the manufacturing, consumption and export of legal hemp products containing CBD under Texas House Bill 1325 signed by Governor Abbott on June 10, 2019 and we were recently granted a Consumable Hemp Product license. While the Company believes that it meets all known requirements of a license for manufacture of legal hemp products, there is no guarantee that the State of Texas will renew the license and/or will not revoke such license, and if either of those events occur, the Company may be forced to move its operations to another state or curtail its operations altogether. The cost of moving its operations and/or penalties or fines in connection with its failure to obtain a license, may have a material adverse effect on the Company’s results of operations and the value of its securities.
We are constrained by law in our ability to market and advertise our products.
Our marketing and advertising are subject to regulation by various regulatory bodies in the jurisdictions we operate. In the United States, our advertising is subject to regulation by the FTC under the Federal Trade Commission Act as well as the FDA under the FFDCA and USDA, including as amended by the Dietary Supplement Health and Education Act of 1994, and by state agencies under analogous and similar state and local laws. Some U.S. states also permit content, advertising and labeling laws to be enforced by state attorney generals, who may seek civil and criminal penalties, relief for consumers, Class Action certifications, class wide damages and recalls of products sold by us. There has also been a recent increase in private litigation that seeks, among other things, relief for consumers, Class Action certifications, class wide damages and recalls of products. We could become a target of such private Class Action litigation. Any actions against us by governmental authorities or private litigants could have a material and adverse effect on our business, financial condition, operating results, liquidity, cash flow and operational performance.
The license we have to use and commercialize the ‘Desirick Procedure’ is only exclusive in four states, and even in those states, is subject to licenses which were existing as of February 9, 2021.
On February 9, 2021, EM3 provided us a royalty-free, perpetual license (unless terminated by the Company) 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 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, 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 such pre-existing licensing rights), and on a non-exclusive basis throughout the rest of the world, in consideration for $10. As such, while our license is exclusive in the four states described above, such license is subject to pre-existing license rights which existed as of February 9, 2021, and is non-exclusive in every other state and throughout the world. Consequently, competitors could compete against us in other states, and throughout the rest of the world using the licensed intellectual property, or may already have license rights to the intellectual property in those four states, which remain valid under the terms of the February 9, 2021 license. As a result, we may face competition for our products and future products using the licensed intellectual property and may have no remedy to prevent such competition pursuant to the terms of the license.
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Each State and other jurisdiction has its own licensing requirements and regulations when it comes to the sale of cannabinoid products.
We plan to offer products in states other than Texas, California, Florida and Nevada in the future and in foreign jurisdictions. Each state and foreign jurisdiction has its own licensing requirements and regulations. As such, we will need to comply with various rules and requirements which may not be consistent from one jurisdiction to another. The failure to comply with applicable rules and requirements could result in us being prohibited from offering our products in a jurisdiction, fines, penalties or other liabilities. Furthermore, significant resources will be needed to stay on top of changing regulations and requirements to ensure compliance with changes in laws. In the event we fail to comply with applicable laws it could have a material adverse effect on our results of operations and the value of our securities.
The FDA has not approved any of the Company’s products.
While the Company’s MDIs are made using FDA listed cans, valves, actuators, propellant and excipients, the Company’s products have not been approved by the FDA-provided that no approval for such products has been sought. To date the Company is only aware of one hemp or CBD product which is FDA approved. The Company and (to the Company’s knowledge) the entire CBD marketplace sells products under the “no enforcement position” of the FDA, which has not been codified (as discussed in greater detail below under “Item 1. Business-Description of Business-Regulation“). The lack of FDA approval may prevent market acceptance of our products, result in liability from consumers, or potentially result in liability from the FDA in the future, any one of which could have a material adverse effect on our results of operations.
The propellants we use in our products contain greenhouse gases and may be subject to future restrictions or limitations on use.
The propellants we use in our products contain greenhouse gases. The U.S. government, under President Biden, has initiated a renewed push to reduce the use of greenhouse gases, which have been found to have an impact on global climate. In the event the specific propellants we use in our products are restricted, limited, or phased out, or it becomes more expensive for us to obtain such propellants in the future, our expenses may increase and we may be forced to reformulate our products to use different propellants, which may be costly and/or time consuming, or may produce inferior products. Any of the above may cause the value of our securities to decline and may have an adverse effect on our revenues and results of operations.
Because we manufacture and sell CBD products, it is possible that, in the future, we may have difficulty accessing the service of banks.
While industrial hemp cultivation was legalized by the 2018 Farm Bill, the FDA is choosing to regulate certain hemp products, including CBD. It is possible that the circumstances surrounding the FDA’s handling of CBD-related issues could cause us to have difficulty securing services from banks, in the future.
The FDA limits the ability to discuss the medical benefits of CBD.
Under FDA rules it is illegal for companies to make “health claims” or claim that a product has a specific medical benefit, without first getting FDA approval for such claim. The FDA has not recognized any medical benefits derived from CBD, which means that the Company is not legally permitted to advertise any potential health claims related to its CBD products. Because of the perception among many consumers that CBD is a health/medicinal product, the Company’s inability to make such health claims about its CBD products, may limit the Company’s ability to market and sell its product to consumers, which would negatively impact the Company’s revenues and profits.
Patent risks
There is no way to predict if our patents that are pending will be approved or will be enforceable or that we will have the financial capacity to enforce them in the future. In addition, patents are costly and may not ever have a commercial market.
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Risks Relating to Our Securities
There is no guarantee that our application to list our common stock and warrants on the Nasdaq Capital Market will be approved, and if our common stock and warrants are listed on the Nasdaq Capital Market, there can be no assurance that we will be able to comply with the Nasdaq Capital Market’s continued listing standards.
We have applied to list our common stock and certain warrants we plan to sell as part of a registered offering on the Nasdaq Capital Market under the symbols “ RTSL “ and “ RTSL WS “, respectively. There can be no assurance that the Nasdaq Capital Market will approve our application for the listing of our common stock and warrants. The approval process for the listing of our shares and the warrants on the Nasdaq Capital Market, or any other exchange, involves factors beyond our control.
Assuming that our common stock and warrants are listed, and assuming the consummation of our contemplated public offering, there can still be no assurance that any broker will be interested in trading our securities. Therefore, it may be difficult to sell your shares of common stock (or warrants) if you desire or need to sell them. Our underwriters in our public offering are not obligated to make a market in our securities, and even if they do make a market, they can discontinue market making at any time without notice. Neither we nor the underwriters can provide any assurance that an active and liquid trading market in our securities will develop or, if developed, that such market will continue.
If our common stock and warrants are approved for listing on the Nasdaq Capital Market, there is no guarantee that we will be able to maintain such listing for any period of time by perpetually satisfying the Nasdaq Capital Market’s continued listing requirements. Our failure to continue to meet these requirements may result in our securities being delisted from the Nasdaq Capital Market.
The absence of such a listing may adversely affect the acceptance of our common stock and warrants as currency or the value accorded by other parties. Further, if we are delisted, we would incur additional costs under state blue sky laws in connection with any sales of our securities. These requirements could severely limit the market liquidity of our common stock and warrants and the ability of our stockholders to sell our common stock and warrants in the secondary market. If our common stock and/or warrants are delisted by the Nasdaq Capital Market, our common stock and/or warrants may be eligible to trade on an over-the-counter quotation system, such as the OTCQB Market or the OTC Pink Market, where an investor may find it more difficult to sell our securities or obtain accurate quotations as to the market value of our securities. In the event our common stock and/or warrants are delisted from the Nasdaq Capital Market in the future, we may not be able to list our common stock or warrants on another national securities exchange or obtain quotation on an over-the counter quotation system.
Your ownership may be diluted if additional capital stock is issued to raise capital, to finance acquisitions or in connection with strategic transactions.
We will need to raise additional funds to expand our operations or finance acquisitions by issuing equity or convertible debt securities, which would reduce the percentage ownership of our existing stockholders. Our board of directors has the authority, without action or vote of the stockholders, to issue all or any part of our authorized but unissued shares of common stock. Our amended articles of incorporation authorize us to issue up to 750,000,000 shares of common stock and up to 100,000,000 shares of “blank check” preferred stock, of which 16,500,000 shares are designated as Series A Convertible Preferred Stock. Future issuances of common stock or of certain types of preferred stock could reduce your influence over matters on which stockholders vote and/or dilute the voting power if your stock, and could be dilutive to earnings per share.
The issuance and sale of common stock upon conversion of the Debenture and exercise of the Offering Warrants and Placement Warrants may depress the market price of our common stock.
If sequential conversions of the Debenture and sales of such converted shares, or exercises of the Offering Warrants and Placement Warrants, and sales of such exercised shares, take place, the price of our common stock may decline. In the future, the shares of common stock which the Debenture is convertible into and the Offering Warrants and Placement Warrants are exercisable for, may be sold without restriction pursuant to Rule 144. As a result, the sale of these shares may adversely affect the market price, if any, of our common stock. To the extent the shares of common stock underlying the Offering Warrants and Placement Warrants are not registered under the Securities Act, the holders of such Offering Warrants and Placement Warrants will have ‘cashless exercise’ rights.
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In addition, the common stock issuable upon conversion of the Debenture and exercise of the Offering Warrants and Placement Warrants may represent overhang that may also adversely affect the market price of our common stock. Overhang occurs when there is a greater supply of a company’s stock in the market than there is demand for that stock. When this happens the price of the company’s stock will decrease, and any additional shares which shareholders attempt to sell in the market will only further decrease the share price. If the share volume of our common stock cannot absorb the shares issuable upon conversion of the Debenture and/or exercise of the Offering Warrants and Placement Warrants, then the value of our common stock will likely decrease. If the Offering Warrants and/or Placement Warrants are exercised on a ‘cashless’ basis we will not receive any cash upon such exercise.
The issuance of common stock upon conversion of the Debenture and upon exercise of the Offering Warrants will cause immediate and substantial dilution.
The issuance of common stock upon conversion of the Debenture and upon exercise of the Offering Warrants will result in immediate and substantial dilution to the interests of other stockholders since the holders of the Debenture and Offering Warrants may ultimately receive and sell the full number of shares issuable in connection with the conversion and exercise of such securities. Although the Debenture may not be converted and Offering Warrants may not be exercised if such conversion/exercise would cause the holders thereof to own more than 4.99% of our outstanding common stock (which percentage may be increased to 9.99% with 61 days prior written notice), this restriction does not prevent the holders subject to such restrictions from converting/exercising some of their holdings, selling those shares, and then converting the rest of its holdings, while still staying below the 4.99%/9.99% limit. In this way, the holders of the Debenture and Offering Warrants could sell more than any applicable ownership limit while never actually holding more shares than the applicable limits allow. If the holders of the Debenture and Offering Warrants choose to do this, it will cause substantial dilution to the then holders of our common stock.
We currently owe a significant amount of money under our outstanding Debenture.
As of the date of this filing, we owe approximately $1,941,176 under the Debenture. We do not have sufficient funds to repay such Debenture which is due May 1, 2022, and if we are unable to raise additional funds in the future to repay such amount, which may not be available on favorable terms, if at all, or such amount does not convert into shares of common stock upon the closing of a future uplisting of our common stock, such failure could have a material adverse effect on our financial condition or results of operations and cause any investment in the Company to decline in value or become worthless.
Certain warrants we have granted include anti-dilutive rights
Warrants to purchase 5,095,587 shares of common stock which we granted in August 2021 which have an exercise price of $0.40 per share, have anti-dilution rights. Specifically, 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 warrants, subject to certain customary exceptions and the sale of up to $1.0 million in private transactions, (of which approximately $1.0 million is currently available) the exercise price of the 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 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. The warrants are exercisable until August 2026.
Shares issuable upon the conversion of convertible notes may substantially increase the number of shares available for sale in the public market and depress the price of our common stock.
As of the date of this Report, we owed approximately $2,115,000 under various convertible promissory notes. The conversion prices of the convertible notes initially vary between $0.05 per share and $0.40 per share, subject to a 4.99% ownership limitation for each beneficial owner of such notes. We also owe approximately $597,000 under various “contingently” convertible promissory notes which are convertible into our common stock, only upon default of such securities, at a conversion price equal to the greater of (a) $0.000075 per share (subject to equitable adjustment for stock splits and stock dividends); and (b) 75% of the average closing bid price of the Company’s common stock, on the principal securities exchange or market where the Company’s common stock is then quoted or traded, for the five trading days immediately prior to the date of conversion. As a result, any
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conversion of the convertible notes and sale of shares of common stock issuable in connection with the conversion thereof may cause the value of our common stock to decline. As of December 31, 2021, notes in the amount of $174,685, plus accrued interest in the amount of $38,685, remain outstanding and are available to be subsequently converted into 4,2687,360 shares of common stock, subject to the ownership limitations set forth therein.
To the extent that the holders of any of the foregoing notes elect to convert them into shares of common stock, there will be substantial dilution to existing stockholders.
In addition, the common stock issuable upon conversion of the convertible notes may represent overhang that may also adversely affect the market price of our common stock. Overhang occurs when there is a greater supply of a company’s stock in the market than there is demand for that stock. When this happens the price of the company’s stock will decrease, and any additional shares which shareholders attempt to sell in the market will only further decrease the share price. In the event of such overhang, the note holders will have an incentive to sell their common stock as quickly as possible. If the share volume of our common stock cannot absorb the discounted shares, then the value of our common stock will likely decrease.
Certain of our outstanding convertible notes include restrictions on future activities.
So long as the Company has any obligation under the January 2022 Note or Suggs Note, the Company is prohibited from selling, leasing or otherwise disposing of any significant portion of its assets outside the ordinary course of business without the prior written consent of the holders of such notes. Such restrictions may prevent the Company from raising funds through the sale of assets and/or result in the default of certain of the Company’s outstanding obligations, which could have a material adverse effect on the Company’s results of operations and the value of its securities.
The concentration of our common stock ownership by our current management will limit your ability to influence corporate matters.
Our directors and executive officers beneficially own and are able to vote in the aggregate 26.5% of our outstanding common stock, provided that our directors, executive officers and certain employees together can vote over 50% of our outstanding common stock. As such, our directors and executive officers, as stockholders, will continue to have the ability to exert significant influence over all corporate activities, including the election or removal of directors and the outcome of tender offers, mergers, proxy contests or other purchases of common stock that could give our stockholders the opportunity to realize a premium over the then-prevailing market price for their shares of common stock. This concentrated control will limit your ability to influence corporate matters and, as a result, we may take actions that our stockholders do not view as beneficial. In addition, such concentrated control could discourage others from initiating changes of control. In such cases, the perception of our prospects in the market may be adversely affected and the market price of our common stock may decline.
We could issue “blank check” preferred stock without stockholder approval with the effect of diluting then current stockholder interests and impairing their voting rights, and provisions in our charter documents and under Nevada corporate law could discourage a takeover that stockholders may consider favorable.
Our Amended and Restated Articles of Incorporation authorize the issuance of up to 100,000,000 shares of “blank check” preferred stock with designations, rights and preferences as may be determined from time to time by our board of directors. Our board of directors is empowered, without stockholder approval, to issue a series of preferred stock with dividend, liquidation, conversion, voting or other rights which could dilute the interest of, or impair the voting power of our common stockholders. The issuance of a series of preferred stock could be used as a method of discouraging, delaying or preventing a change in control.
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, if issued, and the shares of common stock issuable upon conversion thereof, will cause significant dilution to existing stockholders.
Pursuant to certain contractual obligations, we have agreed to issue up to 8.25 million shares of Series A Preferred Stock, 2 million shares of Series B Preferred Stock and 8.5 million shares of Series C Preferred Stock. Each of such shares of preferred stock, if earned, allow the holders thereof the right to, or in the case of the Series B and Series C Preferred Stock, provided for the automatic conversion thereof into, common stock on a one-for-one basis, on the second anniversary of the agreement pursuant to which they are contingently issuable. In the event
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shares of Series B Preferred Stock and/or Series C Preferred Stock are earned and converted into common stock, such conversions of preferred stock will create significant dilution to existing stockholders.
In addition, the common stock issuable upon conversion of the Series A, B and C Preferred Stock may represent overhang that may also adversely affect the market price of our common stock. Overhang occurs when there is a greater supply of a company’s stock in the market than there is demand for that stock. When this happens the price of the company’s stock will decrease, and any additional shares which stockholders attempt to sell in the market will only further decrease the share price. In the event of such overhang, the Series A, B and C Preferred Stock will have an incentive to sell their common stock as quickly as possible. If the share volume of our common stock cannot absorb the discounted shares, then the value of our common stock will likely decrease.
Stockholders may be diluted significantly through our efforts to obtain financing and satisfy obligations through the issuance of additional shares of our common stock.
Wherever possible, our Board of Directors will attempt to use non-cash consideration to satisfy obligations. In many instances, we believe that the non-cash consideration will consist of restricted shares of our common stock or where shares are to be issued to our officers, directors and applicable consultants. Our Board of Directors has authority, without action or vote of the stockholders, to issue all or part of the authorized but unissued shares of common stock. In addition, we may attempt to raise capital by selling shares of our common stock, possibly at a discount to market. These actions will result in dilution of the ownership interests of existing stockholders, which may further dilute common stock book value, and that dilution may be material. Such issuances may also serve to enhance existing management’s ability to maintain control of the Company because the shares may be issued to parties or entities committed to supporting existing management.
There is no material public market for our common stock.
Our securities are currently quoted on the OTC Pink Market maintained by OTC Markets. We currently have a volatile, sporadic and illiquid market for our common stock, which is subject to wide fluctuations in response to several factors. The trading price of our common stock and warrants is likely to continue to be volatile. This volatility may prevent you from being able to sell your securities at or above the price you paid for your securities. Our stock price could be subject to wide fluctuations in response to a variety of factors, which include:
·actual or anticipated variations in our results of operations;
·our ability or inability to generate revenues;
·the number of shares in our public float;
·increased competition; and
·conditions and trends in the market for our services and products.
Our stock price may be impacted by factors that are unrelated or disproportionate to our operating performance. These market fluctuations, as well as general economic, political and market conditions, such as recessions, interest rates or international currency fluctuations may adversely affect the market price of our common stock. Shareholders and potential investors in our common stock should exercise caution before making an investment in us, and should not rely solely on the publicly quoted or traded stock prices in determining our common stock value, but should instead determine the value of our common stock based on the information contained in our public disclosures, industry information, and those business valuation methods commonly used to value private companies.
Additionally, the market price of our common stock historically has fluctuated significantly based on, but not limited to, such factors as general stock market trends, announcements of developments related to our business, actual or anticipated variations in our operating results, our ability or inability to generate revenues, and conditions and trends in the industries in which our customers are engaged.
In recent years, the stock market in general has experienced extreme price fluctuations that have sometimes been unrelated to the operating performance of the affected companies. Similarly, the market price of our common
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stock may fluctuate significantly based upon factors unrelated or disproportionate to our operating performance. These market fluctuations, as well as general economic, political and market conditions, such as recessions, interest rates or international currency fluctuations may adversely affect the market price of our common stock.
There may not be sufficient liquidity in the market for our securities in order for investors to sell their shares. The market price of our common stock may be volatile.
The market price of our common stock will likely be highly volatile, as is the stock market in general. Some of the factors that may materially affect the market price of our common stock are beyond our control, such as conditions or trends in the industry in which we operate or sales of our common stock. This situation is attributable to a number of factors, including the fact that we are a small company which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable.
As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a mature issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. It is possible that a broader or more active public trading market for our common stock will not develop or be sustained, or that trading levels will not continue. These factors may materially adversely affect the market price of our common stock, regardless of our performance. In addition, the public stock markets have experienced extreme price and trading volume volatility. This volatility has significantly affected the market prices of securities of many companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of our common stock.
Trading on the OTC Markets is volatile, illiquid and sporadic, which could depress the market price of our common stock and make it difficult for our security holders to resell their common stock.
Our common stock is quoted on the OTC Pink Market tier of the OTC Markets. We have applied to list our common stock on The NASDAQ Capital Market, however, such application has not been approved to date, and we do not currently meet the listing requirements of the Nasdaq Capital Market. As such, that listing is not guaranteed, and we may never be able to list our common stock on NASDAQ or the NYSE American. If such listing is not approved, our common stock will continue to be quoted on the OTC Pink Market. Trading in securities quoted on the OTC Markets, such as our common stock, is often thin and characterized by wide fluctuations in trading prices, due to many factors, some of which may have little to do with our operations or business prospects. This volatility could depress the market price of our common stock for reasons unrelated to operating performance. Moreover, the OTC Markets is not a stock exchange, and trading of securities on the OTC Markets is often more sporadic than the trading of securities listed on a quotation system like NASDAQ or a stock exchange like the New York Stock Exchange. These factors may result in investors having difficulty reselling any shares of our common stock. Over the past 52 weeks our common stock has been subject to significant swings in trading prices, and has traded between a low of $0.14 to a high of $0.715. We expect the trading prices of our common stock to continue to be highly illiquid, sporadic and volatile in the future.
We will incur significant costs to ensure compliance with U.S. and Nasdaq Capital Market reporting and corporate governance requirements, in the event our common stock and certain warrants are approved for listing on the Nasdaq Capital Market.
We will incur significant costs associated with our public company reporting requirements and with applicable U.S. and Nasdaq Capital Market corporate governance requirements (assuming our common stock and certain warrants are approved for listing on the Nasdaq Capital Market, of which there can be no assurance), including requirements under the Sarbanes-Oxley Act of 2002 and other rules implemented by the SEC and the Nasdaq Capital Market. We expect all of these applicable rules and regulations to significantly increase our legal and financial compliance costs and to make some activities more time consuming and costly. We also expect that these applicable rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our Board of Directors or as executive officers.
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In the event our common stock and certain warrants are approved for listing on the Nasdaq Capital Market, we will need to meet certain continued listing requirements in order to not have our common stock and warrants delisted from such markets.
We have filed an application to list our common stock and certain warrants on the Nasdaq Capital Market. Such application has not yet been approved and any future uplisting will be subject to various conditions which may not be met on a timely basis, if at all, including completion of a planned underwritten offering and the trading of our common stock at above $4.00 per share for at least 30 of 60 trading days.
If our common stock and certain warrants are approved for listing on the Nasdaq Capital Market, but we fail to timely comply with the applicable requirements of the Nasdaq Capital Market, our stock may be delisted. In addition, even if we demonstrate compliance with the requirements below, we will have to continue to meet other objective and subjective listing requirements to continue to be listed on the applicable market. Among the conditions required for continued listing on the Nasdaq Capital Market are maintaining $2.5 million in stockholders’ equity, or a market value of listed securities of $35 million, or net income from continuing operations in the last fiscal year or two of the last three fiscal years of $500,000, having majority independent directors, having an audit committee of at least three members, and maintaining a stock price over $1.00 per share, among other requirements. Delisting from the Nasdaq Capital Market could make trading our common stock and warrants more difficult for investors, potentially leading to declines in our share price and liquidity. Without a Nasdaq Capital Market listing, stockholders may have a difficult time getting a quote for the sale or purchase of our stock, the sale or purchase of our stock would likely be made more difficult and the trading volume and liquidity of our stock could decline. Delisting from the Nasdaq Capital Market could also result in negative publicity and could also make it more difficult for us to raise additional capital. The absence of such a listing may adversely affect the acceptance of our common stock as currency or the value accorded by other parties. Further, if we are delisted, we would also incur additional costs under state blue sky laws in connection with any sales of our securities. These requirements could severely limit the market liquidity of our common stock and warrants and the ability of our stockholders to sell our common stock and warrants in the secondary market. If our common stock and warrants are delisted by the Nasdaq Capital Market , our common stock and warrants may be eligible to trade on an over-the-counter quotation system, such as the OTCQB market or OTC Pink Market, where an investor may find it more difficult to sell our stock or obtain accurate quotations as to the market value of our common stock and warrants. In the event our common stock and warrants are delisted from the Nasdaq Capital Market, we may not be able to list our common stock and warrants on another national securities exchange or obtain quotation on an over-the counter quotation system.
There is a limited public market for our common stock.
Our securities are currently quoted on the OTC Pink Market maintained by OTC Markets. We currently have a volatile, sporadic and illiquid market for our common stock, which is subject to wide fluctuations in response to several factors, including, but not limited to:
·actual or anticipated variations in our results of operations;
·our ability or inability to generate revenues;
·the number of shares in our public float;
·increased competition; and
·conditions and trends in the market for our services and products.
Our stock price may be impacted by factors that are unrelated or disproportionate to our operating performance. These market fluctuations, as well as general economic, political and market conditions, such as recessions, interest rates or international currency fluctuations may adversely affect the market price of our common stock. Stockholders and potential investors in our common stock should exercise caution before making an investment in us, and should not rely solely on the publicly quoted or traded stock prices in determining our common stock value, but should instead determine the value of our common stock based on the information contained in our public disclosures, industry information, and those business valuation methods commonly used to value private companies.
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Additionally, the market price of our common stock historically has fluctuated significantly based on, but not limited to, such factors as general stock market trends, announcements of developments related to our business, actual or anticipated variations in our operating results, our ability or inability to generate revenues, and conditions and trends in the industries in which our customers are engaged.
In recent years, the stock market in general has experienced extreme price fluctuations that have oftentimes been unrelated to the operating performance of the affected companies. Similarly, the market price of our common stock may fluctuate significantly based upon factors unrelated or disproportionate to our operating performance. These market fluctuations, as well as general economic, political and market conditions, such as recessions, interest rates or international currency fluctuations may adversely affect the market price of our common stock.
Our common stock is considered a “penny stock” under SEC rules and it may be more difficult to resell securities classified as “penny stock.”
Our common stock is a “penny stock” under applicable SEC rules (generally defined as non-exchange traded stock with a per-share price below $5.00). While our common stock will not be considered “penny stock” in the event it is listed on the Nasdaq Capital Market, if we are unable to list our common stock on the Nasdaq Capital Market or unable to maintain that listing, unless we maintain a per-share price above $5.00, our common stock will continue to be a “penny stock.” These rules impose additional sales practice requirements on broker-dealers that recommend the purchase or sale of penny stocks to persons other than those who qualify as “established customers” or “accredited investors.” For example, broker-dealers must determine the appropriateness for non-qualifying persons of investments in penny stocks. Broker-dealers must also provide, prior to a transaction in a penny stock not otherwise exempt from the rules, a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, disclose the compensation of the broker-dealer and its salesperson in the transaction, furnish monthly account statements showing the market value of each penny stock held in the customer’s account, provide a special written determination that the penny stock is a suitable investment for the purchaser, and receive the purchaser’s written agreement to the transaction.
Legal remedies available to an investor in “penny stocks” may include the following:
·If a “penny stock” is sold to the investor in violation of the requirements listed above, or other Federal or states securities laws, the investor may be able to cancel the purchase and receive a refund of the investment.
·If a “penny stock” is sold to the investor in a fraudulent manner, the investor may be able to sue the persons and firms that committed the fraud for damages.
These requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a security that becomes subject to the penny stock rules. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in our securities, which could severely limit the market price and liquidity of our securities. These requirements may restrict the ability of broker-dealers to sell our common stock and may affect your ability to resell our common stock.
Many brokerage firms will discourage or refrain from recommending investments in penny stocks. Most institutional investors will not invest in penny stocks. In addition, many individual investors will not invest in penny stocks due to, among other reasons, the increased financial risk generally associated with these investments.
For these reasons, penny stocks may have a limited market and, consequently, limited liquidity. We can give no assurance at what time, if ever, our common stock will not be classified as a “penny stock” in the future.
Risks Related to the Planned Reverse Stock Split
Effective on January 11, 2022, the Company’s majority shareholders voted 51.4% of the outstanding shares of the Company’s common stock, pursuant to a written consent in lieu of a special meeting of shareholders, to approve, among other things, the grant of discretionary authority for the Company’s Board of Directors, without further shareholder approval, to effect a reverse stock split of all of the outstanding common stock of the Company, by the filing of an amendment to the Company’s Articles of Incorporation with the Secretary of State of Nevada, in a ratio of between one-for-two and one-for-fifty, with the Company’s Board of Directors having the discretion as to
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whether or not the reverse split is to be effected, and with the exact exchange ratio of any reverse split to be set at a whole number within the above range as determined by the Board of Directors in its sole discretion, at any time before the earlier of (a) December 31, 2022; and (b) the date of the Company’s 2022 annual meeting of shareholders.
The Company filed a Definitive Information Statement on Schedule 14C in connection with the shareholder approval described above with the SEC on January 14, 2022, and subsequently mailed notice of such Information Statement to the Company’s shareholders. Pursuant to the rules of the SEC (and specifically Section 14(c) of the Exchange Act), the actions approved by the majority shareholders could not become effective any earlier than forty days after notice of the availability of the Information Statement was first sent to shareholders, which date was on or around February 28, 2022.
On March 4, 2022, the Board of Directors approved a 1-for-25 reverse stock split of the Company’s outstanding common stock, pursuant to the Shareholder Authority.
Notwithstanding such Board of Directors approval, the reverse stock split is subject to approval thereof by Financial Industry Regulatory Authority, Inc. (FINRA), which approval has not been received yet, may not be received on a timely basis, if all. The Board of Directors approved the reverse stock split in an effort to increase the trading price of the Company’s common stock to a level sufficient to allow an uplisting of the Company’s common stock on the Nasdaq Capital Market.
We anticipate effecting a reverse stock split of our outstanding common stock in the future.
We expect that the reverse stock split will increase the market price of our common stock while our stock is trading and enable us to meet the minimum market price requirement of the listing rules of the Nasdaq Capital Market. However, the effect of a reverse stock split upon the market price of our common stock cannot be predicted with certainty, and the results of reverse stock splits by companies in similar circumstances have been varied. It is possible that the market price of our common stock following the reverse stock split will not increase sufficiently for us to be in compliance with the minimum market price requirement of the Nasdaq Capital Market, or if it does, that such price will be sustained. If we are unable to meet the minimum market price requirement, we may be unable to list our shares on the Nasdaq Capital Market.
Even if the market price of our common stock increases sufficiently so that we comply with the minimum market price requirement, we cannot assure you that we will be able to comply with the other standards that we are required to meet in order to be approved for listing on the Nasdaq Capital Market or maintain a listing of our common stock on the Nasdaq Capital Market. Our failure to meet these requirements may result in our common stock being unable to be listed on the Nasdaq Capital Market.
The reverse stock split may decrease the liquidity of the shares of our common stock.
The liquidity of the shares of our common stock may be affected adversely by the reverse stock split given the reduced number of shares that will be outstanding following the reverse stock split. In addition, the reverse stock split may increase the number of stockholders who own odd lots (less than 100 shares) of our common stock, creating the potential for such stockholders to experience an increase in the cost of selling their shares and greater difficulty affecting such sales.
The reverse stock split may not increase our stock price over the long-term.
The principal purpose of the reverse stock split is to increase the per-share market price of our common stock. It cannot be assured, however, that the reverse stock split will accomplish this objective for any meaningful period. While it is expected that the reduction in the number of outstanding shares of common stock will proportionally increase the market price of the Company’s common stock, it cannot be assured that the reverse stock split will increase the market price of our common stock by a multiple of the proposed reverse stock split ratio, or result in any permanent or sustained increase in the market price of our common stock, which is dependent upon many factors, including our business and financial performance, general market conditions, and prospects for future success. Thus, while our stock price might meet the initial and continued listing requirements for The Nasdaq Capital Market initially, it cannot be assured that it will continue to do so.
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General Risk Factors
We will continue to incur increased costs as a result of being a reporting company, and given our limited capital resources, such additional costs may have an adverse impact on our profitability.
We are an SEC reporting company. The rules and regulations under the Exchange Act require reporting companies to provide periodic reports with interactive data files, which require that we engage legal, accounting and auditing professionals, and eXtensible Business Reporting Language (XBRL) and EDGAR (Electronic Data Gathering, Analysis, and Retrieval) service providers. The engagement of such services can be costly, and we may continue to incur additional losses, which may adversely affect our ability to continue as a going concern. In addition, the Sarbanes Oxley Act of 2002, as well as a variety of related rules implemented by the SEC, have required changes in corporate governance practices and generally increased the disclosure requirements of public companies. For example, as a result of being a reporting company, we are required to file periodic and current reports and other information with the SEC and we have adopted policies regarding disclosure controls and procedures and regularly evaluate those controls and procedures.
The additional costs we continue to incur in connection with becoming a reporting company (expected to be approximately a hundred thousand dollars per year) will continue to further stretch our limited capital resources. Due to our limited resources, we have to allocate resources away from other productive uses in order to continue to comply with our obligations as an SEC reporting company. Further, there is no guarantee that we will have sufficient resources to continue to meet our reporting and filing obligations with the SEC as they come due.
We may not be able to compete successfully against present or future competitors.
We do not have the resources to compete with larger providers of similar services at this time. With the limited resources we have available, we may experience great difficulties in expanding our operations. Competition from existing and future competitors could result in our inability to secure funding to expand our business. This competition from other entities with greater resources and experience may result in our failure to maintain or expand our business, as we may never be able to successfully execute our business plan.
We have no intention of declaring dividends in the foreseeable future.
The decision to pay cash dividends on our common stock rests with our board of directors and will depend on our earnings, unencumbered cash, capital requirements and financial condition. We do not anticipate declaring any dividends in the foreseeable future, as we intend to use any excess cash to fund our operations. Investors in our common stock should not expect to receive dividend income on their investment, and investors will be dependent on the appreciation of our common stock to earn a return on their investment.
Our ability to grow and compete in the future will be adversely affected if adequate capital is not available.
The ability of our business to grow and compete depends on the availability of adequate capital, which in turn depends in large part on our cash flow from operations and the availability of equity and debt financing. Our cash flow from operations may not be sufficient or we may not be able to obtain equity or debt financing on acceptable terms or at all to implement our growth strategy. As a result, adequate capital may not be available to finance our current growth plans, take advantage of business opportunities or respond to competitive pressures, any of which could harm our business.
We may be subject to claims that we violated intellectual property rights of others, which are extremely costly to defend and could require us to pay significant damages and limit our ability to operate.
There may be intellectual property rights held by others, including issued or pending patents and trademarks, that cover significant aspects of our technologies, products, branding or business methods. Any intellectual property claims against us, regardless of merit, could be time-consuming and expensive to settle or litigate and could divert our management’s attention and other resources. These claims also could subject us to significant liability for damages and could result in our having to stop using technology, products, branding or business methods found to be in violation of another party’s rights. We might be required or may opt to seek a license for rights to intellectual property held by others, which may not be available on commercially reasonable terms, or at all. If we cannot license or develop technology, products, branding or business methods for any
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allegedly infringing aspect of our business, we may be unable to compete effectively. Even if a license is available, we could be required to pay significant royalties, which could increase our operating expenses. We may also be required to develop alternative non-infringing technology, content, branding or business methods, which could require significant effort and expense and be inferior. Any of these results could harm our operating results.
If we do not successfully implement any acquisition strategies, our operating results and prospects could be harmed.
We face competition within our industry for acquisitions of businesses, technologies and assets, and, in the future, such competition may become more intense. As such, even if we are able to identify an acquisition that we would like to consummate, we may not be able to complete the acquisition on commercially reasonable terms or at all because of such competition. Furthermore, if we enter into negotiations that are not ultimately consummated, those negotiations could result in diversion of management time and significant out-of-pocket costs. Even if we are able to complete such acquisitions, we may additionally expend significant amounts of cash or incur substantial debt to finance them, which indebtedness could result in restrictions on our business and use of available cash. In addition, we may finance or otherwise complete acquisitions by issuing equity or convertible debt securities, which could result in dilution of our existing stockholders. If we fail to evaluate and execute acquisitions successfully, we may not be able to realize their benefits. If we are unable to successfully address any of these risks, our business, financial condition or operating results could be harmed.
Failure to adequately manage our planned aggressive growth strategy may harm our business or increase our risk of failure.
For the foreseeable future, we intend to pursue an aggressive growth strategy for the expansion of our operations through increased product development and marketing. Our ability to rapidly expand our operations will depend upon many factors, including our ability to work in a regulated environment, establish and maintain strategic relationships with suppliers, and obtain adequate capital resources on acceptable terms. Any restrictions on our ability to expand may have a materially adverse effect on our business, results of operations, and financial condition. Accordingly, we may be unable to achieve our targets for sales growth, and our operations may not be successful or achieve anticipated operating results.
Additionally, our growth may place a significant strain on our managerial, administrative, operational, and financial resources and our infrastructure. Our future success will depend, in part, upon the ability of our senior management to manage growth effectively. This will require us to, among other things:
·implement additional management information systems;
·further develop our operating, administrative, legal, financial, and accounting systems and controls;
·hire additional personnel;
·develop additional levels of management within our company;
·locate additional office space; and
·maintain close coordination among our operations, legal, finance, sales and marketing, and client service and support personnel.
As a result, we may lack the resources to deploy our services on a timely and cost-effective basis. Failure to accomplish any of these requirements could impair our ability to deliver services in a timely fashion or attract and retain new customers.
If we make any acquisitions, they may disrupt or have a negative impact on our business.
If we make acquisitions in the future, funding permitting, which may not be available on favorable terms, if at all, we could have difficulty integrating the acquired company’s assets, personnel and operations with our own. We do not anticipate that any acquisitions or mergers we may enter into in the future would result in a change of control of the Company. In addition, the key personnel of the acquired business may not be willing to work for us. We cannot predict the effect expansion may have on our core business. Regardless of whether we are successful in making an acquisition, the negotiations could disrupt our ongoing business, distract our management and employees and increase our expenses. In addition to the risks described above, acquisitions are accompanied by a number of inherent risks, including, without limitation, the following:
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·the difficulty of integrating acquired products, services or operations;
·the potential disruption of the ongoing businesses and distraction of our management and the management of acquired companies;
·difficulties in maintaining uniform standards, controls, procedures and policies;
·the potential impairment of relationships with employees and customers as a result of any integration of new management personnel;
·the potential inability or failure to achieve additional sales and enhance our customer base through cross-marketing of the products to new and existing customers;
·the effect of any government regulations which relate to the business acquired;
·potential unknown liabilities associated with acquired businesses or product lines, or the need to spend significant amounts to retool, reposition or modify the marketing and sales of acquired products or operations, or the defense of any litigation, whether or not successful, resulting from actions of the acquired company prior to our acquisition; and
·potential expenses under the labor, environmental and other laws of various jurisdictions.
Our business could be severely impaired if and to the extent that we are unable to succeed in addressing any of these risks or other problems encountered in connection with an acquisition, many of which cannot be presently identified. These risks and problems could disrupt our ongoing business, distract our management and employees, increase our expenses and adversely affect our results of operations.
Our Amended and Restated Articles of Incorporation provide for indemnification of officers and directors at our expense and limits their liability, which may result in a major cost to us and hurt the interests of our stockholders because corporate resources may be expended for the benefit of officers or directors.
Our Amended and Restated Articles of Incorporation require us to indemnify to the fullest extent under Nevada law, any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) by reason of the fact that he is or was a director or officer of the Company, or, while a director or officer of the Company, is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, association or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with which action, suit or proceeding, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal action or proceeding, that he had reasonable cause to believe that his conduct was unlawful. Our Amended and Restated Articles of Incorporation also provide that no director shall be personally liable to the Company, any of its stockholders or its creditors for money damages for breach of fiduciary duty as a director, except to the extent such exemption from liability or limitation thereof is not permitted under the Nevada Revised Statutes.
We have been advised that, in the opinion of the SEC, indemnification for liabilities arising under federal securities laws is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification for liabilities arising under federal securities laws, other than the payment by us of expenses incurred or paid by a director, officer or controlling person in the successful defense of any action, suit or proceeding, is asserted by a director, officer or controlling person in connection with our activities, we will (unless in the opinion of our counsel, the matter has been settled by controlling precedent) submit to a court of appropriate jurisdiction, the question whether indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The legal process relating to this matter if it were to occur is likely to be very costly and may result in us receiving negative publicity, either of which factors is likely to materially reduce the market and price for our shares, if such a market ever develops.
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Our common stock may continue to be followed by only a limited number of analysts and there may continue to be a limited number of institutions acting as market makers for our common stock.
For the foreseeable future, our common stock is unlikely to be followed by a significant number of market analysts, and there may be few institutions acting as market makers for our common stock. Either of these factors could adversely affect the liquidity and trading price of our common stock. Until an orderly market develops in our common stock, if ever, the price at which it trades is likely to fluctuate significantly. Prices for our common stock are determined in the marketplace and may be influenced by many factors, including the depth and liquidity of the market for shares of our common stock, developments affecting our business, including the impact of the factors referred to elsewhere in these Risk Factors, investor perception of us and general economic and market conditions. No assurances can be given that an orderly or liquid market will ever develop for the shares of our common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
From November 15, 2019 to June 30, 2021, our corporate and executive offices were located in an office space in Dallas, Texas, provided by the Company’s Chief Executive Officer at no cost or commitment to the Company. Effective June 30, 2021, the Company relocated to a new office that was leased from a third party, but was previously being utilized by us solely as a laboratory, for the remaining term of the lease agreement, which expired on December 31, 2021.
Effective October 1, 2021, the Company entered into a Commercial Lease Agreement with Triple D Rosegate, LLC to lease 8,566 square feet of commercial office building space located in Addison, Texas, at 4139 Centurion Way Suite 400 Addison, Texas 75001. The lease agreement is for a total term of 63 months, beginning October 1, 2021 and ending December 31, 2026. Rent payable under the lease is as follows:
Dates | Monthly Base Rent |
From October 1, 2021 to December 31, 2021 | $1.00 |
From January 1, 2022 to December 31, 2022 | $7,852 |
From January 1, 2023 to December 31, 2023 | $8,209 |
From January 1 2024 to December 31, 2024 | $8,566 |
From January 1, 2025 to December 31, 2025 | $8,923 |
From January 1, 2026 to December 31,2026 | $9,280 |
We paid a $9,280 security deposit in connection with our entry into the lease. We also agreed to pay our portion of the expenses of the property, including real estate taxes, insurance premiums and common area maintenance expenses, including our pro Rata Share of all costs of compliance with laws, ownership, maintenance, repairs, replacements, and operation of the property.
The Company’s obligations under the lease are guaranteed by Sean Berrier, the Senior Vice President (a non-executive officer position) of the Company and a significant shareholder of the Company.
The lease contains customary indemnification and termination provisions. In addition, the lease contains customary events of default, including payment defaults, breaches of covenants and/or certain representations and warranties, bankruptcy or insolvency proceedings and other events of default customary for this type of transaction. The lease also contains remedies for such events of default, including the landlord’s right to cure a default (together with our requirement to pay 12% interest in connection therewith), the right to terminate the lease, and other remedies customary for this type of transaction.
We have two 60 month extension options under the lease, on the same terms as the original term, but increases for market rent.
As of the date of this Report, the Company is in the process of building out this space with the intention of utilizing it as its corporate office as well as its aerosol filling laboratory and isolate manufacturing facility, beginning
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in the first or second quarter of 2022. This work is approximately 60% complete. The facility should be available for occupancy in the third quarter of 2022, depending on factors beyond the Company’s control including approval by the City of Addison, Texas for commercial occupancy. The actual lab portion has been manufactured and is being prepared for shipment to Dallas, Texas, as of the date of this Report. The lab portion will be assembled by third-party vendors once HVAC and fire suppression construction are completed. The lab will be stored on site in its shipping containers until ready to assemble.
Pending completion of the build out of the new office and lab space in Addison, Texas, the Company relocated back to the office space in Dallas, Texas, provided by the Company’s Chief Executive Officer at no cost or commitment to the Company, effective as of December 31, 2021.
We do not own any real property.
ITEM 3. LEGAL PROCEEDINGS
From time to time in the ordinary course of our business, we may be involved in legal proceedings, the outcomes of which may not be determinable. The results of litigation are inherently unpredictable. Any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and result in diversion of significant resources. We are not able to estimate an aggregate amount or range of reasonably possible losses for those legal matters for which losses are not probable and estimable, primarily for the following reasons: (i) many of the relevant legal proceedings are in preliminary stages, and until such proceedings develop further, there is often uncertainty regarding the relevant facts and circumstances at issue and potential liability; and (ii) many of these proceedings involve matters of which the outcomes are inherently difficult to predict. We are not at this time involved in any legal proceedings.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is presently quoted on the OTC Pink Market, operated by OTC Markets Group Inc., under the symbol “RTSL”. At present, there is a very limited market for our common stock. The OTC Market is a network of security dealers who buy and sell stock. The dealers are connected by a computer network that provides information on current “bids” and “asks”, as well as volume information.
The following table sets forth the range of high and low sales prices for our common stock for each of the periods indicated as reported by the OTC Pink Market. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
Fiscal Year Ended March 31, 2019
|
| High |
| Low | ||
Fiscal Quarter Ended: |
|
|
|
|
|
|
June 30, 2018 |
| $ | * |
| $ | * |
September 30, 2018 |
| $ | 0.67 |
| $ | 0.40 |
December 31, 2018 |
| $ | * |
| $ | * |
March 31, 2019 |
| $ | * |
| $ | * |
Fiscal Year Ended March 31, 2020
|
| High |
| Low | ||
Fiscal Quarter Ended: |
|
|
|
|
|
|
June 30, 2019 |
| $ | 0.40 |
| $ | 0.35 |
September 30, 2019 |
| $ | 0.35 |
| $ | 0.30 |
December 31, 2019 |
| $ | 1.20 |
| $ | 0.30 |
March 31, 2020 |
| $ | 0.74 |
| $ | 0.28 |
Nine Month Transition Period Ended December 31, 2020
|
| High |
| Low | ||
Fiscal Quarter Ended: |
|
|
|
|
|
|
June 30, 2020 |
| $ | 1.50 |
| $ | 0.21 |
September 30, 2020 |
| $ | 2.00 |
| $ | 0.35 |
December 31, 2020 |
| $ | 1.28 |
| $ | 0.65 |
|
|
|
|
|
|
|
Fiscal Year Ended December 31, 2021
|
| High |
| Low | ||
Fiscal Quarter Ended: |
|
|
|
|
|
|
March 31, 2021 |
| $ | 0.85 |
| $ | 0.31 |
June 30, 2021 |
| $ | 0.67 |
| $ | 0.31 |
September 30, 2021 |
| $ | 0.65 |
| $ | 0.14 |
December 31, 2021 |
| $ | 0.50 |
| $ | 0.18 |
* No reported trades during the applicable quarter.
The volume of shares traded on the OTC Pink Market was insignificant and therefore, does not represent a reliable indication of the fair market value of these shares.
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Holders
As of March 14, 2022, there were approximately 130 holders of record of our common stock. The number of record holders does not include beneficial owners of common stock whose shares are held in the names of banks, brokers, nominees or other fiduciaries.
Dividends
We have never paid any cash dividends on our common stock. We currently anticipate that we will retain all future earnings for use in our business. Consequently, we do not anticipate paying any cash dividends in the foreseeable future. The payment of dividends in the future will depend upon our results of operations, as well as our short term and long-term cash availability, working capital, working capital needs, and other factors as determined by our Board of Directors. Additionally, we are precluded from making any dividend payments at the present time under the terms of our Debenture, described in greater detail above under “Item 1. Business-Prior Material Acquisitions and Transactions“.
Recent Sales of Unregistered Securities
There have been no sales of unregistered securities during the quarter ended December 31, 2021 and from the period from January 1, 2022 to the filing date of this report, which have not previously been disclosed in a Quarterly Report on Form 10-Q or in a Current Report on Form 8-K, except as discussed below:
On February 11, 2022, the Company entered into an asset purchase agreement with two individuals pursuant to which the Company acquired certain lab and other equipment in consideration for 100,000 restricted shares of common stock and $52,000 (reduced pro rata for the value of any non-operative equipment).
The issuances described above were exempt from registration pursuant to Section 4(a)(2) or Rule 506 of Regulation D of the Securities Act, since the foregoing issuances did not involve a public offering, the recipients took the securities for investment and not resale, we took appropriate measures to restrict transfer, and the recipients were (a) “accredited investors” and/or (b) had access to similar documentation and information as would be required in a Registration Statement under the Securities Act. The securities are subject to transfer restrictions, and the certificates evidencing the securities contain an appropriate legend stating that such securities have not been registered under the Securities Act and may not be offered or sold absent registration or pursuant to an exemption therefrom. The securities were not registered under the Securities Act and such securities may not be offered or sold in the United States absent registration or an exemption from registration under the Securities Act and any applicable state securities laws.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
Description of Capital Stock
The following information describes our common stock and preferred stock, as well as certain provisions of our Amended and Restated Articles of Incorporation and Bylaws. This description is only a summary. You should also refer to our Amended and Restated Articles of Incorporation and Bylaws.
General
Our authorized capital stock consists of 750,000,000 shares of common stock with a $0.001 par value per share, and 100,000,000 shares of Preferred Stock with a $0.001 par value per share. Our Board of Directors may establish the rights and preferences of the Preferred Stock from time to time. In that regard, the Company has filed three separate designations of Preferred Stock with the Secretary of State of Nevada, beginning in November 2020, designating 16,500,000 shares of Series A Preferred Stock, 2,000,000 shares of Series B Preferred Stock, and 8,500,000 shares of Series C Preferred Stock, however, no shares of preferred stock have been issued to date. As of the date of this Report, there are 193,566,921 shares of our common stock issued and outstanding and no shares of Preferred Stock issued or outstanding.
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Common Stock
We are authorized to issue 750,000,000 shares of common stock, $0.001 par value per share.
Voting Rights. Each share of our common stock is entitled to one vote on all stockholder matters. Shares of our common stock do not possess any cumulative voting rights.
Except for the election of directors, if a quorum is present, an action on a matter is approved if it receives the affirmative vote of the holders of a majority of the voting power of the shares of capital stock present in person or represented by proxy at the meeting and entitled to vote on the matter, unless otherwise required by applicable law, Nevada law, our Amended and Restated Articles of Incorporation, or Bylaws, as amended. The election of directors will be determined by a plurality of the votes cast in respect of the shares present in person or represented by proxy at the meeting and entitled to vote, meaning that the nominees with the greatest number of votes cast, even if less than a majority, will be elected. The rights, preferences and privileges of holders of common stock are subject to, and may be impacted by, the rights of the holders of shares of any series of preferred stock that we have designated, or may designate and issue in the future.
Dividend Rights. Each share of our common stock is entitled to equal dividends and distributions per share with respect to the common stock when, as and if declared by our Board of Directors, subject to any preferential or other rights of any outstanding Preferred Stock.
Liquidation and Dissolution Rights. Upon liquidation, dissolution or winding up, our common stock will be entitled to receive pro rata on a share-for-share basis, the assets available for distribution to the stockholders after payment of liabilities and payment of preferential and other amounts, if any, payable on any outstanding Preferred Stock.
Fully Paid Status. All outstanding shares of the Company’s common stock are validly issued, fully paid and non-assessable.
Other Matters. No holder of any shares of our common stock has a preemptive right to subscribe for any of our securities, nor are any shares of our common stock subject to redemption or convertible into other securities.
Preferred Stock
We are authorized to issue 100,000,000 shares of Preferred Stock, $0.001 par value per share, of which 16,500,000 shares are designated as Series A Preferred Stock, 2,000,000 shares are designated as Series B Preferred Stock, and 8,500,000 shares are designated as Series C Preferred Stock. We had no preferred shares outstanding as of the date of this Report.
Under the terms of our Amended and Restated Articles of Incorporation, our Board of Directors is expressly granted authority to issue shares of preferred stock, in one or more series, and to fix for each such series such voting powers, full or limited, and such designations, preferences and relative, participating, optional or other special rights and such qualifications, limitations or restrictions thereof as shall be stated and expressed in the resolution or resolutions adopted by the Board of Directors providing for the issue of such series (a “Preferred Stock Designation”) and as may be permitted by the Nevada Revised Statutes. The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the voting power of all of the then outstanding shares of the capital stock of the Company entitled to vote generally in the election of directors, voting together as a single class, without a separate vote of the holders of the Preferred Stock, or any series thereof, unless a vote of any such holders is required pursuant to any Preferred Stock Designation.
Series A, Series B and Series C Convertible Preferred Stock
The Series A , Series B and Series C Preferred Stock all have essentially the same rights, as noted below, and are collectively referred to as, “each series of our Preferred Stock.”
Dividend Rights. Each of our Series A , Series B and Series C Preferred Stock do not accrue any dividends, provided that the holders of each series of our Preferred Stock are entitled to such dividends paid and distributions made to the holders of common stock in cash, to the same extent as if such holders had converted each series of our
46
Preferred Stock into common stock at the Conversion Rate (described below under “Conversion Rights”)(without regard to any limitations on conversion) and had held such shares of common stock on the record date for such dividends and distributions.
Liquidation Preference. The Series A , Series B and Series C Preferred Stock provide that each series of our Preferred Stock have a liquidation preference which is (a) pari passu with respect to the Company’s common stock; and (b) junior to all current and future senior indebtedness of the Company. If the Company determines to liquidate, dissolve or wind-up its business and affairs, the Company will prior to or concurrently with the closing, effectuation or occurrence of any such action, pay the holders of each series of our Preferred Stock, pari passu with the holders of the common stock, an amount equal to the Liquidation Preference per share of each series of our Preferred Stock. The “Liquidation Preference” per share of each series of our Series A , Series B and Series C Preferred Stock is equal to $0.80 per share.
Conversion Rights. Shares of each series of our Series A , Series B and Series C Preferred Stock are convertible into common stock of the Company on a one-for-one basis (subject to customary adjustments for stock splits, stock dividends and recapitalizations affecting the Company’s common stock and each series of our Preferred Stock)(the “Conversion Rate”), at the option of the holder thereof, at any time beginning two years after the issuance date.
Voting Rights. Each share of our Series A , Series B and Series C Preferred Stock has no voting rights on general matters to come before the stockholders of the Company; however, the Company is prohibited from undertaking any of the following actions without the approval of holders holding a majority of the then aggregate shares of each series of our Series A , Series B and Series C Preferred Stock, as applicable:
(a) Increasing or decreasing (other than by redemption or conversion) the total number of authorized shares of each series of our Preferred Stock;
(b) Re-issuing any shares of each series of our Preferred Stock converted pursuant to the terms of the Series A, Series B and Series C Designations;
(c) Issuing any shares of each series of our Preferred Stock other than pursuant to a certain Purchase Agreement (in the case of Series A Preferred Stock); a certain Employment Agreement with Duane Drinkwine, Ph.D. (in the case of Series B Preferred Stock); and a certain Independent Contractor Agreement with We the 23, LLC or the Independent Contractor Agreement with Epic Medical Research (in the case of Series C Preferred Stock);
(d) Altering or changing the rights, preferences or privileges of the shares of each series of our Preferred Stock so as to affect adversely the shares of such series; or
(e) Amending or waiving any provision of the Company’s Articles of Incorporation or Bylaws relative to each series of our Preferred Stock so as to affect adversely the shares of such series of our Preferred Stock in any material respect as compared to holders of other series of shares.
Redemption Rights. Each share of Series A, Series B and Series C Preferred Stock does not have any redemption rights.
ITEM 6. [RESERVED]
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in this Report. The forward-looking statements included in this discussion and elsewhere in this Report involve risks and uncertainties, including those set forth under “Cautionary Statement About Forward-Looking Statements.“ Actual results and experience could differ materially from the anticipated results and other expectations expressed in our forward-looking statements as a result of a number of factors, including but not limited to those discussed in this Item and in “Item 1A. Risk Factors.”
Plan of Operations
Since execution of the Sublicense Agreement with TMDI in November 2019 (as discussed in greater detail above under “Item 1. Business”), our plan of operations has been primarily focused on preliminary activities of marketing and production planning for our licensed aerosol inhaler product line ultimately leading to the initial sales of our new products, beginning in early 2020. In that regard, we have supplemented the proceeds received from the sale of convertible notes with the private sales of restricted shares of our common stock to various accredited investors, and completed the recent sale of a convertible debenture in the aggregate principal amount of $1,941,176 and other convertible notes, as discussed in greater detail below, to further fund our operations moving forward.
We plan to grow our operations as discussed in greater detail above under “Growth Strategy” under “Item 1. Business”.
Novel Coronavirus (COVID-19)
In December 2019, a novel strain of coronavirus, which causes the infectious disease known as COVID-19, was reported in Wuhan, China. The World Health Organization declared COVID-19 a “Public Health Emergency of International Concern” on January 30, 2020 and a global pandemic on March 11, 2020. In March and April 2020, many U.S. states and local jurisdictions began issuing ‘stay-at-home’ orders. As disclosed above, the Company has recently adopted a new business strategy focused on developing potential commercial opportunities which will involve the rapid application of therapeutics using proprietary metered dose inhaler technology that the Company has recently licensed from a third party. This strategy includes typical pharmaceutical type marketing efforts (e.g., marketing directly to doctors) that has been shown to work with traditional drug product type sales, versus novelty type sales, which currently include cannabidiols. We are planning on moving away from traditional internet sales and marketing and believe this transition will benefit the Company going forward. COVID-19 resulted in the Company being forced to temporarily suspend its marketing plans as the Company was not able to travel to meet with doctors directly. Moving forward, the range of possible impacts on the Company’s business in the event the coronavirus pandemic continues to include: (i) changing demand for the Company’s products; (ii) rising bottlenecks in the Company’s supply chain; and (iii) increasing contraction in the capital markets. At this time, the Company’s sales have not been materially affected by the pandemic (as the Company has had only limited sales to date), and it believes that it is premature to determine the potential impact on the Company’s business prospects from these or any other factors that may be related to the coronavirus pandemic; however, it is possible that Covid-19 and the worldwide response thereto, may have a material negative effect on our operations, cash flows and results of operations.
Through the date of this Report, we have been able to successfully support our operations with our cash on hand, through equity sales (which have to date been completed through private offerings), and borrowings. Moving forward we believe we will need to raise additional funding to support our operations which funding we anticipate being available through the sale of equity or debt, similar to our recently completed sale of a convertible debenture and convertible debt, as discussed below. We also continue to evaluate our business operations based on new information as it becomes available and will make changes that we consider necessary in light of any new developments regarding the pandemic. Additionally, we anticipate requiring further funds in the future to grow our operations and produce additional product lines, which funds we anticipate raising through equity offerings, and if necessary, debt.
The future impact of COVID-19 on our business and operations is currently unknown. The pandemic is continuously evolving and the full extent to which COVID-19 will ultimately impact us depends on future
48
developments, including the duration and spread of the virus, as well as potential seasonality of new outbreaks and virus mutations.
Results of Operations
The following discussion pertains to the Company’s revenues and expenses for the year ended December 31, 2021 and the nine-month transition period ended December 31, 2020, as reported in our consolidated financial statements and notes thereto included herein.
Revenues - The Company commenced limited sales of its inhaler products to customers, while still in a product development mode, on a trial basis in January 2020. However, due to the subsequent impact of the COVID-19 pandemic, as well as other contributing factors, the Company has not sustained a consistent level of sales thus far. The Company has two different sales channels as follows:
·Wholesale - designed to capture fairly large, but sporadic, orders received from wholesale customers, often for substantial quantities with relatively high profit margins.
·Retail - designed to capture a high volume of small orders received from retail customers through an online portal, with significantly lower profit margins.
The revenues from such sales on a trial basis in the year ended December 31, 2021 were $534 compared to $130,916 for the nine-month transition period ended December 31, 2020, consisting mainly of two large wholesale orders. Revenues from sales of the Company’s inhaler and other products, under both sales channels, are expected to gradually increase in the future, once the current trial period ends.
Cost of Goods Sold - Cost of goods sold in the year ended December 31, 2021 were $200 compared to $19,394 in the nine-month transition period ended December 31, 2020. The cost of goods sold reflected the cost of procuring inhalers and related products and supplies for resale. The cost of goods sold in the year ended December 31, 2021 was not relevant due to the very low level of sales in that period, whereas the cost of goods sold in the nine months ended December 31, 2020, resulted in a gross profit margin of $111,522.
General and Administrative Expense - General and administrative expenses in the year ended December 31, 2021 were $2,114,770 compared to $2,023,379 in the nine-month transition period ended December 31, 2020. This fluctuation was due to the increase in certain cash overhead expenses, mostly for payroll, arising from the adoption of a new business strategy focused on commercial opportunities involving the rapid application of therapeutics using the RxoidTM MDI technology, supplemented by the assets acquired from Razor Jacket in late 2020.
Amortization Expense - Amortization expense in the year ended December 31, 2021 was $33,759 compared to $75,000 in the nine-month transition period ended December 31, 2020. This decrease was largely due to the termination of the Sublicense Agreement, effective February 9, 2021, under which the Company was previously obligated to reimburse TMDI in the amount of $200,000 for a license fee owed by TMDI to EM3, covering the first two years of the Sublicense Agreement, as discussed in greater detail in the section above, partially offset by the initial amortization expense recognized on an operating lease asset beginning in October 2021.
Depreciation Expense - Depreciation expense in the year ended December 31, 2021 was $22,100 compared to $7,255 in the nine-month transition period ended December 31, 2020. This increase reflects depreciation on the Company’s purchases of property and equipment beginning in September 2020.
Other Income (Expense) - Interest expense in the year ended December 31, 2021 was $1,329,441 compared to $58,009 in the nine-month transition period ended December 31, 2020. This increase was due to the amortization of the original issue debt discount and other adjustments to interest expense arising from the warrant liability recognized from the issuance of common stock warrants issued in conjunction with a convertible debenture in August 2021, partially offset by the conversion of certain convertible notes into common stock in August 2020 and March 2021. Other income (expense) also includes a gain from the change in valuation of the warrant liability in the year ended December 31, 2021 of $631,853.
Net Loss - Net loss in the year ended December 31, 2021 was $2,867,883 compared to $2,052,121 in the nine-month transition period ended December 31, 2020, representing the net amounts of the various revenue and
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expense categories indicated above. The Company has not recognized any income tax benefits for these net losses due to the uncertainty of their ultimate realization.
Liquidity and Capital Resources
Cash flows from Operating activities. Net cash used in operating activities in the year ended December 31, 2021 was $2,209,131 compared to $1,724,829 in the nine-month transition period ended December 31, 2020. This net increase was largely due to the higher level of overhead costs and other working capital changes following the Company’s adoption of a new business strategy in early 2020, as further noted above.
Cash flows from Investing activities. Net cash used in investing activities in the year ended December 31, 2021 was $292,531 compared to $106,740 in the nine-month transition period ended December 31, 2020. This increase was due to the Company’s greater level of purchases of property and equipment which began in September 2020.
Cash flows from Financing activities. Net cash provided by financing activities in the year ended December 31, 2021 was $2,195,000 compared to $2,194,500 in the nine-month transition period ended December 31, 2020. Net cash provided by financing activities in the year ended December 31, 2021 resulted from $1,650,000 received from the sale of the Debenture in the original principal amount of $1,941,176, as well as from the private sales of 1,462,500 shares of restricted common stock to several accredited investors at an offering price of $0.40 per share for total proceeds of $585,000, partially offset by the net repayment of various unsecured notes payable in the amount of $40,000. Net cash provided by financing activities in the nine-month transition period ended December 31, 2020 reflected the sale of 9,288,750 shares of restricted common stock in private transactions in the amount of $1,922,500, and the issuance of new notes payable in the amount of $422,000, partially offset by the payments of existing notes payable in the amount of $150,000.
Effective August 31, 2020, the Company reached the necessary milestone to trigger the automatic conversion of certain notes payable issued to the holders on various dates in 2018 and 2019, as amended, in the total principal amount of $732,835 into shares of the Company’s common stock, subject to a 4.99% ownership limitation for each beneficial owner of such notes. In conjunction with this conversion, holders of notes in the principal amount of $404,601, plus an additional accrued interest amount of $96,536, converted their notes into 10,022,749 shares of common stock.
Effective March 31, 2021, the following additional conversions of the Company’s remaining convertible notes payable occurred: (i) the holders of convertible notes payable issued in 2018 at a conversion price of $0.13 per share with total principal and accrued interest balances in the aggregate amount of $410,888 converted their notes into a total of 3,160,684 shares of common stock; and (ii) the holders of convertible notes payable amended or issued in 2019 at a conversion price of $0.05 per share with total principal and accrued interest balances in the aggregate amount of $383,470, the automatic conversion of which had previously been triggered on August 31, 2020, as discussed above, subject to each holder’s beneficial ownership limitation, converted their notes into a total of 7,669,381 shares of common stock. As a result of these conversions, a total of 10,830,065 new shares of common stock were issued and the Company’s outstanding debt obligations were substantially reduced.
On October 15, 2020, the Company entered into a private stock subscription agreement with an accredited investor whereby the Company agreed to sell the investor 2,640,000 shares of restricted common stock and warrants to purchase 6,000,000 shares of the Company’s common stock at an exercise price of $0.50 per share and a term of one year, in exchange for a cash payment to the Company in the amount of $100,000, and the performance of certain other obligations. Based on previous negotiations between the Company and the investor prior to the execution of this agreement, the investor had made a provisional payment of $90,000, which was reflected by the Company as a liability as of September 30, 2020. Upon execution of the agreement, the investor paid the remaining $10,000 to the Company. The resale of the shares held by the purchaser are subject to a lock-up agreement.
In November 2020, the Company closed an Asset Purchase and Sales Agreement with Razor Jacket, an Oregon based supplier of isolate and related products, to acquire all of Razor Jacket’s equipment relating to the manufacture of cannabinoid isolates and related products. As previously noted, the Company paid $300,000 in cash at closing, and issued 625,000 shares of restricted common stock to the owners of Razor Jacket, and provided them the right to earn up to 16.5 million shares of Series A Preferred Stock of the Company, convertible for common stock on a one-for-one basis, subject to certain conditions.
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In order to meet short-term working capital needs in mid-2021, the Company obtained unsecured cash advances from two of its officers (its Chief Executive Officer, Donal R. Schmidt, Jr., and Sean Berrier, the Senior Vice President (a non-executive officer position)) in May through August 2021 in the net amount of $260,000. Such advances are expected to be repaid out of the proceeds of an underwritten public offering of the Company’s equity securities which the Company is currently pursuing. However, no assurance can be given that the Company will be successful in achieving a closing of the underwritten public offering.
In order to meet longer-term working capital needs in advance of a proposed underwritten offering, which may not be completed timely, if at all, on August 4, 2021, the Company sold the Debenture and issued the same investor the Investor Warrants, each discussed in greater detail above under “Item 1. Business-Prior Material Acquisitions and Transactions“.
The amount owed under the Debenture, including amounts owed upon the occurrence of an event of default, may be converted, in whole or part, by the holder, into common stock of the Company, at a conversion price of $0.40 per share (the “Conversion Price”), provided that the outstanding amount of the Debenture automatically converts into common stock of the Company upon the closing of a Qualified Offering, at the lower of (i) the Conversion Price; and (ii) 75% of the offering price of the Qualified Offering. The conversion of the Debenture is subject to a beneficial ownership limitation of 4.99%, preventing such conversion by the holder thereof, if such exercise would result in such holder and its affiliates, exceeding ownership of 4.99% of our common stock, which percentage may be increased to up to 9.99%, with at least 61 days prior written notice by the holder thereof.
The Investor Warrants, which are evidenced by a common stock Purchase Warrant (the “Warrant Agreement”), have an exercise price of $0.40 per share, and may be exercised at any time from the grant date of the Investor Warrants until August 3, 2026. The total number of shares of common stock issuable upon exercise of the warrants equals 100% of the total initial shares of common stock issuable upon conversion of the Debenture. The Investor Warrants have cashless exercise rights if when exercised, and following the six-month anniversary of the closing of the offering, a registration statement registering the shares of common stock issuable upon exercise thereof, is not effective with the Securities and Exchange Commission. The exercise of the Investor Warrants is subject to a beneficial ownership limitation of 4.99%, preventing such exercise by the holder thereof, if such exercise would result in such holder and its affiliates, exceeding ownership of 4.99% of our common stock, which percentage may be increased to up to 9.99% with at least 61 days prior written notice by the holder thereof. The Investor Warrants contain anti-dilution rights such that if we issue, or are deemed to have issued, common stock or common stock equivalents at a price less than the then exercise price of the Investor Warrants, subject to certain customary exceptions and the sale of up to $1.5 million in private transactions, the exercise price of the Investor Warrants is automatically reduced to such lower value, and the number of shares of common stock issuable upon exercise thereafter is adjusted proportionately so that the aggregate exercise price payable upon exercise of such Investor Warrants is the same prior to and after such reduction in exercise price. As a result, the effect of the anti-dilution right may cause significant dilution to existing shareholders.
Pursuant to a Placement Agent Agreement entered into with Maxim Group LLC (the “Placement Agent”), who served as placement agent for the offering of the Debenture and Investor Warrants, we agreed to pay the Placement Agent for the offering a cash commission of 8% of the gross proceeds received in the offering ($132,000), and to grant the Placement Agent a warrant to purchase 5% of the total shares issuable upon conversion of the Debenture (242,647), with an exercise price equal to the same exercise price as the Investor Warrants ($0.40 per share), which have a term of five years and are in substantially similar form as the Investor Warrants (the “Placement Warrants” and together with the Investor Warrants, the “Offering Warrants”). We agreed to register the shares of common stock issuable upon exercise of the Placement Warrants under the Securities Act.
The Company has been using the proceeds of the offering to meet its short-term working capital needs in anticipation of closing a qualified listing on a national exchange and raising capital in connection with an underwritten offering, provided no assurance can be given that the Company will be successful in uplisting to a national exchange or achieving a closing of the underwritten public offering.
As of December 31, 2021, we had a cash balance of $0.2 million and a working capital deficit of $2.6 million. We have not generated a net profit from the limited sales of our inhaler products beginning in early 2020 and only generated minimal revenues during the year ended December 31, 2021. Until such time that we can generate substantial net profit from operations, if ever, we expect to finance our operating activities through a combination of equity offerings and debt financings and we may seek to raise additional capital through strategic collaborations.
51
However, we may be unable to raise additional funds or enter into such arrangements when needed on favorable terms, or at all, which would have a negative impact on our financial condition and could force us to delay, limit, reduce or terminate our operations. Failure to receive additional funding could cause us to cease operations, in part or in full. Furthermore, even if we believe we have sufficient funds for our current or future operating plans, we may seek additional capital due to favorable market conditions or strategic considerations, which may cause dilution to our existing stockholders.
In the first quarter of 2022 we sold the Suggs Note and the Red Road Note, each discussed in greater detail above under “Item 1. Business-Prior Material Acquisitions and Transactions“.
Off-Balance Sheet Transactions
We do not engage in off-balance sheet transactions.
Going Concern
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has generated limited revenues and has suffered recurring losses totaling $8,521,423 since inception. These factors, among others, indicate that there is substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time. The consolidated financial statements do not contain any adjustments to reflect the possible future effects on the classification of assets or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.
Critical Accounting Policies and Significant Judgments and Estimates
The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide information required under this item.
52
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Rapid Therapeutic Science Laboratories, Inc.
Financial Statements
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
54 | ||
|
| |
Consolidated Balance Sheets as of December 31, 2021 and 2020 | 55 | |
|
| |
56 | ||
|
| |
57 | ||
|
| |
58 | ||
|
| |
59 | ||
53
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Rapid Therapeutic Science Laboratories, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Rapid Therapeutic Science Laboratories, Inc. (the “Company”), as of December 31, 2021 and 2020 and the related consolidated statements of operations, stockholders’ (deficit), and cash flows for the year ended December 31, 2021 and for the nine month transition period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the nine-month transition period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Going Concern Matter
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has negative working capital at December 31, 2021, has incurred recurring losses and recurring negative cash flow from operating activities, and has an accumulated deficit which raises substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.
/s/ PWR CPA, LLP
PCAOB #6686
We have served as the Company’s auditor since 2020
Houston, Texas
March 16, 2022
54
Rapid Therapeutic Science Laboratories, Inc.
Consolidated Balance Sheets
| December 31, | ||||
2021 |
| 2020 | |||
Assets |
|
|
| ||
Current assets: |
|
|
| ||
Cash and cash equivalents | $ | 192,484 |
| $ | 499,146 |
Inventory |
| 175,047 |
|
| 186,802 |
Prepaid expenses |
| 51,631 |
|
| - |
Total current assets |
| 419,162 |
|
| 685,948 |
|
|
|
|
| |
Property and equipment |
| 1,214,917 |
|
| 606,740 |
Accumulated depreciation |
| (29,355) |
|
| (7,255) |
Net property and equipment |
| 1,185,562 |
|
| 599,485 |
|
|
|
|
|
|
Other long-term assets |
|
|
|
|
|
Operating lease right-of-use asset, net |
| 425,171 |
|
| - |
License agreement, net of accumulated amortization of zero and $112,500 |
| 170,075 |
|
| 227,500 |
|
|
|
|
|
|
Total assets | $ | 2,199,970 |
| $ | 1,512,933 |
|
|
|
|
|
|
Liabilities and Stockholders’ Deficit |
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
Accounts payable and accrued liabilities | $ | 465,204 |
| $ | 112,298 |
Notes payable - related party |
| 283,700 |
|
| 23,700 |
Convertible notes payable - other |
| 1,099,734 |
|
| 674,927 |
Accrued interest payable |
| 45,696 |
|
| 354,659 |
Current portion of operating lease obligation |
| 73,289 |
|
| - |
Warrant liability and other derivatives |
| 1,085,360 |
|
| 43,306 |
Total current liabilities |
| 3,052,983 |
|
| 1,208,890 |
|
|
|
|
|
|
Long-term liabilities |
|
|
|
|
|
Convertible notes payable |
| 150,000 |
|
| 315,240 |
Long-term portion of operating lease obligation |
| 378,744 |
|
| - |
Total liabilities |
| 3,581,727 |
|
| 1,524,130 |
|
|
|
|
|
|
Commitments and contingencies (Note 12) |
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ deficit: |
|
|
|
|
|
Preferred stock, no par value per share, 16,500,000 shares authorized (Series A), 2,000,000 shares authorized (Series B), 8,500,000 shares authorized (Series C), no shares issued and outstanding |
| - |
|
| - |
Common stock, $0.001 par value per share, 750,000,000 shares authorized, 193,566,921 and 180,936,608 shares issued and outstanding |
| 193,567 |
|
| 180,937 |
Additional paid in capital |
| 7,283,438 |
|
| 5,798,745 |
Accumulated deficit |
| (8,521,423) |
|
| (5,653,540) |
Treasury stock |
| (337,339) |
|
| (337,339) |
Total stockholders’ deficit |
| (1,381,757) |
|
| (11,197) |
|
|
|
|
|
|
Total liabilities and stockholders’ deficit | $ | 2,199,970 |
| $ | 1,512,933 |
The accompanying notes are an integral part of these consolidated financial statements.
55
Rapid Therapeutic Science Laboratories, Inc.
Consolidated Statements of Operations
Year ended December 31, 2021 |
| Nine month transition period ended December 31, 2020 | |||
|
|
|
| ||
Revenues | $ | 534 |
| $ | 130,916 |
Cost of goods sold |
| 200 |
|
| 19,394 |
Gross profit |
| 334 |
|
| 111,522 |
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
General and administrative |
| 2,114,770 |
|
| 2,023,379 |
Amortization expense |
| 33,759 |
|
| 75,000 |
Depreciation expense |
| 22,100 |
|
| 7,255 |
Total operating expenses |
| 2,170,629 |
|
| 2,105,634 |
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
Gain on valuation of warrant liability |
| 631,853 |
|
| - |
Interest expense |
| (1,329,441) |
|
| (58,009) |
Total other income (expense) |
| (697,588) |
|
| (58,009) |
|
|
|
|
|
|
Net loss before income taxes |
| (2,867,883) |
|
| (2,052,121) |
Income taxes |
| - |
|
| - |
|
|
|
|
|
|
Net loss | $ | (2,867,883) |
| $ | (2,052,121) |
|
|
|
|
|
|
Net loss per share, basic and diluted | $ | (0.02) |
| $ | (0.01) |
|
|
|
|
|
|
Weighted average shares outstanding, basic and diluted |
| 190,739,289 |
|
| 168,759,123 |
The accompanying notes are an integral part of these consolidated financial statements.
56
Rapid Therapeutic Science Laboratories, Inc.
Consolidated Statement of Stockholders’ Equity (Deficit)
| Common Stock |
|
|
|
|
|
|
|
| ||||||
Shares | Amount |
| Additional Paid-in Capital |
| Accumulated Deficit |
| Treasury Stock |
| Total Stockholders' Equity | ||||||
|
|
|
|
|
|
|
|
|
|
| |||||
Balance at March 31, 2020 | 159,556,000 | $ | 159,556 |
| $ | 2,414,718 |
| $ | (3,601,419) |
| $ | (337,339) |
| $ | (1,364,484) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued for conversion of debt and interest | 10,103,524 |
| 10,104 |
|
| 524,970 |
|
| - |
|
| - |
|
| 535,074 |
Stock issued for acquisition of assets | 625,000 |
| 625 |
|
| 499,375 |
|
| - |
|
| - |
|
| 500,000 |
Private offering of common stock | 9,288,750 |
| 9,289 |
|
| 2,003,211 |
|
| - |
|
| - |
|
| 2,012,500 |
Stock compensation expense | 1,363,334 |
| 1,363 |
|
| 356,471 |
|
| - |
|
| - |
|
| 357,834 |
Net loss | - |
| - |
|
| - |
|
| (2,052,121) |
|
| - |
|
| (2,052,121) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2020 | 180,936,608 |
| 180,937 |
|
| 5,798,745 |
|
| (5,653,540) |
|
| (337,339) |
|
| (11,197) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued for conversion of debt and interest | 11,094,585 |
| 11,094 |
|
| 878,937 |
|
| - |
|
| - |
|
| 890,031 |
Stock issued for accrued interest and lending fee | 23,228 |
| 23 |
|
| 2,269 |
|
| - |
|
| - |
|
| 2,292 |
Private offering of common stock | 1,462,500 |
| 1,463 |
|
| 583,537 |
|
| - |
|
| - |
|
| 585,000 |
Stock compensation expense | 50,000 |
| 50 |
|
| 19,950 |
|
| - |
|
| - |
|
| 20,000 |
Net loss | - |
| - |
|
| - |
|
| (2,867,883) |
|
| - |
|
| (2,867,883) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2021 | 193,566,921 | $ | 193,567 |
| $ | 7,283,438 |
| $ | (8,521,423) |
| $ | (337,339) |
| $ | (1,381,757) |
The accompanying notes are an integral part of these consolidated financial statements.
57
Rapid Therapeutic Science Laboratories, Inc.
Consolidated Statements of Cash Flows
Year ended December 31, 2021 |
| Nine month transition period ended December 31, 2020 | |||
Cash flows from operating activities: |
|
|
| ||
Net loss | $ | (2,867,883) |
| $ | (2,052,121) |
Adjustments to reconcile net loss to net cash provided by (used in) operations |
|
|
|
|
|
Gain on valuation of warrant liability |
| (631,853) |
|
| - |
Amortization of debt discount |
| 1,147,865 |
|
| - |
Stock compensation expense |
| 20,000 |
|
| 357,834 |
Amortization of sublicense fees |
| 12,500 |
|
| 75,000 |
Amortization of operating lease asset |
| 21,259 |
|
| - |
Depreciation expense |
| 22,100 |
|
| 7,255 |
Changes in operating assets and liabilities: |
|
|
|
|
|
Inventory |
| 11,755 |
|
| (180,929) |
Prepaid expenses |
| (51,631) |
|
| - |
Accounts payable and accrued liabilities |
| 82,185 |
|
| 47,721 |
Accrued interest payable |
| 24,572 |
|
| 52,411 |
Contract liabilities |
| - |
|
| (32,000) |
Net cash flows used in operating activities |
| (2,209,131) |
|
| (1,724,829) |
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
Additions to property and equipment |
| (292,531) |
|
| (106,740) |
Net cash flows used in investing activities |
| (292,531) |
|
| (106,740) |
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
Common stock sales |
| 585,000 |
|
| 2,012,500 |
Issuance of convertible debenture payable |
| 1,650,000 |
|
| - |
Issuance of notes payable - related party |
| 260,000 |
|
| - |
Issuance of notes payable - other |
| - |
|
| 422,000 |
Payments of notes payable - other |
| (300,000) |
|
| (150,000) |
Equity subscription payable |
| - |
|
| (90,000) |
Net cash flows provided by financing activities |
| 2,195,000 |
|
| 2,194,500 |
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
| (306,662) |
|
| 362,931 |
Cash and cash equivalents at beginning of period |
| 499,146 |
|
| 136,215 |
|
|
|
|
|
|
Cash and cash equivalents at end of period | $ | 192,484 |
| $ | 499,146 |
|
|
|
|
|
|
Supplemental cash flow data: |
|
|
|
|
|
Cash paid for interest | $ | - |
| $ | 5,599 |
Cash paid for income taxes |
| - |
|
| - |
|
|
|
|
|
|
Non-Cash financing activities: |
|
|
|
|
|
Stock issued for acquisition of equipment | $ | - |
| $ | 500,000 |
Accounts payable for acquisition of equipment |
| 315,646 |
|
| - |
Operating lease obligation for acquisition of right-of-use asset |
| 446,429 |
|
| - |
Conversion of notes payable for stock |
| (892,323) |
|
| (535,074) |
The accompanying notes are an integral part of these consolidated financial statements.
58
Rapid Therapeutic Science Laboratories, Inc.
Notes to Consolidated Financial Statements
December 31, 2021 and 2020
(1) General Organization and Business
The Company - Rapid Therapeutic Science Laboratories, Inc. (“we”, “our” or the “Company”) was incorporated in the State of Nevada on February 22, 2013, originally under the name of PowerMedChairs. On June 2, 2017, the Company changed its name to Holly Brothers Pictures, Inc. On February 1, 2018, the Company acquired 100% of the equity interests in Power Blockchain, LLC through an exchange agreement in a transaction that resulted in the transition to a planned new business of mining crypto-currency. Effective November 15, 2019, the Company exited from that business and adopted a new business strategy focused on developing potential commercial opportunities which involve the rapid application of therapeutics using inhaler technology that the Company licensed from a third party as a result of the execution of a license agreement with the licensor (see Note 4). In conjunction with the adoption of that new business strategy, the Company changed its name to Rapid Therapeutic Science Laboratories, Inc., effective January 13, 2020. At that time, the Company also commenced initial sales of its inhaler products.
Impact of COVID-19 Pandemic on Consolidated Financial Statements. The outbreak of the 2019 novel coronavirus disease (“COVID-19”), which was declared a global pandemic by the World Health Organization on March 11, 2020, and the related responses by public health and governmental authorities to contain and combat its outbreak and spread has severely impacted the U.S. and world economies. Decreased demand for our products caused by COVID-19 could have a material adverse effect on our results of operations. Separately, economic recessions, including those brought on by the COVID-19 outbreak may have a negative effect on the demand for our products and our operating results. Based on our limited operating history, we believe the range of possible impacts on the Company’s business from the coronavirus pandemic could 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 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.
(2) Summary of Significant Accounting Policies
Basis of Accounting - The basis is United States generally accepted accounting principles. The accompanying consolidated financial statements include the accounts of the Company and its two wholly-owned subsidiaries, one of which is presently inactive.
Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Change in Fiscal Year - In February 2021, the Board of Directors of the Company approved a change in the Company’s fiscal year end from March 31 to December 31. The Company’s fiscal year now begins on January 1 and ends on December 31 of each year, starting on January 1, 2021. The required transition period of April 1, 2020 to December 31, 2020 is included in the consolidated financial statements.
Cash and Cash Equivalents - The Company considers all short-term investments with original maturities of three months or less at the date of purchase to be cash equivalents.
Inventory - Inventory as of December 31, 2021 and 2020, consists of inhalers and related products and supplies delivered to a secured location within the Company’s offices, and held for sale to wholesale or retail customers. Inventory is stated at the lower of weighted average cost or market. The Company periodically reviews the value of items in inventory and records an allowance to reduce the carrying value of inventory to the lower of cost or net realizable value based on its assessment of market conditions, inventory turnover and current stock levels.
Property and Equipment - Property and equipment, consisting of office furniture and fixtures, laboratory equipment and leasehold improvements, is depreciated on a straight-line basis over their useful lives ranging from two to five years.
59
Intangible Assets - The Company amortizes the costs of any renewable license or sub-license agreements over the contractual terms of such renewable agreements. For any license or sub-license agreements which do not require any renewal payments to be made, the Company performs periodic assessments in order to determine whether there has been any impairment in the carrying value of such intangible assets (see Note 4).
Revenue recognition - We account for revenue from contracts with customers in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” The unit of account in Topic 606 is a performance obligation, which is a promise in a contract to transfer to a customer either a distinct good or service (or bundle of goods or services) or a series of distinct goods or services provided at a point in time or over a period of time. Topic 606 requires that a contract’s transaction price, which is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, is to be allocated to each performance obligation in the contract based on relative standalone selling prices and recognized as revenue when (point in time) or as (over time) the performance obligation is satisfied.
Earnings per Share - The basic earnings (loss) per share is calculated by dividing the Company’s net income (loss) available to common shareholders by the weighted average number of common shares issued and outstanding during the year. The diluted earnings (loss) per share is calculated by dividing the Company’s net income (loss) available to common shareholders by the diluted weighted average number of shares outstanding during the year. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted as of the first year for any potentially dilutive debt or equity.
Income Taxes - The provision for income taxes is the total of the current taxes payable and the net of the change in the deferred income taxes. Provision is made for the deferred income taxes where differences exist between the period in which transactions affect current taxable income and the period in which they enter into the determination of net income in the financial statements. A valuation allowance is provided for the amount of deferred assets that, based on available evidence, is not expected to be realized.
Use of Estimates - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 consolidated financial statements and the reported amounts of revenue and expenses during the reporting period.
Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from estimates.
Fair Value of Financial Instruments - Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as further noted below.
Level 1: The preferred inputs to valuation efforts are “quoted prices in active markets for identical assets or liabilities,” with the caveat that the reporting entity must have access to that market. Information at this level is based on direct observations of transactions involving the same assets and liabilities, not assumptions, and thus offers superior reliability. However, relatively few items, especially physical assets, actually trade in active markets.
Level 2: FASB acknowledged that active markets for identical assets and liabilities are relatively uncommon and, even when they do exist, they may be too thin to provide reliable information. To deal with this shortage of direct data, the board provided a second level of inputs that can be applied in three situations.
Level 3: If inputs from levels 1 and 2 are not available, FASB acknowledges that fair value measures of many assets and liabilities are less precise. The board describes Level 3 inputs as “unobservable,” and limits their use by saying they “shall be used to measure fair value to the extent that observable inputs are not available.” This category allows “for situations in which there is little, if any, market activity for the asset or liability at the measurement date”. Earlier in the standard, FASB explains that “observable inputs” are gathered from sources other than the reporting company and that they are expected to reflect assumptions made by market participants.
60
Recently Issued Accounting Pronouncements - During the year ended December 31, 2021, the Financial Accounting Standards Board issued several new Accounting Standards Updates which the Company believes will have no material impact to the Company.
Subsequent Events - Management has evaluated any subsequent events occurring in the period from December 31, 2021 through the date the financial statements were issued, to determine if disclosure in this report is warranted (see Note 13).
(3) Going Concern
The Company's consolidated financial statements are prepared using the generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, the Company has generated minimal revenues and has suffered recurring losses totaling $8,521,423 since inception. These factors, among others, indicate that there is substantial doubt about the Company’s ability to continue as a going concern within one year from the issuance date of this filing.
In order to obtain the necessary capital to sustain operations, management’s plans include, among other things, the possibility of pursuing new equity sales and/or making additional debt borrowings. There can be no assurances, however, that the Company will be successful in obtaining such additional financing, or that such financing will be available on favorable terms, if at all. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might result from the outcome of this uncertainty.
(4) Intangible Assets
The Company has acquired certain intangible asset rights to use the metered dose inhaler (MDI) developed by EM3 Methodologies, LLC (“EM3”) under a perpetual license agreement, dated February 9, 2021 (the “EM3 Exclusive License”). From November 15, 2019 to February 9, 2021, we held essentially the same rights, but on a more costly basis, under a renewable sublicense agreement with an affiliated company that had a license agreement with EM3, as further described below.
Effective November 15, 2019, we entered into a sublicense agreement (the “TMDI Agreement”) with Texas MDI, Inc., a Texas corporation, which is controlled by Donal R. Schmidt, Jr., the Chief Executive Officer and Director of the Company (“TMDI”), whereby we acquired a sublicense from TMDI to use certain technology regarding MDI’s that TMDI had licensed from EM3 and the right to use the RxoidTM brand name owned by TMDI. At that time, 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, pursuant to an Exclusive License Agreement dated October 1, 2019, by and between TMDI and EM3 (the “Original EM3 Exclusive License”). Pursuant to the TMDI Agreement, we 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 cannabis, hemp or a combination thereof in any legal jurisdiction, in consideration for the issuance of 140,000,000 shares of the Company’s common stock. Such rights were recorded as the acquisition of an intangible asset in the amount of $140,000, based on the par value of the shares issued.
Effective February 9, 2021, both the TMDI Agreement and the Original EM3 Exclusive License were effectively terminated by mutual agreement of all parties and EM3 agreed to provide the Company with a royalty-free, perpetual license to use the Desirick Procedure or any derivation thereof and its application and use 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), and on a non-exclusive basis throughout the rest of the world.
During the term of the TMDI Agreement, we were required to reimburse TMDI for the initial two year license fee owed by TMDI to EM3 in the amount of $200,000. We partially satisfied this obligation by making an equipment purchase on behalf of EM3 in the amount of $135,000, and agreed to pay the remaining license fee of $65,000, either by making cash fee payments or by making cash purchases of certain supplies from EM3, within a 24-month period (for which, we had recorded a liability of $44,925 for the unpaid portion of this amount in accounts payable as of December 31, 2020). We had recorded the entire $200,000 license fee as an intangible asset and were amortizing such expense on a straight-line basis over a 24-month period at the rate of $25,000 per quarter. Pursuant to the termination of the two agreements on February 9, 2021, we no longer owe TMDI (or EM3) any license fees
61
under either agreement (including, the accrued liability of $44,925). Effective in February 2021, the Company is accounting for the licenses as an indefinite life asset not subject to amortization, resulting in the remaining balance of $170,075 being subjected to impairment testing at least annually, or more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired.
(5) Asset Acquisition
On November 16, 2020, the Company closed an Asset Purchase and Sales Agreement with Razor Jacket, LLC (“Razor Jacket”), an Oregon based supplier of isolate and related products and its owners, with an effective date of November 1, 2020 (the “RJ Agreement”). Pursuant to the terms of the RJ Agreement, we purchased the intellectual property owned by Razor Jacket and the related equipment owned by the two members of Razor Jacket for a total purchase price of: (a) $300,000 in cash, paid at closing; (b) 625,000 shares of restricted common stock, issued at closing; and (c) the right for the sellers to earn up to 16,500,000 shares of our Series A Preferred Stock, which are convertible into common stock on a one-for-one basis, subject to certain conditions. The acquired equipment was recently shipped to our existing facilities in Texas, where it is awaiting installation in a new location in that area (see Note 6).
The Company has accounted for this transaction as an acquisition of assets, pursuant to the provisions of Accounting Standards Codification (ASC) 805-50. Accordingly, we have accounted for each component of the purchase price as follows:
·We have charged the $300,000 in cash paid to the sellers at closing, which reflects an underlying cost that has no continuing benefit to the Company, to general and administrative expense in the nine-month transition period ended December 31, 2020 that was a prepaid asset at closing.
·We have allocated the 625,000 shares of restricted common stock issued to the sellers at closing as an addition to property and equipment in the amount of $500,000, based on an agreed upon price of $0.80 per share, which approximated the then current quoted price of the Company’s common stock, in accordance with the terms of the RJ Agreement.
·We have treated the right for the sellers to earn up to 16,500,000 shares of Series A Preferred Stock of the Company, consisting of three tranches of 5,500,000 shares each, as performance based contingent consideration, which potentially could be earned over a three-year period. Therefore, the Company will account for the issuance of any such shares of Series A Preferred Stock as compensation expense, when (and if) each tranche is earned and the shares are issued, pursuant to the terms of the RJ Agreement.
Razor Jacket was originally formed in July 2019 for the sole purpose of researching techniques for the extraction of isolates from raw hemp. We have not presented any pro forma disclosures relating to this acquisition in the notes to our financial statements because the transaction is deemed an asset acquisition.
62
(6) Property and Equipment
As of December 31, 2021, and December 31, 2020, the Company had the following balances of property and equipment:
| December 31, | ||||
2021 |
| 2020 | |||
Equipment purchased from Razor Jacket, LLC and awaiting installation in the Company's new facilities in Addison, Texas | $ | 500,000 |
| $ | 500,000 |
|
|
|
|
|
|
Equipment located in the Company's existing facilities in Addison, Texas |
| 221,412 |
|
| 104,240 |
|
|
|
|
|
|
Leasehold improvements in progress at the Company's new facilities in Addison, Texas |
| 491,005 |
|
| - |
|
|
|
|
|
|
Leasehold improvements in the Company's existing facilities in Addison, Texas |
| 2,500 |
|
| 2,500 |
|
|
|
|
|
|
Total property and equipment |
| 1,214,917 |
|
| 606,740 |
|
|
|
|
|
|
Less: Accumulated depreciation |
| (29,355) |
|
| (7,255) |
|
|
|
|
|
|
Net property and equipment | $ | 1,185,562 |
| $ | 599,485 |
Effective October 1, 2021, the Company entered into a lease agreement with a landlord to lease 8,566 square feet of commercial office building space located in Addison, Texas (see Note 8). As of December 31, 2021, the Company was in the process of building out this space with the intention of utilizing it as its corporate office as well as its aerosol filling laboratory and isolate manufacturing facility, beginning in the first or second quarter of 2022. As of December 31, 2021, the Company had capitalized leasehold improvements in progress at the new location in the amount of $491,005, of which $315,646 had not been paid and is reflected in Accounts Payable as of that date.
The equipment purchased from Razor Jacket, LLC in November 2020 was recently shipped to the Company’s existing facilities near Dallas, Texas, where it is awaiting installation in the new location in Addison, Texas, referenced above (see Note 5).
63
(7) Notes Payable
As of December 31, 2021 and 2020, the Company had the following note payable obligations:
|
| December 31, | ||||
|
| 2021 |
| 2020 | ||
Convertible debenture issued to an accredited investor on August 4, 2021, due May 1, 2022 in principal amount of $1,941,176, original issue discount of 15%, convertible at option of investor into a total of 4,852,940 shares of common stock at $0.40 per share and automatically convertible at 25% discount to the price per share of common stock in a qualified offering (net of unamortized debt discount of $866,128 as of December 31, 2021) |
| $ | 1,075,048 |
| $ | - |
|
|
|
|
|
|
|
Promissory note issued to an accredited investor on November 10, 2020, accruing interest at 5% per annum, due on January 10, 2021, along with lending fee of 20,000 shares of common stock |
|
| - |
|
| 300,000 |
|
|
|
|
|
|
|
Convertible promissory notes issued to two accredited investors on November 15, 2019, maturing in 1 to 5 years, accruing interest at 5% per annum, convertible into common stock at $0.05 per share |
|
| 150,000 |
|
| 150,000 |
|
|
|
|
|
|
|
Unsecured advances received from two officers in May through August 2021, accruing interest at 1% per annum, payable on demand |
|
| 260,000 |
| - | - |
|
|
|
|
|
|
|
Convertible promissory notes issued to former owners in acquisition of Power Blockchain, accruing interest at 5% per annum, principal repayments originally due in four equal installments on 2nd, 3rd, 4th and 5th anniversaries, convertible into common stock at $0.13 per share, with final maturity on February 1, 2023. |
|
| - |
|
| 165,240 |
|
|
|
|
|
|
|
Other short term notes issued to various affiliates of the former owners of Power Blockchain for acquisition of Treasury Stock, computers and equipment, and working capital financing, at stated interest rates of 10%. Amended on November 15, 2019, to mature in one year and to be convertible into common stock at $0.05 per share. |
|
| 48,386 |
|
| 351,933 |
|
|
|
|
|
|
|
Convertible notes issued to an accredited investor in three tranches from June to August 2020, net of unamortized debt discount of $43,306 (see further discussion below) |
|
| - |
|
| 46,694 |
|
|
|
|
|
|
|
Total notes payable |
| $ | 1,533,434 |
| $ | 1,013,867 |
Future maturities of notes payable as of December 31, 2021, without taking into account the unamortized debt discount, are as follows:
Year ending December 31, 2022 |
| $ | 2,249,562 |
Year ending December 31, 2023 |
|
| - |
Year ending December 31, 2024 |
|
| 150,000 |
|
| $ | 2,399,562 |
On August 4, 2021, the Company closed a short-term bridge loan with an institutional investor in the gross amount of $1,941,176. The closing of this bridge loan resulted in net proceeds to the Company of $1,650,000, after deducting the 15% original issue discount, which the Company is accreting as a non-cash charge to interest expense over the term of the loan. We recorded amortization on this original issue discount for the period from August 4, 2021 to December 31, 2021, in the amount of $161,764. The bridge loan is in the form of a convertible debenture with a maturity date of May 1, 2022 or earlier upon the closing of a 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
64
exchange (including Nasdaq). The debenture may not be prepaid without the prior written consent of the investor and 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. While the debenture is outstanding, the Company is prohibited from incurring additional indebtedness, repurchasing its securities or repaying certain of its indebtedness, paying cash dividends or other distributions on equity securities, other than pursuant to certain limited exceptions. The debenture is convertible into shares of the Company’s common stock at the lower of:
(a)$0.40 per share, which is equal to 100% of the market price of the Company’s common stock on the day prior to the closing of the offering, or
(b)a 25% discount to the offering price of the Company’s common stock in a qualified listing on a national exchange.
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 Company early adopted the provisions of ASU 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. Accordingly, the Company is treating the entire debenture as a debt liability on its consolidated balance sheet and has not bifurcated it into separate debt and equity components. The proceeds of the bridge loan will be used to meet the Company’s short-term working capital needs in anticipation of ultimately closing a qualified listing on a national exchange.
In conjunction with the convertible debenture, we granted the investor five-year warrants to purchase a total of 4,852,940 shares of our common stock at an exercise price of $0.40 per share. Such warrants have cashless exercise rights if when exercised, and following the six-month anniversary of the closing of the offering, a registration statement for the underlying shares of common stock, is not effective. The exercise of the warrants is subject to a beneficial ownership limitation of 4.99%, preventing such exercise by the holder, 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. The warrants contain anti-dilution rights such that if we issue, or are deemed to have issued, common stock at a price less than the then exercise price of the warrants, subject to certain exceptions, the exercise price of the 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 warrants is the same prior to and after such reduction in exercise price. The warrants also require the Company, at the holder’s option, following a Fundamental Transaction (as defined in the agreement), to purchase the warrants from the holder in cash, based on the Black Scholes value (as calculated pursuant to the terms of the warrant). Additionally, we made a grant to the placement agent for the bridge loan of warrants to purchase a total of 242,647 shares of our common stock at an exercise price of $0.40 per share, with substantially similar terms. All of these warrants are outstanding as of December 31, 2021.
The Company accounted for the issuance of the warrants as a liability recorded at fair value in accordance with ASC 480-10. Using the Black Scholes model, the warrant liability was valued at issuance in the amount of $1,717,213. This was recorded as a discount to the convertible debt of $1,650,000 with the excess $67,213 expensed as interest. The Company accreted the debt discount to interest expense over the term of the convertible debenture. Debt discount amortization for the period from August 4, 2021 to December 31, 2021 totaled $980,497. As of December 31, 2021, we adjusted the warrant liability, to its then current fair value of $1,085,360, based on the Black Scholes model, resulting in a gain on warrant liability of $631,853 that was recorded in the statement of operations.
Prior to obtaining the bridge loan noted above, the Company received unsecured cash advances from two of its officers from May through August 2021, in the net amount of $260,000. These related party advances accrue interest at the rate of 1% per annum and are payable on demand. Such advances are expected to be repaid out of the proceeds of an underwritten public offering of the Company’s equity securities in conjunction with the planned listing on a national exchange. However, no assurance can be given that the Company will be successful in achieving a closing of the underwritten public offering.
Effective August 31, 2020, the Company reached the necessary milestone to trigger the conversion of certain notes payable issued on various dates in 2018 and 2019, as amended, in the total principal amount of
65
$732,835, into shares of the Company’s common stock, at a conversion price of $0.05 per share, 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 additional accrued interest in the amount of $96,536, converted their notes into 10,022,749 shares of common stock at that time.
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. As of December 31, 2021, convertible notes payable in the amount of $174,685, plus accrued interest in the amount of $38,683, remain outstanding and are available to be subsequently converted into 4,267,360 shares of common stock, subject to the ownership limitation (see Note 9).
From June 30, 2020 to August 14, 2020, the Company entered into three identical Securities Purchase Agreements with an accredited investor (the “Buyer”) with respect to Convertible Promissory Notes (the “Notes”) issued by the Company to the Buyer in the total amount of $125,000. The Notes had a maturity date of one year after the date of each issuance and bore interest at a rate of 12% per annum, which was not due until maturity. At the option of the Buyer, the Notes could be converted into shares of the Company’s common stock, beginning one hundred eighty (180) days following the date of each issuance. Under this option, the conversion price was equal to a discount of 42% of the average of the three (3) lowest closing bid prices for the common stock during the prior fifteen (15) trading day period. The Buyer was limited to a 4.99% beneficial ownership limitation in connection with such conversion right under the note. The Company determined that the conversion feature of the Notes required the recognition of a derivative liability upon each issuance. Accordingly, the Company calculated the fair value of these derivative liabilities, using the Black Scholes model, and recognized a derivative liability for each Note in that amount offset by a debt discount. On December 30, 2020, the Buyer elected to exercise the conversion option on $35,000 of principal of the first Note resulting in the issuance of 80,775 shares of common stock to the Buyer. In the three months ended March 31, 2021, the Buyer elected to exercise the conversion option on the remaining principal of the first Note and the entire principal of the second and third Notes resulting in the issuance of 264,520 shares of common stock to the Buyer.
Effective November 15, 2019, the following transactions took place in the Company’s notes payable:
·The Company entered into new promissory notes with two accredited investors under which the Company borrowed a total of $300,000, with such notes maturing in five years, accruing interest at 5% per annum, and being convertible into common stock at the option of the holders, at a conversion price of $0.05 per share.
·The two holders of outstanding convertible notes payable elected to exercise their existing rights to convert a portion of their notes into shares of common stock, at the stated conversion ratio of $0.13 per share. The two holders converted a total principal amount of $2,034,760 in notes into a total of 15,652,000 shares of common stock leaving the remaining total principal balance of $165,240 unconverted.
·The Company entered into an amendment with the holders of existing non-convertible notes in the total principal amount of $732,835 (out of a total of $756,535) whereby such notes will remain outstanding and continue to accrue interest with deferral of the maturity dates being extended for one year or until the Company had raised an additional $500,000 of new equity securities, at which time, the principal and accrued interest was to be converted into common stock at a conversion price of $0.05 per share (as indicated above, such notes in the amount of $708,150 have been converted into common stock through December 31, 2021, as a result of such $500,000 equity raise threshold being met).
The Company performed an analysis of both the newly issued convertible notes and the newly amended existing notes, which were formerly non-convertible, to determine whether there was a beneficial conversion feature and noted none.
66
(8) Long Term Lease Obligation
Effective October 1, 2021, the Company entered into a lease agreement with a landlord to lease 8,566 square feet of commercial office building space located in Addison, Texas (see Note 6). The lease agreement is for a total term of 63 months, beginning October 1, 2021 and ending December 31, 2026. As of December 31, 2021, the Company is building out this space and intends to utilize it as its corporate office as well as its aerosol filling laboratory and isolate manufacturing facility. The Company is accounting for the lease agreement as an operating lease under ASU 2016-02, Leases (Topic 842). Accordingly, the Company has capitalized the present value of the future lease obligations and is amortizing the related right-of-use asset on a straight-line basis each month over the term of the lease.
Future operating lease minimum payments, together with their present values as of December 31, 2021, are summarized as follows:
Year ending December 31, 2022 |
| $ | 94,226 |
Year ending December 31, 2023 |
|
| 98,509 |
Year ending December 31, 2024 |
|
| 102,792 |
Year ending December 31, 2025 |
|
| 107,075 |
Year ending December 31, 2026 |
|
| 111,358 |
Total future minimum lease payments |
|
| 513,960 |
Less amounts representing interest |
|
| (61,927) |
Present value of lease liability |
|
| 452,033 |
Current portion of operating lease liability |
|
| (73,289) |
|
|
|
|
Long-term portion of operating lease liability |
| $ | 378,744 |
As of December 31, 2021, the operating lease right-of-use asset and operating lease liabilities were $425,171 and $452,033, respectively. The long-term portion of the operating lease liabilities, $378,744, is included in long-term obligations. As of December 31, 2021, the weighted-average discount rate for this operating lease was 5%.
The future operating lease payments are guaranteed by an employee of the Company.
(9) Stockholders’ Equity
Effective January 13, 2020, the Company filed a Certificate of Amendment to its Amended and Restated Articles of Incorporation (the “Certificate of Amendment”) with the Secretary of State of the State of Nevada to increase the total authorized shares of common stock of the Company from 200 million shares to 750 million shares and to authorize 100 million shares of “blank check” Preferred Stock of the Company. Subsequently, the Company filed three separate designations of preferred stock with the Secretary of State of Nevada, beginning in November 2020, designating 16,500,000 shares of Series A Preferred Stock, 2,000,000 shares of Series B Preferred Stock, and 8,500,000 shares of Series C Preferred Stock, however, no shares of preferred stock have been issued to date.
Effective August 31, 2020, the Company reached the necessary milestone to trigger the 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, at a conversion price of $0.05 per share, 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 at that time.
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
67
stock were issued. As of December 31, 2021, convertible notes payable in the amount of $174,685, plus accrued interest in the amount of $38,683, remain outstanding and are available to be subsequently converted into 4,267,360 shares of common stock, subject to the ownership limitation (see Note 7).
During the year ended December 31, 2021, the Company entered into private stock subscription agreements with several accredited investors whereby it sold them a total of 1,462,500 shares of restricted common stock at an offering price of $0.40 per share, resulting in gross proceeds to the Company of $585,000. The investors also received an equal number of warrants to purchase additional shares of common stock at exercise prices of $0.85 to $1.00 per share. Such purchases must be made within 180 days of the Company’s 3-day volume weighted average stock price being above the exercise price, otherwise, such warrants are void.
On December 29, 2020, the Board of Directors adopted, subject to the ratification by the majority shareholders, which ratification occurred pursuant to a majority shareholder consent, effective on December 30, 2020, the Rapid Therapeutic Science Laboratories, Inc. 2020 Equity Incentive Plan. Effective on January 7, 2022, the Board of Directors adopted, subject to the ratification by the majority shareholders, which ratification occurred pursuant to a majority shareholder consent, effective on January 11, 2022, the First Amended and Restated Rapid Therapeutic Science Laboratories, Inc. 2020 Equity Incentive Plan (the “2020 Plan”).
The 2020 Plan provides an opportunity for any employee, officer, director or consultant of the Company, subject to limitations provided by federal or state securities laws, to receive (i) incentive stock options (to eligible employees only); (ii) nonqualified stock options; (iii) restricted stock; (iv) stock awards; (v) shares in performance of services; (vi) other stock-based awards; or (vii) any combination of the foregoing. In making such determinations, the Board of Directors may take into account the nature of the services rendered by such person, his or her present and potential contribution to the Company’s success, and such other factors as the Board of Directors in its discretion shall deem relevant.
Subject to adjustment in connection with the payment of a stock dividend, a stock split or subdivision or combination of the shares of common stock, or a reorganization or reclassification of the Company’s common stock, the aggregate number of shares of common stock which may be issued pursuant to awards under the 2020 Plan is the sum of (i) 25,000,000 shares, and (ii) an annual increase on March 1st of each calendar year, beginning in 2022 and ending in 2030, in each case subject to the approval of the Board of Directors or the compensation committee of the Company (if any) on or prior to the applicable date, equal to the lesser of (A) five percent (5%) of the total shares of common stock of the Company outstanding on the last day of the immediately preceding fiscal year; (B) 25,000,000 shares of common stock; and (C) such smaller number of shares as determined by the Board of Directors or compensation committee of the of the Company (if any)(the “Share Limit”), also known as an “evergreen” provision. Notwithstanding the foregoing, shares added to the Share Limit are available for issuance as incentive stock options only to the extent that making such shares available for issuance as incentive stock options would not cause any incentive stock option to cease to qualify as such. In the event that the Board of Directors or the compensation committee (if any) does not take action to affirmatively approve an increase in the Share Limit on or prior to the applicable date provided for under the plan, the Share Limit remains at its then current level. Notwithstanding the above, no more than 250,000,000 incentive stock options may be granted pursuant to the terms of the 2020 Plan.
The maximum number of shares subject to awards granted during a single calendar year to any non-employee director, taken together with any cash fees paid during the compensation year to the non-employee director, in respect of the director’s service as a member of the Board during such year (including service as a member or chair of any committees of the Board), will not exceed $500,000 in total value (calculating the value of any such awards based on the grant date fair value of such awards for financial reporting purposes). Compensation will count towards this limit for the calendar year in which it was granted or earned, and not later when distributed, in the event it is deferred.
Employees, non-employee directors, and consultants of the Company and its subsidiaries are eligible to participate in the 2020 Plan. Incentive stock options may be granted under the 2020 Plan only to employees of the Company and its affiliates. Employees, directors and consultants of the Company and its affiliates are eligible to receive all other types of awards under the 2020 Plan. No awards are issuable by the Company under the 2020 Plan (a) in connection with services associated with the offer or sale of securities in a capital-raising transaction; or (b) where the services directly or indirectly promote or maintain a market for the Company’s securities.
68
The 2020 Plan will automatically terminate on the 10th anniversary of original approval date of the Plan (December 29, 2030). However, prior to that date, the Company’s Board of Directors may amend or terminate the 2020 Plan as it deems advisable, but it cannot adopt an amendment if it would (1) without a grantee’s consent, materially and adversely affect that grantee’s award; or (2) without shareholder approval, increase the number of shares of the Company’s common stock that can be awarded under the 2020 Plan, except as provided for therein.
The Company has made no awards under the 2020 Plan to date.
In March 2018, the Board approved the establishment of a 2018 Stock Option Plan with an authorization for the issuance of up to 20,000,000 shares of common stock. The Plan is designed to provide for future discretionary grants of stock options, stock awards and stock unit awards to key employees and non-employee directors. The Company has made no awards under the 2018 Stock Option Plan to date.
(10) Related Party Transactions
Office services were provided without charge by our Chief Executive Officer and director, Donal R. Schmidt, Jr., from November 15, 2019 to June 30, 2021 (at which time, the Company relocated to a new leased office location). Such costs are immaterial to the consolidated financial statements and, accordingly, have not been reflected therein. The officers and directors of the Company are involved in other business activities and may, in the future, become involved in other business opportunities. If a specific business opportunity becomes available, such persons may face a conflict in selecting between the Company and their other business interests. The Company’s audit committee is tasked with resolving related party conflicts.
(11) Provision for Income Taxes
The Company accounts for income taxes under FASB Accounting Standard Codification ASC 740 “Income Taxes”. ASC 740 requires use of the liability method. ASC 740 provides that deferred tax assets and liabilities are recorded based on the differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes, referred to as temporary differences. Deferred tax assets and liabilities at the end of each period are determined using the currently enacted tax rates applied to taxable income in the periods in which the deferred tax assets and liabilities are expected to be settled or realized.
For the year ended December 31, 2021, the Company had net operating loss carry forwards of approximately $2,847,900, after taking certain non-deductible items into account, as compared to $1,694,300 for the nine months ended December 31, 2020. Such net operating loss carry forwards may be available to reduce future years' taxable income, however, any 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 as not likely to occur. Accordingly, the Company has recorded a valuation allowance for the deferred tax asset relating to these tax loss carry-forwards. Net operating losses will begin to expire in 2030.
Components of net deferred tax assets, including a valuation allowance, as of December 31, 2021 and 2020, are as follows:
|
| December 31, | ||||
| 2021 |
| 2020 | |||
Deferred tax assets |
|
|
|
|
|
|
Net operating loss carryforward |
| $ | 1,200,100 |
| $ | 602,000 |
Total deferred assets |
|
| 1,200,100 |
|
| 602,000 |
|
|
|
|
|
|
|
Valuation allowance |
|
| (1,200,100) |
|
| (602,000) |
Net deferred tax assets |
| $ | - |
| $ | - |
In assessing the recovery of the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in the periods in which those temporary differences become deductible. Management considers the scheduled reversals of future deferred tax assets, projected future taxable income, and tax planning strategies in making this assessment. As a result, management determined it was more likely than not the deferred tax assets would not be realized as of December 31, 2021. The provision for
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income taxes differs from the amount computed by applying the statutory federal income tax rate to income before provision for income taxes. The sources and tax effects of the differences are as follows:
Year Ended December 31, 2021 |
| Nine Months Ended December 31, 2020 | |
|
|
|
|
U.S. federal statutory tax rate | 21.0% |
| 21.0% |
Valuation allowance | (21.0)% |
| (21.0)% |
Net effective tax rate | 0% |
| 0% |
At December 31, 2021, we had an unused net operating loss carryover of approximating $5,715,000, after taking certain non-deductible items into account, that is available to offset future taxable income which expires beginning 2038. The availability of such net operating loss carryover to be offset against any future taxable income is significantly limited as a result of a change of control transaction that occurred in November 2019. All prior tax years remain open currently.
(12) Commitments and Contingencies
From time to time in the ordinary course of our business, the Company may be involved in legal proceedings, the outcomes of which may not be determinable. The results of litigation are inherently unpredictable. Any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and result in diversion of significant resources. We are not able to estimate an aggregate amount or range of reasonably possible losses for those legal matters for which losses are not probable and estimable, primarily for the following reasons: (i) many of the relevant legal proceedings are in preliminary stages, and until such proceedings develop further, there is often uncertainty regarding the relevant facts and circumstances at issue and potential liability; and (ii) many of these proceedings involve matters of which the outcomes are inherently difficult to predict. We currently have no insurance policies covering such potential losses.
We are not at this time involved in any legal proceedings.
(13) Subsequent Events
In late January 2022, the Company closed two short-term loans from two different lenders in the total amount of $573,738. One of these loans was from an independent director of the Company in the amount of $400,000. Both of these loans were in the form of unsecured promissory notes bearing interest at a rate of approximately 18% per annum with a maturity of one year. For the larger note from 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 are required. In the event of a default by the Company on the payment terms of either note, the notes would be convertible into shares of the Company’s common stock at a conversion price equal to the greater of (a) $0.000075 per share; and (b) 75% of the average closing bid price of the Company’s common stock, on the principal securities exchange or market where the Company’s common stock is then quoted or traded, for the five trading days immediately prior to the date of conversion. The Company expects to use the proceeds of these loans to meet its short-term working capital needs in anticipation of ultimately closing a qualified listing on a national exchange, of which there can be no assurance.
On February 11, 2022, the Company made a contingent purchase of lab equipment from the two principals of a private company. Such equipment is ultimately planned to be installed in the Company’s new laboratory and office facility which is currently under construction (see Note 6). The consideration for this purchase consists of: (a) 50,000 shares of Common Stock issued to each of the two principals, and (b) $52,000 in cash payment to be made no later than June 30, 2022, subject to completion of a qualified listing on a national exchange. If such a listing is not completed by that date, the Company may elect to return the equipment, however, the two principals will retain the 100,000 shares as non-cash compensation.
On March 8, 2022, the Company fully repaid the note with an institutional investor received in late January 2022 by borrowing funds from a seperate institutional investor, with substantially similar terms, but with a slightly longer maturity in the amount of $197,000. Under this new loan, we are required to make monthly principal and interest payments of $21,276, beginning on May 1, 2022.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures.
Our management, including our principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of December 31, 2021, the end of the period covered by this Report. Based on this evaluation, our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), concluded that as a result of the material weakness in our internal controls over financial reporting discussed below, our disclosure controls and procedures were not effective at ensuring that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding disclosure.
Inherent Limitations over Internal Controls
The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles (“GAAP”). The Company’s internal control over financial reporting includes those policies and procedures that: (i)pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (ii)provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of the Company’s management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Management, including the Company’s Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Attestation Report of the Registered Public Accounting Firm
Our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal controls over financial reporting as of December 31, 2021.
Management's Report on Internal Control Over Financial Reporting
Our principal executive officer and our principal accounting and financial officer, are responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Management conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2021. In making this assessment, management used the criteria described in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment using those criteria, management concluded that our internal controls over financial reporting were not effective at the reasonable assurance level, primarily due to a lack of segregation of duties in financial reporting as of December 31, 2021, and continue to be ineffective. To the extent
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practical in light of its current financial condition, the Company will consider expanding financial reporting resources in the future.
In light of the material weakness described above, we performed additional analysis and other post-closing procedures to ensure our consolidated financial statements were prepared in accordance with generally accepted accounting principles. Accordingly, we believe that the consolidated financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.
Changes in Internal Controls
There were no changes in the Company’s internal controls over financial reporting that occurred during the quarter ended December 31, 2021 that have materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
ITEM 9B. OTHER INFORMATION.
The following information was required to be disclosed in a Current Report on Form 8-K during the period covered by this Annual Report on Form 10-K, but was inadvertently not timely reported by the Company. Instead of filing such information on a separate Current Report on Form 8-K, we have elected to make the following disclosures in this Annual Report on Form 10-K under Items 1.01 and 2.03 of Form 8-K, below:
Item 1.01 Entry into a Material Definitive Agreement.
The disclosures under Item 2.03 below are incorporated by reference into this Item 1.01.
Item 2.03 Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant.
Effective October 1, 2021, the Company entered into a Commercial Lease Agreement with Triple D Rosegate, LLC to lease 8,566 square feet of commercial office building space located in Addison, Texas, at 4139 Centurion Way, Suite 400, Addison, Texas 75001. The lease agreement is for a total term of 63 months, beginning October 1, 2021 and ending December 31, 2026. Rent payable under the lease is as follows:
Dates | Monthly Base Rent |
From October 1, 2021 to December 31, 2021 | $1.00 |
From January 1, 2022 to December 31, 2022 | $7,852 |
From January 1, 2023 to December 31, 2023 | $8,209 |
From January 1 2024 to December 31, 2024 | $8,566 |
From January 1, 2025 to December 31, 2025 | $8,923 |
From January 1, 2026 to December 31,2026 | $9,280 |
We paid a $9,280 security deposit in connection with our entry into the lease. We also agreed to pay our portion of the expenses of the property, including real estate taxes, insurance premiums and common area maintenance expenses, including our pro Rata Share of all costs of compliance with laws, ownership, maintenance, repairs, replacements, operation of the property.
The Company’s obligations under the lease are guaranteed by Sean Berrier, Senior Vice President (a non-executive officer position) of the Company and a significant shareholder of the Company.
The lease contains customary indemnification and termination provisions. In addition, the lease contains customary events of default, including payment defaults, breaches of covenants and/or certain representations and warranties, bankruptcy or insolvency proceedings and other events of default customary for this type of transaction. The lease also contains remedies for such events of default, including the landlord’s right to cure a default (together with our requirement to pay 12% interest in connection therewith), the right to terminate the lease, and other remedies customary for this type of transaction.
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We have two 60 month extension options under the lease, on the same terms as the original term, but increases for market rent.
As of the date of this Report, the Company is in the process of building out this space with the intention of utilizing it as its corporate office as well as its aerosol filling laboratory and isolate manufacturing facility, beginning in the second or third quarter of 2022.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.
Not applicable.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following table sets forth certain information, with respect to our current directors and executive officers as of March 14, 2022.
Name |
| Position |
| Age |
| Director/Officer Since |
Donal R. Schmidt, Jr. |
| Director, President and Chief Executive Officer |
| 61 |
| November 2019 |
D. Hughes Watler, Jr. |
| Director and Chief Financial Officer |
| 73 |
| November 2019 |
J. Scott Suggs |
| Director |
| 52 |
| August 2021 |
Dr. Henry A. Punzi |
| Director |
| 63 |
| August 2021 |
We do not have any executive officers who are not also members of the Board of Directors. Our directors and any additional directors we may appoint in the future are elected annually (or as often as we hold meetings of stockholders) and will hold office until our next annual meeting of the stockholders and until their successors are elected and qualified. Officers will hold their positions at the pleasure of the Board of Directors, absent any employment agreement. Our officers and directors may receive compensation as determined by us from time to time by vote of the Board of Directors. Such compensation might be in the form of stock options. Directors may be reimbursed by the Company for expenses incurred in attending meetings of the Board of Directors. Vacancies in the Board of Directors are filled by majority vote of the remaining directors.
Business Experience
The following is a brief description of the education and business experience of our current directors and executive officers.
Donal R. Schmidt, Jr. - Director, President and Chief Executive Officer
Donal R. Schmidt, Jr. is the founder and President of Texas MDI, Inc. Mr. Schmidt is an attorney and Certified Public Accountant in Texas with substantial combined business experience in both fields. Mr. Schmidt has served as the Company’s Chief Executive Officer, President, and Director since November 2019. In the last five years, he has practiced law in the Law Firm of Donal R. Schmidt, Jr., PLLC, in Dallas, Texas, as the principal. He has previously run several successful public companies, including Maxwell Resources, Inc., an oil and gas company which transitioned to a resource play in mining (which Mr. Schmidt served as Chief Executive Officer and Chairman of from February 2014 to November 2014) and INTREorg Systems, Inc., an internet consulting and ‘back office’ service provider to other businesses (which Mr. Schmidt served as Chief Executive Officer and Chairman of from May 2011 to February 2012). In conjunction with his founding of TMDI, he has gained significant experience as an attorney and entrepreneur in the cannabinoid industry. He received both M.S. and M.B.A. degrees from the University of Texas at Dallas and a J.D. degree from Texas Wesleyan (now Texas A&M) University School of Law.
Qualifications:
The Board of Directors believes that Mr. Schmidt is highly qualified to serve as a member of the Board due to his significant experience running public companies and his substantial understanding of the aerosol manufacturing and marketing industry in general.
D. Hughes Watler, Jr. - Director and Chief Financial Officer
D. Hughes Watler, Jr. is a Certified Public Accountant in Texas and has been an independent financial and accounting consultant since January 2018. Mr. Watler has served as the Chief Financial Officer and as a Director of the Company since November 2019. From March 2007 to November 2017, he served as the Chief Financial Officer of Stack-It Storage, Inc. (OTCQB: STAK) and predecessor companies. He previously served as Senior Vice President & Chief Financial Officer of Goodrich Petroleum Corporation (NYSE: GDP) from 2003 to 2006 and as a financial officer of several other public and private energy companies from 1992 to 2003. Prior thereto, he was an audit partner with Price Waterhouse LLP and was on the firm’s audit staff. He received a B.B.A degree from Texas A&M University and an M.P.A. degree from the University of Texas at Austin.
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Qualifications:
Mr. Watler has served as a financial officer of many private and public companies in the past and his industry financial expertise makes him an asset to the Company and qualified to serve as director of the Company.
J. Scott Suggs - Director
Mr. Suggs has served as the President and founder of Suggs Pediatric Outpatient Services (“SPOTS”) since its founding in 2010. SPOTS is a pediatric outpatient and physical therapy practice located in Dallas, Texas. Among other medical related specialties, SPOTS provides occupational and physical therapy services, including sensory integration therapy, fine and gross motor skill training, visual perceptual training, handwriting remediation and interactive Metronome therapy. SPOTS currently employs a total of 11 therapists between its primary office in Dallas and two satellite locations.
In addition, Mr. Suggs has served as the President and co-founder of S&S Transportation, a diversified transportation company located in Lewisville, Texas, which is focused on specialized delivery services to the oil and gas industry, since 2012. Previously, he served as the Director of Doctor Recruitment for Monarch Dental Corporation, a former publicly-traded company located in Dallas, from 2000 to 2001, and as the Director of Real Estate of such entity, from 1993 to 2001.
Mr. Suggs received an Associate degree in Business Administration from Austin College in Sherman, Texas, in 1993.
Qualifications:
The Board of Directors believes that Mr. Suggs is highly qualified to serve as a member of the Board due to his significant experience in the healthcare space and with startup companies.
Dr. Henry A. Punzi - Director
Dr. Punzi has been engaged in the private practice of Internal Medicine and Hypertension in Carrollton, Texas, since 1984. During that time, he has served as the Medical Director, Clinical Trials, at Trinity Hypertension & Metabolic Research Institute, and Attending Physician, Internal Medicine Department, at Carrollton Regional Medical Center, both located in Carrollton, Texas. Since 2010, he has also been a Clinical Assistant Professor at the University of Texas Southwestern Medical School and has been an Associate Clinical Professor since 2004 at Texas Women’s University, both located in Dallas, Texas. Dr. Punzi has been the author or co-author of over 100 medical publications that have been published in a wide variety of professional journals and he has also served as the principal investigator for over 100 clinical research trials in the last 35 years. Dr. Punzi received a Doctor of Medicine degree from the University of Buenos Aires in 1980 and an MBA degree from Texas Tech University in 2009.
Qualifications:
The Board of Directors believes that Dr. Punzi is highly qualified to serve as a member of the Board due to his significant experience as a physician and due to his involvement with clinical trials and Investigative New Drug Applications with the FDA.
Significant Employees
Duane Drinkwine, Ph.D. - Chief Science Officer (a non-executive position)
Dr. Duane C. Drinkwine, joined the Company as Chief Science Officer (a non-executive position) in charge of laboratory operations in January 2021. From October 2020 until January 2021, he served as a laboratory consultant for the pharmaceutical industry at Apcial Consultations in Louisville, KY. From May 2017 until October 2020, he was Senior Applications Engineering Manager with responsibility for laboratory equipment qualification, set-up and training at Cascade Sciences and AGI USA in Portland, OR. From August 2015 until May 2017, he was Senior Applications Engineering Manager with responsibility for heat transfer equipment sizing for jacketed laboratory reactors for the pharmaceutical, petroleum, food, biotech and cosmetic industries at Huber USA in Cary NC. His previous experience includes serving as a laboratory reactor scientist at GlaxoSmithKline PLC. Dr.
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Drinkwine received a Bachelor’s degree in Electrical Engineering Technology from Pacific University in 1997 and a Ph.D. degree in Electrical Engineering Technology from Ashbourne University in 2004.
Corporate Governance
Family Relationships amongst Directors and Officers
There are no family relationships among our directors, executive officers, or persons nominated or chosen by the Company to become directors or executive officers.
Arrangements between Officers and Directors
To our knowledge, there is no arrangement or understanding between any of our officers and any other person, including directors, pursuant to which the officer was selected to serve as an officer, except as discussed below.
Involvement in Certain Legal Proceedings
None of our executive officers or directors has been involved in any of the following events during the past ten years: (1) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (2) any conviction in a criminal proceeding or being a named subject to a pending criminal proceeding (excluding traffic violations and minor offenses); (3) being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; (4) being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law; (5) being the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of (i) any Federal or State securities or commodities law or regulation; (ii) any law or regulation respecting financial institutions or insurance companies, including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or (iii) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or (6) being the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section (1a)(40) of the Commodity Exchange Act), or any equivalent exchange, association, entity, or organization that has disciplinary authority over its members or persons associated with a member.
Board Leadership Structure
Our Board of Directors has the responsibility for selecting the appropriate leadership structure for the Company. In making leadership structure determinations, the Board of Directors considers many factors, including the specific needs of the business and what is in the best interests of the Company’s stockholders.
Risk Oversight
Effective risk oversight is an important priority of the Board of Directors. Because risks are considered in virtually every business decision, the Board of Directors discusses risk throughout the year generally or in connection with specific proposed actions. The Board of Directors’ approach to risk oversight includes understanding the critical risks in the Company’s business and strategy, evaluating the Company’s risk management processes, allocating responsibilities for risk oversight, and fostering an appropriate culture of integrity and compliance with legal responsibilities. The directors exercise direct oversight of strategic risks to the Company.
Other Directorships
No director of the Company is also a director of issuers with a class of securities registered under Section 12 of the Exchange Act (or which otherwise are required to file periodic reports under the Exchange Act).
Committees of the Board
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Effective on February 3, 2021, the Board of Directors adopted Charters of the Audit Committee; Compensation Committee and Nominating and Corporate Governance Committee.
Committee membership of the Board of Directors is as follows:
Board Committee Membership
| Independent | Audit Committee | Compensation Committee | Nominating and Corporate Governance Committee |
Donal R. Schmidt, Jr.(1) |
|
|
|
|
D. Hughes Watler, Jr. |
|
|
|
|
J. Scott Suggs | X | C | M | C |
Dr. Henry A. Punzi | X | M | C | M |
(1) Chairman of Board of Directors.
C - Chairman of Committee.
M - Member.
Audit Committee
The Audit Committee, which is comprised exclusively of independent directors, has been established by the Board to oversee our accounting and financial reporting processes and the audits of our financial statements.
The Board has selected the members of the Audit Committee based on the Board’s determination that the members are financially literate (as required by Nasdaq Capital Market rules) and qualified to monitor the performance of management and the independent auditors and to monitor our disclosures so that our disclosures fairly present our business, financial condition and results of operations.
The Board has also determined that Mr. Scott Suggs, is an “audit committee financial expert” (as defined in the SEC rules) because he has the following attributes: (i) an understanding of generally accepted accounting principles in the United States of America (“GAAP”) and financial statements; (ii) the ability to assess the general application of such principles in connection with accounting for estimates, accruals and reserves; (iii) experience analyzing and evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by our financial statements; (iv) an understanding of internal control over financial reporting; and (v) an understanding of audit committee functions. Mr. Suggs has acquired these attributes largely by self-study.
The Audit Committee has the sole authority, at its discretion and at our expense, to retain, compensate, evaluate and terminate our independent auditors and to review, as it deems appropriate, the scope of our annual audits, our accounting policies and reporting practices, our system of internal controls, our compliance with policies regarding business conduct and other matters. In addition, the Audit Committee has the authority, at its discretion and at our expense, to retain special legal, accounting or other advisors to advise the Audit Committee.
Compensation Committee
The Compensation Committee, which is comprised exclusively of independent directors, is responsible for the administration of our stock compensation plans, approval, review and evaluation of the compensation arrangements for our executive officers and directors and overseeing and advising the Board on the adoption of policies that govern the Company’s compensation and benefit programs. In addition, the Compensation Committee will have the authority, at its discretion and at our expense, to retain special legal, accounting or other advisors to advise the Compensation Committee.
Specifically, the principal responsibilities and functions of the Compensation Committee are as follows: (1) review the competitiveness of the Company’s executive compensation programs to ensure (a) the attraction and retention of executives, (b) the motivation of executives to achieve the Company’s business objectives, and (c) the alignment of the interests of key leadership with the long-term interests of the Company’s stockholders; assist the
77
Board of Directors in establishing CEO annual goals and objectives; (2) review trends in executive compensation, oversee the development of new compensation plans, and, when necessary, approve the revision of existing plans; (3) review and approve the compensation structure for executives; (4) oversee an evaluation of the performance of the Company’s executive officers and approve the annual compensation, including salary, bonus, incentive and equity compensation, for the executive officers. Review and approve compensation packages for new executive officers and termination packages for executive officers; (5) review and make recommendations concerning long-term incentive compensation plans, including the use of equity-based plans; (6) periodically review the compensation paid to non-employee directors and make recommendations to the Board for any adjustments. No member of the Committee will act to fix his or her own compensation except for uniform compensation to directors for their services as a director; (7) review periodic reports from management on matters relating to the Company’s compensation practices; (8) produce an annual report of the Compensation Committee on executive compensation for the Company’s annual proxy statement in compliance with and to the extent required by applicable SEC rules and regulations and any relevant listing authority; (9) obtain or perform an annual evaluation of the Committee’s performance and make applicable recommendations about, among other things, changes to the charter of the Committee; and (10) take other actions that the Board shall reasonably request.
Nominating and Governance Committee
The Nominating and Governance Committee, which is comprised exclusively of independent directors, is responsible for identifying prospective qualified candidates to fill vacancies on the Board, recommending director nominees (including chairpersons) for each of our committees, developing and recommending appropriate corporate governance guidelines and overseeing the self-evaluation of the Board.
In considering individual director nominees and Board committee appointments, our Nominating and Governance Committee seeks to achieve a balance of knowledge, experience and capability on the Board and Board committees and to identify individuals who can effectively assist the Company in achieving our short-term and long-term goals, protecting our stockholders’ interests and creating and enhancing value for our stockholders. In so doing, the Nominating and Governance Committee considers a person’s diversity attributes (e.g., professional experiences, skills, background, race and gender) as a whole and does not necessarily attribute any greater weight to one attribute. Moreover, diversity in professional experience, skills and background, and diversity in race and gender, are just a few of the attributes that the Nominating and Governance Committee takes into account. In evaluating prospective candidates, the Nominating and Governance Committee also considers whether the individual has personal and professional integrity, good business judgment and relevant experience and skills, and whether such individual is willing and able to commit the time necessary for Board and Board committee service.
While there are no specific minimum requirements that the Nominating and Governance Committee believes must be met by a prospective director nominee, the Nominating and Governance Committee does believe that director nominees should possess personal and professional integrity, have good business judgment, have relevant experience and skills, and be willing and able to commit the necessary time for Board and Board committee service. Furthermore, the Nominating and Governance Committee evaluates each individual in the context of the Board as a whole, with the objective of recommending individuals that can best perpetuate the success of our business and represent stockholder interests through the exercise of sound business judgment using their diversity of experience in various areas. We believe our current directors possess diverse professional experiences, skills and backgrounds, in addition to (among other characteristics) high standards of personal and professional ethics, proven records of success in their respective fields and valuable knowledge of our business and our industry.
The Nominating and Governance Committee uses a variety of methods for identifying and evaluating director nominees. The Nominating and Governance Committee also regularly assesses the appropriate size of the Board and whether any vacancies on the Board are expected due to retirement or other circumstances. In addition, the Nominating and Governance Committee considers, from time to time, various potential candidates for directorships. Candidates may come to the attention of the Nominating and Governance Committee through current Board members, professional search firms, stockholders or other persons. These candidates may be evaluated at regular or special meetings of the Nominating and Governance Committee and may be considered at any point during the year.
The Committee evaluates director nominees at regular or special Committee meetings pursuant to the criteria described above and reviews qualified director nominees with the Board. The Committee selects nominees that best suit the Board’s current needs and recommends one or more of such individuals for election to the Board.
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Stockholder Communications with the Board
A stockholder who wishes to communicate with our Board of Directors may do so by directing a written request addressed to our Secretary, 5580 Peterson Ln., Suite 120, Dallas, Texas 75240, who, upon receipt of any communication other than one that is clearly marked “Confidential,” will note the date the communication was received, open the communication, make a copy of it for our files and promptly forward the communication to the director(s) to whom it is addressed. Upon receipt of any communication that is clearly marked “Confidential,” our Secretary will not open the communication, but will note the date the communication was received and promptly forward the communication to the director(s) to whom it is addressed.
Board of Directors Meetings
During the year ended December 31, 2021 and the nine-month transition period ending December 31, 2020, the Board held no formal meetings but approved a number of corporate actions by unanimous consent.
Policy on Equity Ownership
The Company does not have a policy on equity ownership at this time.
Policy Against Hedging
The Company recognizes that hedging against losses in Company shares may disturb the alignment between stockholders and executives that equity awards are intended to build; however, while ‘short sales’ are discouraged by the Company, the Company does not currently have a policy prohibiting such transactions. We plan to implement a policy prohibiting such transactions in the future.
Compensation Recovery
Under the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), in the event of misconduct that results in a financial restatement that would have reduced a previously paid incentive amount, we can recoup those improper payments from our Chief Executive Officer and Chief Financial Officer. We plan to implement a clawback policy in the future, although we have not yet implemented such policy.
Code of Ethics
We have adopted a Code of Ethical Business Conduct (“Code of Ethics”) that applies to all of our directors, officers and employees. We intend to disclose any amendments to our Code of Ethics and any waivers with respect to our Code of Ethics granted to our principal executive officer, our principal financial officer, or any of our other employees performing similar functions on our website at www.rtslco.com within four business days after the amendment or waiver. In such case, the disclosure regarding the amendment or waiver will remain available on our website for at least 12 months after the initial disclosure. There have been no waivers granted with respect to our Code of Ethics to any such officers or employees.
Whistleblower Protection Policy
The Company adopted a Whistleblower Protection Policy (“Whistleblower Policy”) that applies to all of its directors, officers, employees, consultants, contractors and agents of the Company. The Whistleblower Policy has been reviewed and approved by the Board.
Director Independence
The Board has affirmatively determined that each of J. Scott Suggs and Dr. Henry A. Punzi are independent directors within the requirements of the Nasdaq Capital Market.
Delinquent Section 16(a) Reports
Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires our executive officers and directors, and persons who beneficially own more than 10% of our common stock, to file initial reports of ownership and reports of changes in ownership with the SEC. Executive officers and directors with
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greater than 10% beneficial ownership are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. Based upon a review of the copies of such forms as filed with the Securities and Exchange Commission, we believe that all Section 16(a) reports were timely filed for the fiscal year ended December 31, 2021.
ITEM 11. EXECUTIVE COMPENSATION
Effective November 15, 2019, our Board of Directors appointed Donal R. Schmidt, Jr. and D. Hughes Watler, Jr. as the then sole members of our Board of Directors and as executive officers of the Company (Chief Executive Officer and President, and Chief Financial Officer, respectively). Effective on November 16, 2020, the Board of Directors appointed Mr. Ryan C. Johnson as the Chief Operating Officer of the Company and as a member of the Board of Directors. Mr. Johnson subsequently resigned as Chief Operating Officer and as a member of the Board of Directors on February 10, 2021, however, he remained as a non-executive employee of the Company until his termination for cause in April 2021.
The Company has not entered into any employment agreements with either Mr. Schmidt or Mr. Watler. Since November 15, 2019, Mr. Schmidt has spent a material portion of his time on his duties with the Company and has been compensated for his services generally on a monthly basis, although he has periodically elected to defer payment of such compensation in various months due to the Company’s financial situation. Since November 15, 2019, Mr. Watler has spent only a portion of his time on his duties with the Company, and has been compensated on an hourly basis for his services.
The following table sets forth information concerning the compensation of (i) all individuals serving as our principal executive officer or acting in a similar capacity (“PEO”) for the year ended December 31, 2021, the nine-month transition period ended December 31, 2020 and the fiscal year ended March 31, 2020, regardless of compensation level; (ii) our two most highly compensated executive officers other than the PEO who were serving as executive officers for the year ended December 31, 2021, the nine-month transition period ended December 31, 2020 and the fiscal year ended March 31, 2020; and (iii) up to two additional individuals for whom disclosure would have been provided pursuant to paragraph (ii) but for the fact that the individual was not serving as an executive officer at December 31, 2021 (collectively, the “Named Executive Officers”).
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Summary Compensation Table
Name and Principal Position | Fiscal Year Ended | Salary ($) | Bonus ($) | Stock awards ($) | Option awards ($) | All other compensation ($) | Total ($) |
Donal R. Schmidt, Jr., Chief Executive Officer (1) | December 31, 2021 | $105,000 | - | - | - | - | $105,000 |
| 2020-T(*) | $135,500 | - | - | - | - | $135,500 |
| March 31, 2020 | $22,500 | - | - | - | - | $22,500 |
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|
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D. Hughes Watler, Jr., Chief Financial Officer (2) | December 31, 2021 | $50,025 | - | - | - | - | $50,025 |
| 2020-T(*) | $25,575 | - | - | - | - | $25,575 |
| March 31, 2020 | $10,200 | - | - | - | - | $10,200 |
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|
|
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|
|
|
Brent Willson, Former Chief Executive Officer(3) | March 31, 2020 | - | - | - | - | - | - |
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|
|
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|
|
|
Steve Bond, Former Chief Financial Officer(3) | March 31, 2020 | - | - | - | - | - | - |
Does not include perquisites and other personal benefits, or property, unless the aggregate amount of such compensation is more than $10,000. No executive officer earned any non-equity incentive plan compensation, or nonqualified deferred compensation, during the periods reported above. Does not include disclosure of compensation paid to executive officers (other than our CEO and CFO), who did not make over $100,000 during the 12-month period ended December 31, 2021.
* Refers to the transition period from March 31, 2020 to December 31, 2020.
(1)The amounts shown for Donal R. Schmidt, Jr. represent the amounts paid by the Company for his services in the periods from November 15, 2019 to March 31, 2020, January 1, 2021 to December 31, 2021, and from April 1, 2020 to December 31, 2020, as both a contractor and as an employee in the latter period and solely as a contractor in the former period.
(2)The amounts shown for D. Hughes Watler, Jr. represent the amounts accrued by the Company for his services in the periods from November 15, 2019 to March 31, 2020, January 1, 2021 to December 31, 2021, and from April 1, 2020 to December 31, 2020, in his capacity as a contractor, not as an employee.
(3)Col. Willson resigned as Chief Executive Officer and director on November 15, 2019. Mr. Bond resigned as Chief Financial Officer and director on November 15, 2019.
We do not maintain any life or disability insurance on any of our officers.
Outstanding Equity Awards at Fiscal Year-End
The Company: (i) did not grant any stock options to its executive officers or directors during the year ended December 31, 2021 and the nine-month transition period ended December 31, 2020; (ii) did not have any outstanding equity awards as of December 31, 2021; and (iii) had no options exercised by its Named Executive Officers during the year ended December 31, 2021 or during the nine-month transition period ended December 31, 2020.
Compensation of Directors
Our directors do not receive any compensation for serving as such. As of the date hereof, there were no other arrangements between us and our directors that resulted in our making payments to any of our directors for any services provided to us by them as directors.
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Employment Agreements; Key Man Insurance and Stock Incentive Plans
Employment Agreements of Significant Employees
The Company does not have any employment agreements or other compensation arrangements currently in place with any of its executive officers. The Company does have an employment agreement in place with Dr. Drinkwine, as well as with Mr. Frank Gill, the Company’s Chief Isolate Laboratory Technician, both of which are more fully described below.
Dr. Duane Drinkwine Agreement
On January 11, 2021, we entered into an Employment Agreement with Duane Drinkwine, Ph.D., effective February 1, 2021 (the “Employment Agreement”). Pursuant to the Employment Agreement, Dr. Drinkwine agreed to serve as the Chief Science Officer of the Company, a non-executive position. The Employment Agreement has a term of one year, automatically renewable thereafter for additional one-year periods unless terminated by either party no less than 60 days prior to such automatic renewal dates. We agreed to pay Dr. Drinkwine $125,000 per year in cash, which amount may be increased from time-to-time in the discretion of the management of the Company, including on an annual basis, and that Dr. Drinkwine would be eligible for stock or cash bonuses (including stock options), in the discretion of the management of the Company, from time to time. As additional consideration under the agreement, we agreed that Dr. Drinkwine could earn up to 2,000,000 shares of Series B Preferred Stock of the Company, which would have an agreed upon value of $0.80 per share, and convert into common stock of the Company on a one-for-one basis, at any time, beginning two years after the effective date of the Employment Agreement. A total of 500,000 shares of Series B Preferred Stock are provisionally due on or about the six-month anniversary of the effective date, and 500,000 shares of Series B Preferred Stock will be due thereafter on each anniversary date of the effective date (until a total of 2 million shares are issued), subject to Dr. Drinkwine’s continued service to the Company. (the first 1 million shares are expected to be issued shortly. However, if Dr. Drinkwine’s employment is terminated for cause prior to the second anniversary of the agreement, all shares previously earned are forfeited. Any shares of common stock issuable upon conversion of Series B Preferred Stock are subject to a trading restriction, which prohibits Dr. Drinkwine from trading such shares until January 1, 2023, and from not trading more than 5% of the average daily trading volume of the Company’s common stock from January 2, 2023, to October 31, 2025, subject to certain exceptions.
The Company also agreed to provide Dr. Drinkwine the use of an apartment and a vehicle. The agreement includes customary assignment of inventions, non-solicitation and non-compete language, prohibiting Dr. Drinkwine from competing against the Company or soliciting employees until the later of the second anniversary of the termination date of his employment and the third anniversary of the date of the Employment Agreement, subject to certain exceptions. In the event Dr. Drinkwine’s employment is terminated by the Company other than for death, disability, non-renewal, with cause, or by Dr. Drinkwine for good reason, Dr. Drinkwine is due 12 months of severance pay, payable in equal monthly installments, subject to Dr. Drinkwine providing a general release to the Company.
Frank Gill Employment Agreement
On November 16, 2020, the Company entered into an Employment Agreement with Frank Gill. Mr. Gill’s Employment Agreement provides for:
i. An effective date of December 1, 2020;
ii. Mr. Gill to serve as Chief Isolate Laboratory Technician of the Company;
iii. Mr. Gill to be employed until December 1, 2021, subject to automatic yearly renewals in the event the agreement is not terminated no less than 60 days prior to any applicable renewal date, which agreement was not terminated on December 1, 2021, and renewed for an additional one year period;
iv. Mr. Gill to be paid $175,000 per year, which may be increased by management from time to time, and for Mr. Gill to be eligible to be granted by the management of the Company or the Board of Directors, stock option or cash bonuses in the discretion of the Board of Directors and/or management;
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v. Standard assignment of inventions, confidentiality requirements, non-solicitation requirements, and representations and warranties of the parties;
vi. Three weeks of paid vacation per year (of which one week may carry forward from year-to-year);
vii. A non-compete, in consideration for, among other things, an additional $1,000 per year of compensation, restricting him from competing against the Company or owning any percentage of any entity which is in the hemp or aerosol business, for a period until the later of (x) two years after the termination of the agreement, and (y) December 1, 2023, subject to certain exceptions;
viii. That the Company may terminate the agreement at any time for any reason (subject to the requirement to pay severance fee, as discussed below, where applicable); and
ix. That in the event that Mr. Gill’s employment with the Company is terminated by the Company other than due to his death, disability, the non-renewal of the agreement pursuant to its terms, or with cause (defined as his failure to substantially perform his duties, failure to comply with any written or oral direction of the Chief Executive Officer which relates to the performance of his duties, subject to certain exceptions, the commission of any criminal act which constitutes a felony or involves fraud, dishonesty, or moral turpitude, the failure to render services under the agreement due to alcohol or drug abuse, or a willful material violation of any employment policies of the Company or any material breach of any term of the employment agreement, subject where applicable under the agreement, to the right to cure such breaches), or in the event Mr. Gill terminates the agreement for good reason (as defined in the agreement as the Company’s failure to pay any compensation due to Mr. Gill, a reduction in his compensation without his consent, the failure of the Company to provide adequate resources to Mr. Gill (subject to certain exceptions), or any action by the Company, except as required by law or government regulation, which would adversely affect Mr. Gill’s ability to perform his duties under the agreement or participate in any bonus or incentive plan), the Company is required to pay Mr. Gill 12 months of severance (based on his then base salary), payable equally in 12 monthly installments. Upon termination of the agreement for any other reason, he is due only accrued and unpaid compensation (and accrued vacation days) through the date of termination.
Independent Contractor Agreements
Powell Independent Contractor Agreement
On April 22, 2021, we entered into an Independent Contractor Agreement with We the 23, LLC, a Texas limited liability company, whose managing member is Charles L. Powell, M.D. (“Powell” and the “Powell Agreement”). Pursuant to the Powell Agreement, we engaged Powell, as an independent contractor, to provide oversight services and interpretation of clinical research for the Company. The Powell Agreement has a term of one year, automatically extendable thereafter on a month-to-month basis, unless terminated by either party with 30 days prior written notice, subject to certain termination rights described in greater detail in the agreement. The agreement contains customary confidentiality, proprietary information, work for hire, indemnification and arbitration provisions, and representations of Powell.
In consideration for Powell agreeing to provide services under the agreement, the Company agreed to pay Powell $10, and to issue Powell up to 8,000,000 shares of then newly designated Series C Convertible Preferred Stock (“Series C Preferred Stock. Specifically, the Company agreed to issue (a) 1,000,000 shares of Series C Preferred Stock to Powell upon the completion of a study, showing favorable therapeutic benefits accompanied with underlying supporting medical or pharmaceutical data which is of value to the Company, as determined in the reasonable determination of the Company, relating to each of (1) anxiety; (2) depression; (3) attention deficit hyperactivity disorder (ADHD); (4) insomnia; and (5) arthritis or chronical pain (5,000,000 in aggregate)(each a “Study”, collectively, the “Studies”, and each successful study, a “Successful Study”); and (b) such number of Series C Preferred Stock as equals 3,000,000 multiplied by a fraction, the numerator of which is the number of Successful Studies and denominator of which is five, which shares are issuable upon completion of the last of the Studies. The right of Powell to earn any of the Series C Preferred Stock shares ends upon termination of the Powell Agreement. Powell has not earned any shares of Series C Preferred Stock pursuant to the terms of the agreement to date.
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Powell entered into a Trading Agreement in connection with the entry into the Powell Agreement, which restricts Powell’s ability to transfer or sell any of the Series C Preferred Stock (and any shares of common stock issuable upon conversion thereof), until April 22, 2025, provided that between April 22, 2023, and April 22, 2025, Powell may sell, on any trading day, not more than 5% of the average daily aggregate trading volume of the Company’s common stock over the preceding 30 day rolling period, subject to certain other requirements.
Epic Independent Contractor Agreement
On May 18, 2021, the Company entered into an Independent Contractor Agreement with Epic Medical Research (“Epic” and the “Epic Agreement”). Pursuant to the Epic Agreement, we engaged Epic, as an independent contractor, to act as the principal investigator of the Company’s products related to the Powell Agreement, while performing clinical research, including obtaining informed consent of patients, implementation of study procedures, product dispensing, evaluations of patient compliance with study requirements, and preparations of required study documents. The Epic Agreement has a term of one year, subject to certain termination rights described in greater detail in the agreement. The Epic Agreement contains customary confidentiality, indemnification and arbitration provisions, and representations of Epic. In consideration for Epic agreeing to provide services under the agreement, the Company agreed to issue Epic up to 500,000 shares of Series C Preferred Stock, of which 250,000 shares are earned and due upon completion of the five Studies, and with 250,000 shares of Series C Preferred Stock earned upon the start of the first Study. Epic has not earned any shares of Series C Preferred Stock pursuant to the terms of the agreement to date.
Key Man Insurance
The Company does not hold “Key Man” life insurance on any of its officers or directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding the beneficial ownership of our common stock as of March 7, 2022 (the “Date of Determination”) by (i) each Named Executive Officer, as such term is defined above under “Item 11. Executive Compensation“, (ii) each member of our Board of Directors, (iii) each person deemed to be the beneficial owner of more than five percent (5%) of our common stock, and (iv) all of our executive officers and directors as a group. Unless otherwise indicated, each person named in the following table is assumed to have sole voting power and investment power with respect to all shares of our common stock listed as owned by such person.
Beneficial ownership is determined in accordance with the rules of the SEC and includes voting and/or investing power with respect to securities. These rules generally provide that shares of common stock subject to options, warrants or other convertible securities that are currently exercisable or convertible, or exercisable or convertible within 60 days of the Date of Determination, are deemed to be outstanding and to be beneficially owned by the person or group holding such options, warrants or other convertible securities for the purpose of computing the percentage ownership of such person or group, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person or group. The percentages are based upon 193,566,921 shares of our common stock outstanding as of the Date of Determination.
To our knowledge, except as indicated in the footnotes to this table and pursuant to applicable community property laws, as of the Date of Determination, (a) the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them, subject to applicable community property laws; and (b) no person owns more than 5% of our common stock. Unless otherwise indicated, the address for each of the officers or directors listed in the table below is 5580 Peterson Lane, Suite 120, Dallas, Texas 75240.
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Name and Address of Beneficial Owner |
| Beneficial Ownership | ||
Directors and Executive Officers |
| Amount |
| Percent |
Donal R. Schmidt, Jr. (1) |
| 48,333,333 |
| 25.0 |
D. Hughes Watler, Jr. |
| -0- |
| -0- |
J. Scott Suggs (2) |
| 2,903,228 |
| 1.5 |
Henry A. Punzi (3) |
| 125,000 |
| * |
All Executive Officers and Directors as a Group (four persons) |
| 51,361,561 |
| 26.5 |
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|
|
|
|
Greater than 5% Stockholders |
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Sean Berrier (4) |
| 48,333,333 |
| 25.0 |
Dan F. Boone (5) |
| 15,400,000 |
| 8.0 |
Disciples of the Way Ministries (6) |
| 13,674,771 |
| 7.1 |
(1)Shares are held in the name of Diamond Head Ventures, LLC, which entity Mr. Schmidt owns and controls and which shares Mr. Schmidt has voting and dispositive control over.
(2)Not including shares of common stock issuable upon conversion of a $400,000 face amount convertible promissory note, which has a conversion price equal to the greater of (a) $0.000075 per share (subject to equitable adjustment for stock splits and stock dividends); and (b) 75% of the average closing bid price of the Company’s common stock, on the principal securities exchange or market where the Company’s common stock is then quoted or traded, for the five trading days immediately prior to the date of conversion, only upon the occurrence an event of default, as no event of default has occurred under such note to date. The conversion of the note is subject to a beneficial ownership limitation of 4.99%, preventing such conversion by the holder thereof, if such exercise would result in such holder and its affiliates, exceeding ownership of 4.99% of our common stock.
(3)Shares are held in the name of the Connie Punzi Estate, which entity Mr. Punzi is deemed to beneficially own due to his position as executor thereof.
(4)Address: 7108 Duffield Drive, Dallas, Texas 75248. These shares are held in the name of SCBRRR Limited Partnership, which entity Mr. Berrier serves as General Partner of, which entity Mr. Berrier and his wife own, and which shares he is deemed to beneficially own as a result of such position and control. Mr. Berrier is the Senior Vice President (a non-executive officer position) of the Company.
(5)Address: 1615 West Loop 289, Lubbock, Texas 79416. Shares are held jointly by Mr. Boone and his wife.
(6)Address: 6500 Greenville Ave, Suite 190, Dallas, Texas 75206. Pursuant to the Schedule 13G filed by the shareholder with the Securities and Exchange Commission on July 26, 2021, which information the Company has not independently confirmed. Shares are beneficially owned by Karim Baidaoui, the Executive Director of Disciples of the Way Ministries, a Texas not for profit corporation.
* Less than 1%.
Change of Control
The Company is not aware of any arrangements which may at a subsequent date result in a change of control of the Company.
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Equity Compensation Plan Information
The following table provides information as of December 31, 2021 with respect to securities that may be issued under our equity compensation plans.
Plan Category |
| Number of securities to be issued upon exercise of outstanding options, warrants and rights |
| Weighted- average exercise price of outstanding options, warrants and rights |
| Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |||
|
| (a) |
| (b) |
| (c) | |||
Equity compensation plans approved by security holders |
|
| 45,000,000 |
| $ | -0- |
|
| 45,000,000 |
Equity compensation plans not approved by security holders |
|
| - |
|
| - |
|
| - |
Total |
|
| 45,000,000 |
| $ | -0- |
|
| 45,000,000 |
Represents awards issuable under the Company’s 2018 Stock Plan (20,000,000 shares) and 2020 Equity Incentive Plan (25,000,000 shares, subject to annual increases as provided therein at the option of the Board of Directors).
2018 Stock Option Plan
The 2018 Stock Option Plan (“2018 Plan”) is administered by the Board of Directors of the Company, or, once constituted, the Compensation Committee of the Board of Directors. The number of shares of the Company’s common stock that may be issued under the 2018 Plan is 20,000,000. Of these 20,000,000 shares: (i) the maximum number of shares issuable as stock options (either incentive stock options or nonqualified stock options) is 20,000,000; (ii) the maximum number of shares as to which a key employee may receive stock options in any calendar year is 1,000,000 (or 1,000,000 in the calendar year in which the employee's employment commences); and (iii) the maximum number of shares that may be used for stock awards and/or stock unit awards is 1,000,000. All employees of the Company designated as key employees for purposes of the 2018 Plan and all non-employee directors of the Company are eligible to receive awards under the 2018 Plan. The 2018 Plan provides for discretionary awards of stock options, stock awards and stock unit awards to participants. Each award made under the 2018 Plan will be evidenced by a written award agreement specifying the terms and conditions of the award as determined by the Board of Directors in its sole discretion, consistent with the terms of the 2018 Plan.
First Amended and Restated 2020 Equity Incentive Plan
On December 29, 2020, the Board of Directors adopted, subject to the ratification by the majority shareholders, which ratification occurred pursuant to a majority shareholder consent, effective on December 30, 2020, the Rapid Therapeutic Science Laboratories, Inc. 2020 Equity Incentive Plan. Effective on January 7, 2022, the Board of Directors adopted, subject to the ratification by the majority shareholders, which ratification pursuant to a majority shareholder consent, effective on January 11, 2022, the First Amended and Restated Rapid Therapeutic Science Laboratories, Inc. 2020 Equity Incentive Plan (the “2020 Plan”).
The 2020 Plan provides an opportunity for any employee, officer, director or consultant of the Company, subject to limitations provided by federal or state securities laws, to receive (i) incentive stock options (to eligible employees only); (ii) nonqualified stock options; (iii) restricted stock; (iv) stock awards; (v) shares in performance of services; (vi) other stock-based awards; or (vii) any combination of the foregoing. In making such determinations, the Board of Directors may take into account the nature of the services rendered by such person, his or her present and potential contribution to the Company’s success, and such other factors as the Board of Directors in its discretion shall deem relevant.
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Subject to adjustment in connection with the payment of a stock dividend, a stock split or subdivision or combination of the shares of common stock, or a reorganization or reclassification of the Company’s common stock, the aggregate number of shares of common stock which may be issued pursuant to awards under the 2020 Plan is the sum of (i) 25,000,000 shares, and (ii) an annual increase on March 1st of each calendar year, beginning in 2022 and ending in 2030, in each case subject to the approval of the Board of Directors or the compensation committee of the Company (if any) on or prior to the applicable date, equal to the lesser of (A) five percent (5%) of the total shares of common stock of the Company outstanding on the last day of the immediately preceding fiscal year; (B) 25,000,000 shares of common stock; and (C) such smaller number of shares as determined by the Board of Directors or compensation committee of the of the Company (if any)(the “Share Limit”), also known as an “evergreen” provision. Notwithstanding the foregoing, shares added to the Share Limit are available for issuance as incentive stock options only to the extent that making such shares available for issuance as incentive stock options would not cause any incentive stock option to cease to qualify as such. In the event that the Board of Directors or the compensation committee (if any) does not take action to affirmatively approve an increase in the Share Limit on or prior to the applicable date provided for under the plan, the Share Limit remains at its then current level. Notwithstanding the above, no more than 250,000,000 incentive stock options may be granted pursuant to the terms of the 2020 Plan.
The maximum number of shares subject to awards granted during a single calendar year to any non-employee director, taken together with any cash fees paid during the compensation year to the non-employee director, in respect of the director’s service as a member of the Board during such year (including service as a member or chair of any committees of the Board), will not exceed $500,000 in total value (calculating the value of any such awards based on the grant date fair value of such awards for financial reporting purposes). Compensation will count towards this limit for the calendar year in which it was granted or earned, and not later when distributed, in the event it is deferred.
Employees, non-employee directors, and consultants of the Company and its subsidiaries are eligible to participate in the 2020 Plan. Incentive stock options may be granted under the 2020 Plan only to employees of the Company and its affiliates. Employees, directors and consultants of the Company and its affiliates are eligible to receive all other types of awards under the 2020 Plan. No awards are issuable by the Company under the 2020 Plan (a) in connection with services associated with the offer or sale of securities in a capital-raising transaction; or (b) where the services directly or indirectly promote or maintain a market for the Company’s securities.
The 2020 Plan will automatically terminate on the 10th anniversary of original approval date of the Plan (December 29, 2030). However, prior to that date, the Company’s Board of Directors may amend or terminate the 2020 Plan as it deems advisable, but it cannot adopt an amendment if it would (1) without a grantee’s consent, materially and adversely affect that grantee’s award; or (2) without shareholder approval, increase the number of shares of the Company’s common stock that can be awarded under the 2020 Plan, except as provided for therein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Except as discussed below or otherwise disclosed above under “Item 11. Executive Compensation“, which information is incorporated by reference where applicable in this “Item 13. Certain Relationships and Related Transactions, and Director Independence” section, the following sets forth a summary of all transactions since the beginning of the fiscal year of 2018, or any currently proposed transaction, in which the Company was to be a participant and the amount involved exceeded or exceeds the lesser of $120,000 or one percent of the average of the Company’s total assets at the fiscal year-end for December 31, 2021, December 31, 2020 and March 31, 2020, and in which any related person had or will have a direct or indirect material interest (other than compensation described above under “Item 11. Executive Compensation“). We believe the terms obtained or consideration that we paid or received, as applicable, in connection with the transactions described below were comparable to terms available or the amounts that would be paid or received, as applicable, in arm’s-length transactions.
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Transactions with Related Persons
Texas MDI Agreements
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, entered into a sublicense agreement whereby the Company acquired a sublicense from TMDI to use certain technology regarding metered dose inhalers (MDI) that TMDI has licensed from 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, pursuant to an Exclusive License Agreement dated October 1, 2019, by and between TMDI and EM3. 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).
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, in consideration for 100,000 shares of the Company’s common stock.
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 Agreement. 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 are 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 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.
On February 9, 2021, the Company entered into a Settlement and Mutual Release Agreement dated February 9, 2021 with TMDI, Diamond Head, EM3, the owner of EM3, Richard Adams and 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 had 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
88
(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. 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, 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), 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 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 and/or nhālerTM brands or on a white label basis.
Related Party Notes
As of December 31, 2021, we had the following notes payable to previously related parties: (i) $24,685 of convertible notes payable issued in February 2018 to an accredited investor known to the Company in connection with working capital financing, (ii) $150,000 of convertible notes payable issued in November 2019 to an accredited investor known to the Company in connection with working capital financing; and (iii) unsecured cash advances received from two officers (its Chief Executive Officer, Donal R. Schmidt, Jr., and Sean Berrier, the Senior Vice President (a non-executive officer position)) for working capital financing in May through August 2021, in the net amount of $260,000.
As of December 31, 2021, we also had the following related party notes payable: $23,700 was owed by the Company under a promissory note payable to a company which Mr. Watler serves as an officer.
The Company’s notes payable are described in greater detail in in Note 7 to the audited financial statements included herein under “Part II-Item 8. Financial Statements and Supplementary Data“.
Office Space
From November 15, 2019 to June 30, 2021, our corporate and executive offices were located in an office space in Dallas, Texas, provided by the Company’s Chief Executive Officer at no cost or commitment to the Company. Effective June 30, 2021, the Company relocated to a new office that was leased from a third party, but was previously being utilized by us solely as a laboratory, for the remaining term of the lease agreement, which expired on December 31, 2021. Effective October 1, 2021, the Company entered into a 63-month lease agreement with a landlord to lease 8,566 square feet of commercial office building space located in Addison, Texas. As of December 31, 2021, the Company was in the process of building out this space with the intention of utilizing it as its corporate office as well as its aerosol filling laboratory and isolate manufacturing facility, beginning in the first or second quarter of 2022 (see Note 8 to our Consolidated Financial Statements). Pending completion of the build out of the new office and lab space in Addison, Texas, the Company relocated back to the office space in Dallas, Texas, provided by the Company’s Chief Executive Officer at no cost or commitment to the Company, effective as of December 31, 2021.
The Company’s obligations under the October 1, 2021 lease are guaranteed by Sean Berrier, Senior Vice President (a non-executive officer position) of the Company and a significant shareholder of the Company.
89
Securities Purchase Agreement and Convertible Promissory Note
On January 28, 2022, we entered into a Securities Purchase Agreement (the “Purchase Agreement”), with J. Scott Suggs, a member of our Board of Directors (the “Purchaser”), pursuant to which the Company agreed to sell, and the Purchaser agreed to purchase, a Promissory Note (the “Note”).
The Note was purchased for, and has an initial face amount of, $400,000. The Note accrues interest at 18% per annum, compounded monthly (at the end of each month), until the earlier of (i) January 26, 2023 (the “Maturity Date”) or (ii) ten days from the date that the Company’s common stock is listed on a national exchange and that the Company receives funding under any underwritten offering in connection therewith (the “Pre-Payment Date”), when all accrued interest and outstanding principal under the Note is required to be paid in a single lump sum. If the Pre-Payment Date occurs prior to the Maturity Date, the Company will be required to pay a prepayment penalty equal to the outstanding principal balance of the Note multiplied by 25.44% ($101,760), less the amount of total accrued interest owed under the Note as of the Pre-Payment Date (the “Pre-Payment Penalty”). No Pre-Payment Penalty will be due if the Note is repaid on the Maturity Date, provided the Pre-Payment Date has not previously occurred. Other than on the Pre-Payment Date, the Company has no right to accelerate payments or prepay the Note, except with the prior written approval of the Purchaser.
The Note is unsecured. So long as the Company has any obligation under the Note, the Company is prohibited from selling, leasing or otherwise disposing of any significant portion of its assets outside the ordinary course of business without the prior written consent of the holder of the Note.
The Note contains certain customary events of default, including failure to pay amounts due under the Note (subject to a five day cure period); breach of the Company’s covenants under the Note, subject to a 20 day cure period; breach of the representations and warranties of the Company; the occurrence of certain bankruptcy related events; the delisting of the Company’s common stock from a national securities exchange or the OTC Markets; failure to comply with the requirements of the Exchange Act; dissolution, liquidation, cessation of operations; certain financial statement restatements; replacement of the Company’s transfer agent; and certain cross-defaults of other agreements entered into with the Purchaser. Upon the occurrence of an event of default under the Note, the Note becomes immediately due and payable and we are required to pay the Purchaser the principal, accrued interest, Pre-Payment Penalty, and default interest due under the Note. If such default amount is not paid within five business days of written notice thereof from the Purchaser, the Purchaser can convert the amount due to the Purchaser into common stock of the Company as discussed below.
Upon an event of default under the Note, the amounts due to the holder of the Note may be converted, in whole or part, by the holder, into common stock of the Company, at a conversion price equal to the greater of (a) $0.000075 per share (subject to equitable adjustment for stock splits and stock dividends); and (b) 75% of the average closing bid price of the Company’s common stock, on the principal securities exchange or market where the Company’s common stock is then quoted or traded, for the five trading days immediately prior to the date of conversion (the “Variable Conversion Rate”). We agreed to reserve six times the number of shares of common stock then issuable upon conversion of the Note, initially equal to a total of 10,813,793 shares of common stock. If we fail to deliver shares of common stock to the holder of the Note upon the conversion thereof within three business days, we agreed to pay the holder $2,000 per day in cash, to the extent such failure is not the result of a third party. The conversion of the Note is subject to a beneficial ownership limitation of 4.99%, preventing such conversion by the holder thereof, if such exercise would result in such holder and its affiliates, exceeding ownership of 4.99% of our common stock.
The closing of the transactions contemplated by the Purchase Agreement, including the sale of the Note, occurred on January 28, 2022.
The Purchase Agreement included standard and customary representations of the parties; and included certain positive and negative covenants (including obligations to indemnify the Purchaser in certain cases upon breach thereof), which included the requirement that we use the funds raised through the sale of the Note only for working capital, and that we reimburse $3,750 of the Purchaser’s attorney’s fees.
Review, Approval and Ratification of Related Party Transactions
The Audit Committee of the Board of Directors of the Company is tasked with reviewing and approving any issues relating to conflicts of interests and all related party transactions of the Company (“ Related Party
90
Transactions “). The Audit Committee, in undertaking such review and will analyze the following factors, in addition to any other factors the Audit Committee deems appropriate, in determining whether to approve a Related Party Transaction: (1) the fairness of the terms for the Company (including fairness from a financial point of view); (2) the materiality of the transaction; (3) bids / terms for such transaction from unrelated parties; (4) the structure of the transaction; (5) the policies, rules and regulations of the U.S. federal and state securities laws; (6) the policies of the Committee; and (7) interests of each related party in the transaction.
The Audit Committee will only approve a Related Party Transaction if the Audit Committee determines that the terms of the Related Party Transaction are beneficial and fair (including fair from a financial point of view) to the Company and are lawful under the laws of the United States. In the event multiple members of the Audit Committee are deemed a related party, the Related Party Transaction will be considered by the disinterested members of the Board of Directors in place of the Committee.
In addition, our Code of Ethics (described above under “Item 10. Directors, Executive Officers and Corporate Governance-Code of Ethics”), which is applicable to all of our employees, officers and directors, requires that all employees, officers and directors avoid any conflict, or the appearance of a conflict, between an individual’s personal interests and our interests.
Director Independence
We are currently not subject to listing requirements of any national securities exchange or inter-dealer quotation system which has requirements that a majority of the Board of Directors be “independent” and, as a result, we are not at this time required to (and we do not) have a Board of Directors comprised of a majority of “Independent Directors.”
Our Board of Directors has considered the independence of its Directors in reference to the definition of “Independent Director” established by the Nasdaq Marketplace Rule 5605(a)(2). In doing so, the Board has reviewed all commercial and other relationships of each director in making its determination and has determined that J. Scott Suggs and Dr. Henry A. Punzi are independent directors within the requirements of the Nasdaq Capital Market.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Prager Metis CPA’s LLP (“Prager”), served as the Company’s independent registered public accounting firm for the year ended March 31, 2019 and for the subsequent period through March 26, 2020. Effective on that date, the Company dismissed Prager as the Company’s independent registered public accounting firm and engaged PWR CPA, LLC (“PWR”) as its new independent registered public accounting firm. PWR has served as the Company’s independent registered public accounting firm since the fiscal year ended March 31, 2020. The aggregate fees for professional services rendered by Prager and PWR for the year ended December 31, 2021, the nine-month transition period ended December 31, 2020, and the fiscal year ended March 31, 2020, were as follows:
|
| Year ended December 31, 2021 |
| Nine Months ended December 31, 2020 |
| Year ended March 31, 2020 | |||
Audit and Quarterly Review Fees - Prager | $ | --- |
| $ | --- |
| $ | 10,500 |
|
Audit and Quarterly Review Fees - PWR |
| 28,500 |
|
| 32,500 |
|
| 19,000 |
|
Audit-related fees |
| - |
|
| - |
|
| - |
|
Tax fees |
| - |
|
| - |
|
| - |
|
All other fees |
| - |
|
| - |
|
| - |
|
TOTAL | $ | 28,500 |
| $ | 32,500 |
| $ | 29,500 |
|
Audit and Quarterly Review Fees
Audit fees represent the aggregate fees billed for professional services rendered by our independent accounting firm for the audit of our annual financial statements, review of financial statements included in our quarterly reports, review of registration statements or services that are normally provided in connection with statutory and regulatory filings or engagements for those fiscal years.
91
Audit-Related Fees
Audit-related fees represent the aggregate fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and are not reported under Audit Fees.
Tax Fees
Tax fees represent the aggregate fees billed for professional services rendered by our principal accountants for tax compliance, tax advice, and tax planning for such years.
All Other Fees
All other fees represent the aggregate fees billed for products and services other than the services reported in the other categories.
Audit Committee Pre-Approval Policies and Procedures
It is the policy of our Board of Directors that all services to be provided by our independent registered public accounting firm, including audit services and permitted audit-related and non-audit services, must be pre-approved by our Audit Committee.
92
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENTS
(a) Documents filed as part of this Report
1. All Financial Statements
The consolidated financial statements and notes are included herein under “Part II-Item 8. Financial Statements and Supplementary Data“.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
54 | ||
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| |
Consolidated Balance Sheets as of December 31, 2021 and 2020 | 55 | |
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| |
56 | ||
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| |
57 | ||
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| |
58 | ||
|
| |
59 | ||
2. Financial Statement Schedules
All schedules are omitted because they are inapplicable or not required or the required information is shown in the consolidated financial statements or notes thereto.
93
3. Exhibits required by Item 601 of Regulation S-K
|
|
|
| Incorporated by Reference |
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| ||||||
Exhibit No. |
| Description |
| Form |
| File No. |
| Exhibit |
| Filing Date |
| Filed or Furnished Herewith |
2.1# |
| Asset Purchase and Sales Agreement dated October 23, 2020, by and between Rapid Therapeutic Science Laboratories, Inc., as purchaser, and Razor Jacket, LLC, Frank Gill, and Ryan Johnson, as sellers |
| 8-K |
| 000-55018 |
| 2.1 |
| 10/29/2020 |
|
|
| First Amendment to Asset Purchase and Sales Agreement dated November 16, 2020, by and between Rapid Therapeutic Science Laboratories, Inc., as purchaser, and Razor Jacket, LLC, Frank Gill, and Ryan Johnson, as sellers |
| 8-K |
| 000-55018 |
| 2.2 |
| 11/18/2020 |
|
| |
| Membership Interest Purchase Agreement by and between the sole member of Rxoid Health Solutions, LLC, and Rapid Therapeutic Science Laboratories, Inc., dated November 30, 2020 |
| 8-K |
| 000-55018 |
| 2.1 |
| 2/9/2021 |
|
| |
| Amended and Restated Articles of Incorporation |
| 8-K |
| 000-55018 |
| 3.1 |
| 1/21/2020 |
|
| |
| Certificate of Designation of Rapid Therapeutic Science Laboratories, Inc. Establishing the Designation, Preferences, Limitations and Relative Rights of Its Series A Convertible Preferred Stock as filed with the Secretary of State of Nevada on November 12, 2020 |
| 8-K |
| 000-55018 |
| 3.1 |
| 11/18/2020 |
|
| |
| Certificate of Designation of Rapid Therapeutic Science Laboratories, Inc. Establishing the Designation, Preferences, Limitations and Relative Rights of Its Series B Convertible Preferred Stock as filed with the Secretary of State of Nevada on May 28, 2021 |
| 8-K |
| 000-55018 |
| 3.1 |
| 6/2/2021 |
|
| |
| Certificate of Designation of Rapid Therapeutic Science Laboratories, Inc. Establishing the Designation, Preferences, Limitations and Relative Rights of Its Series C Convertible Preferred Stock as filed with the Secretary of State of Nevada on May 28, 2021 |
| 8-K |
| 000-55018 |
| 3.2 |
| 6/2/2021 |
|
| |
| Bylaws |
| S-1 |
| 333-188781 |
| 3.2 |
| 5/23/2013 |
|
| |
4.1* |
| Description of Securities of the Registrant |
|
|
|
|
|
|
|
|
| X |
94
|
|
|
| Incorporated by Reference |
|
| ||||||
Exhibit No. |
| Description |
| Form |
| File No. |
| Exhibit |
| Filing Date |
| Filed or Furnished Herewith |
| Form of five-year Note issued in Exchange Agreement between Holly Brothers Pictures, Inc., PBC Group, LLC and Black Car, Inc. dated February 1, 2018 |
| 8-K |
| 000-55018 |
| 10.4 |
| 2/2/2018 |
|
| |
10.2** |
| Rapid Therapeutic Science Laboratories, Inc. 2018 Amended and Restated Stock Plan |
| 10-K/A |
| 000-55018 |
| 10.1 |
| 8/27/2020 |
|
|
| Sublicense Agreement between Texas MDI, Inc. and Holly Brothers Pictures, Inc., dated as of November 15, 2019 |
| 8-K |
| 000-55018 |
| 10.1 |
| 11/22/2019 |
|
| |
| Exclusive License Agreement dated October 1, 2019 by and between Texas MDI, Inc. and EM3 Methodologies, LLC [Filed as Exhibit A to the Sublicense Agreement incorporated by reference herein as Exhibit 10.3] |
| 8-K |
| 000-55018 |
| 10.1 |
| 11/22/2019 |
|
| |
| First Amendment to Exclusive License Agreement dated June 25, 2020 by and between Texas MDI, Inc. and EM3 Methodologies, LLC |
| 10-K/A |
| 000-55018 |
| 10.4 |
| 8/27/2020 |
|
| |
| Form of Promissory Note issued by Holly Brothers Pictures, Inc. to an investor, dated as of November 18, 2019, with a five year maturity |
| 8-K |
| 000-55018 |
| 10.2 |
| 11/22/2019 |
|
| |
| Form of Amendment to certain Promissory Notes issued by Holly Brothers Pictures, Inc. to various holders, dated as of November 18, 2019 |
| 8-K |
| 000-55018 |
| 10.4 |
| 11/22/2019 |
|
| |
| Securities Purchase Agreement between Rapid Therapeutic Science Laboratories, Inc. and Power Up Lending Group, Ltd., dated as of June 30, 2020 |
| 8-K |
| 000-55018 |
| 10.1 |
| 7/6/2020 |
|
| |
| Form of Subscription Agreement (August 2020) |
| 10-Q |
| 000-55018 |
| 10.2 |
| 8/13/2020 |
|
| |
10.10** |
| Employment Agreement entered into between Rapid Therapeutic Science Laboratories, Inc. and Frank Gill, dated November 16, 2020 |
| 8-K |
| 000-55018 |
| 10.1 |
| 11-18-2020 |
|
|
| Assignment of Intellectual Property Agreement dated November 16, 2020, by and between Rapid Therapeutic Science Laboratories, Inc., Razor Jacket, LLC, Frank Gill and Ryan Johnson |
| 8-K |
| 000-55018 |
| 10.3 |
| 11-18-2020 |
|
| |
| Trading Agreement dated November 16, 2020, between Frank Gill and Rapid Therapeutic Science Laboratories, Inc. |
| 8-K |
| 000-55018 |
| 10.4 |
| 11-18-2020 |
|
| |
95
|
|
|
| Incorporated by Reference |
|
| ||||||
Exhibit No. |
| Description |
| Form |
| File No. |
| Exhibit |
| Filing Date |
| Filed or Furnished Herewith |
| Trading Agreement dated November 16, 2020, between Frank Gill, Ryan Johnson and Rapid Therapeutic Science Laboratories, Inc. |
| 8-K |
| 000-55018 |
| 10.5 |
| 11-18-2020 |
|
| |
| Form of Subscription Agreement $0.40 Per Share (January 2021 Private Offering) |
| 8-K |
| 000-55018 |
| 10.1 |
| 1-26-2021 |
|
| |
| Form of Common Stock Purchase Warrant (January 2021 Private Offering) |
| 8-K |
| 000-55018 |
| 10.2 |
| 1-26-2021 |
|
| |
10.16** |
| Employment Agreement with Duane Drinkwine dated January 11, 2021 |
| 8-K |
| 000-55018 |
| 10.3 |
| 1-26-2021 |
|
|
10.17** |
| Trading Agreement dated January 11, 2021, with Duane Drinkwine |
| 8-K |
| 000-55018 |
| 10.4 |
| 1-26-2021 |
|
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| Settlement and Mutual Release Agreement dated February 9, 2021, by and between Rapid Therapeutic Science Laboratories, Inc., Texas MDI, Inc. (formerly Texas MDI, LLC), Diamond Head Ventures, LLC, EM3 Methodologies, LLC, and Richard Adams and Holly Brothers Pictures, LLC |
| 8-K/A |
| 000-55018 |
| 10.1 |
| 2/9/2021 |
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| |
| Exclusive License Agreement dated February 9, 2021, by and between Rapid Therapeutic Science Laboratories, Inc., EM3 Methodologies, LLC, and Richard Adams |
| 8-K/A |
| 000-55018 |
| 10.2 |
| 2/9/2021 |
|
| |
| Form of Subscription Agreement $0.40 Per Share (First and Second Quarter 2021 Private Offering) |
| 10-Q |
| 000-55018 |
| 10.7 |
| 5/14/2021 |
|
| |
| Independent Contractor Agreement dated April 22, 2021, by and between We the 23, LLC, and Rapid Therapeutic Science Laboratories, Inc. |
| 8-K |
| 000-55018 |
| 10.1 |
| 6/2/2021 |
|
| |
| Trading Agreement dated April 22, 2021, between We the 23, LLC and Rapid Therapeutic Science Laboratories, Inc. |
| 8-K |
| 000-55018 |
| 10.2 |
| 6/2/2021 |
|
| |
| Independent Contractor Agreement dated May 18, 2021, by and between Epic Medical Research, and Rapid Therapeutic Science Laboratories, Inc. |
| 8-K |
| 000-55018 |
| 10.3 |
| 6/2/2021 |
|
| |
| Form of Common Stock Purchase Warrant of Rapid Therapeutic Science Laboratories, Inc., for August 2021 Private Offering (to purchase 4,852,940 shares of common stock) |
| 8-K |
| 000-55018 |
| 4.1 |
| 8/5/2021 |
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96
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| Incorporated by Reference |
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Exhibit No. |
| Description |
| Form |
| File No. |
| Exhibit |
| Filing Date |
| Filed or Furnished Herewith |
| Form of Common Stock Purchase Warrant of Rapid Therapeutic Science Laboratories, Inc., granted to Maxim Group LLC and assigns |
| 8-K |
| 000-55018 |
| 4.2 |
| 8/5/2021 |
|
| |
| Form of Securities Purchase Agreement dated August 1, 2021, by and between Rapid Therapeutic Science Laboratories, Inc., and the Purchaser party thereto |
| 8-K |
| 000-55018 |
| 10.1 |
| 8/5/2021 |
|
| |
| Form of Original Issue Discount Convertible Debenture Due May 1, 2022, dated August 4, 2021, in the amount of $1,941,176 |
| 8-K |
| 000-55018 |
| 10.2 |
| 8/5/2021 |
|
| |
| Form of Leak-Out Agreement (August 2021 Offering) |
| 8-K |
| 000-55018 |
| 10.3 |
| 8/5/2021 |
|
| |
| Commercial Lease Agreement, dated October 1, 2021, between Triple D Rosegate, LLC and Rapid Therapeutic Science Laboratories, Inc. |
| 10-Q |
| 000-55018 |
| 10.8 |
| 11/10/2021 |
|
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10.30** |
| First Amended and Restated Rapid Therapeutic Science Laboratories, Inc. 2020 Equity Incentive Plan |
| 8-K |
| 000-55018 |
| 10.1 |
| 1/18/2022 |
|
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10.31 |
| (not used) |
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10.32 |
| (not used) |
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10.33** |
| Securities Purchase Agreement dated January 28, 2022, by and between Rapid Therapeutic Science Laboratories, Inc., and J. Scott Suggs |
| 8-K |
| 000-55018 |
| 10.1 |
| 2/1/2022 |
|
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10.34** |
| $400,000 Promissory Note dated January 28, 2022, by Rapid Therapeutic Science Laboratories, Inc., in favor of J. Scott Suggs |
| 8-K |
| 000-55018 |
| 10.2 |
| 2/1/2022 |
|
|
| Code of Ethics |
| 8-K |
| 000-55018 |
| 14.1 |
| 2/9/2021 |
|
| |
21.1 |
| Subsidiaries of the Registrant |
| 10-KT |
| 000-55018 |
| 21.1 |
| 3/16/2021 |
|
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31.1* |
| Certification of Principal Executive Officer Pursuant to Section 302 of Sarbanes- Oxley Act of 2002 |
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| X |
31.2* |
| Certification of Principal Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 |
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| X |
32.1*** |
| Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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| X |
32.2*** |
| Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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| X |
97
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| Incorporated by Reference |
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| ||||||
Exhibit No. |
| Description |
| Form |
| File No. |
| Exhibit |
| Filing Date |
| Filed or Furnished Herewith |
| Charter of the Audit Committee |
| 8-K |
| 000-55018 |
| 99.1 |
| 2/9/2021 |
|
| |
| Charter of the Compensation Committee |
| 8-K |
| 000-55018 |
| 99.2 |
| 2/9/2021 |
|
| |
| Charter of the Nominating and Corporate Governance Committee |
| 8-K |
| 000-55018 |
| 99.3 |
| 2/9/2021 |
|
| |
| Whistleblower Protection Policy |
| 8-K |
| 000-55018 |
| 99.4 |
| 2/9/2021 |
|
| |
101.INS |
| Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
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| X |
101.SCH |
| XBRL Taxonomy Extension Schema Document |
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| X |
101.INS |
| Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
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| X |
101.SCH |
| XBRL Taxonomy Extension Schema Document |
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| X |
101.CAL |
| XBRL Taxonomy Extension Calculation Linkbase Document |
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| X |
101.DEF |
| XBRL Taxonomy Extension Definition Linkbase Document |
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| X |
101.LAB |
| XBRL Taxonomy Extension Label Linkbase Document |
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| X |
101.PRE |
| XBRL Taxonomy Extension Presentation Linkbase Document |
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| X |
104 |
| Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101) |
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| X |
*Filed herewith.
**Denotes a management contract or compensatory plan or arrangement.
***Furnished herewith.
+Certain schedules, exhibits, annexes and similar attachments have been omitted pursuant to Item 601(b)(2) and/or 601(a)(5) of Regulation S-K. A copy of any omitted schedule or exhibit will be furnished supplementally to the Securities and Exchange Commission upon request; provided, however that Rapid Therapeutic Science Laboratories, Inc. may request confidential treatment pursuant to Rule 24b-2 of the Exchange Act, for any schedule or exhibit so furnished.
ITEM 16. FORM 10-K SUMMARY.
None.
98
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| RAPID THERAPEUTIC SCIENCE LABORATORIES, INC. | |
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| By: | /s/ Donal R. Schmidt, Jr. |
|
| Donal R. Schmidt, Jr. |
|
| Chief Executive Officer, President and Director (Principal Executive Officer) |
Date: March 16, 2022
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Signature |
| Title |
| Date |
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/s/ Donal R. Schmidt, Jr. |
| Chief Executive Officer, President, and Director |
| March 16, 2022 |
Donal R. Schmidt, Jr. |
| (Principal Executive Officer) |
|
|
|
|
|
|
|
/s/ D. Hughes Watler, Jr. |
| Chief Financial Officer and Director |
| March 16, 2022 |
D. Hughes Watler, Jr. |
| (Principal Financial & Accounting Officer) |
|
|
|
|
|
|
|
/s/ Henry A. Punzi |
| Director |
| March 16, 2022 |
Henry A, Punzi |
|
|
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|
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|
|
|
/s/ J. Scott Suggs |
| Director |
| March 16, 2022 |
J, Scott Suggs |
|
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|
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