What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-13 compared with 2021-11-10 · 68 added, 96 removed, 91 unchanged (64% of the section changed)

34 unchanged sentences

The following sections discuss and analyze the changes in the significant line items in our statements of operations for the comparison periods identified.

Comparison of the Three Months ended September 30, 2021 and 2020

Comparison of the Three Months ended March 31, 2022 and 2021

Revenues, net .

For the three months ended September 30, 2021, revenues increased by $93,000 to $335,000 when compared to $242,000 for the three months ended September 30, 2020.

The increase in our overall revenues was predominantly due to growth of consumer product sales and finished good custom white-label sales.

The branded product sales increased growth, however, there was a decrease in our historical legacy revenue due to certain customers experiencing supply chain packaging delays related to COVID-19 in 2021.

For the three months ended March 31, 2022 revenues were $396 thousand and increased by $129 thousand, or 48%, when compared to $267 thousand for the three months ended March 31, 2021.

The increase in our overall revenues was due to sales growth of new products as well as our initiatives in custom label manufacturing and branded consumer product.

Gross profit (loss) .

Our gross loss was $57,000 for the three months ended September 30, 2021, compared to a gross loss of $27,000 for the three months ended September 30, 2020.

The gross loss recorded for the three months ended September 30, 2021, as compared to a gross profit recorded for the three months ended September 30, 2020, was primarily due to a significant cost associated with the supplemental staffing requirements in the current quarter.

On a percentage basis, our gross loss was approximately (17)% for the three months ended September 30, 2021.

Gross loss for the three months ended September 30, 2020 was approximately (11)%.

The components of cost of revenues are as follows for the three months ended September 30, 2021 and 2020 ($ in thousands):

Our gross loss was $22 thousand for the three months ended March 31, 2022 compared to a gross loss of $42 thousand for the three months ended March 31, 2021.

The decrease of $20 thousand in gross loss quarter over quarter was primarily due to the higher volume of contract manufacturing sales against fixed costs partially offset by higher manufacturing labor costs.

Gross loss was approximately (6%) for the three months ended March 31, 2022 compared to a gross loss of (16.0%) for the three months ended March 31, 2021.

The components of cost of revenues are as follows for the three months ended March 31, 2022 and 2021 ($ in thousands):

Three Months Ended

September 30,

Cost of revenues

Materials and finished products

Share-based compensation

Compensation and benefits

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Total cost of revenues

Cost of revenues increased by $123 thousand to $392 thousand for the three months ended September 30, 2021, as compared to $269 thousand for the three months ended September 30, 2020.

The increase in cost of revenues was primarily due to a significant cost associated with restart of the plant accelerator post upgrade and increased material and finished products associated with increased revenue.

The Company anticipates increased utilization of the facility is the current year, which we believe will increase our gross margins as the fixed cost of the facilities will not increase on a proportional basis.

Cost of revenues increased by $109 thousand, or 35%, to $418 thousand for the three months ended March 31, 2022, as compared to $309 thousand for the three months ended March 31, 2021.

The increase in cost of revenues is primarily aligned with the new product line growth and an increase in compensation and benefits in the current year.

Selling, general and administrative expenses .

The following table highlights selling, general and administrative expenses by type for the three months ended September 30, 2021 and 2020 ($ in thousands):

The following table highlights Selling, general and administrative expenses by type for the three months ended March 31, 2022 and 2021 ($ in thousands):

Three Months Ended

September 30,

Selling, general and administrative expenses

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Total Selling, general and administrative expenses

Selling, general and administrative expenses increased by $45,000 to $553,000 for the three months ended September 30, 2021, as compared to $508,000 for the three months ended September 30, 2020.

The increase in selling, general and administrative expenses is primarily attributable to our decrease in compensation and benefits and our share-based compensation offset by higher costs for professional fees and other administrative expenses.

Compensation and benefits declined by $45,000 to $87,000 for the three months ended September 30, 2021, as compared to $132,000 for the three months ended September 30, 2020.

The company’s adjustments to staffing resulted in a compensation decrease compared to the prior year period.

Share-based compensation was $45,000 for the three months ended September 30, 2021, which is related to stock option expense of $24,000 to a director and a strategic advisor and $21,000 related to the vesting of restricted awards to our Chief Executive Officer.

Share-based compensation was $83,000 for the three months ended September 30, 2020, which is related to the issuance of 5,714,282 stock options and the issuance of restricted awards to our Chief Executive Officer.

Other Expenses and professional fees increased by $167,000 to $418,000 for the three months ended September 30, 2021 from $251,000 for the three months ended September 30, 2020.

Other selling, general and administrative expenses generally consist of costs associated with our selling efforts and general management, including information technology, travel, training and recruiting.

We continued to incur legal, accounting and consulting fees associated with public company governance requirements, however, the increase in professional fees compared to the prior year period was the primary result of professional fees incurred in preparation for a planned exchange listing.

Comparison of the Nine Months Ended September 30, 2021 and 2020

Revenues, net .

For the nine months ended September 30, 2021 revenues were $1,018,000 and increased by $445,000 when compared to $573,000 for the nine months ended September 30, 2020.

The increase in our overall revenues was predominantly due to initiation of consumer product sales and finished good custom white-label and branded product sales.

There was a decrease in our historical legacy revenue due to certain customers experiencing supply chain delays related to Covid-19 during 2020.

Gross profit (loss) .

Our gross loss was ($95,000) for the nine months ended September 30, 2021 compared to a gross loss of ($153,000) for the nine months ended September 30, 2020.

The loss recorded for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020, was primarily due to the higher volume of contract manufacturing sales and lower manufacturing labor costs.

Gross loss was approximately -9% for the nine months ended September 30, 2021.

Gross profit was (26.7)% for the nine months ended September 30, 2020.

The components of cost of revenues are as follows for the nine months ended September 30, 2021 and 2020 ($ in thousands):

Nine Months Ended

September 30,

Cost of revenues

Materials and finished products

Share-based compensation

Compensation and benefits

Depreciation and amortization

Equipment, production and other expenses

Total cost of revenues

Selling, general and administrative expenses.

The following table highlights selling, general and administrative expenses by type for the nine months ended September 30, 2021 and 2020 ($ in thousands):

Nine Months Ended

September 30,

Selling, general and administrative expenses

Compensation and benefits

Share-based compensation

Depreciation and amortization

Other expenses and professional fees

Total selling, general and administrative expenses

Selling, general and administrative expenses increased by $157,000 to $1,588,000 for the nine months ended September 30, 2021, as compared to $1,431,000 for the nine months ended September 30, 2020.

The increase in selling, general and administrative expenses is primarily attributable to a decrease in compensation and benefits as well as other expenses and professional fees offset by an increase in share-based compensation as compared to the prior year period.

Compensation and benefits decreased by $91,000 to $259,000 for the nine months ended September 30, 2021, as compared to $350,000 for the nine months ended September 30, 2020.

The number of employees increased compared to the prior period, however, adjustments to staffing compensation resulted in a decrease compared to the prior year period.

Share-based compensation was $230,000 for the nine months ended September 30, 2021, which is related to stock option expense of $167,000 to a director and a strategic advisor and $63,000 related to the vesting of restricted awards to our Chief Executive Officer.

Other Expenses and Professional fees increased by $243,000 to $1,089,000 for the nine months ended September 30, 2021 from $846,000 for the nine months ended September 30, 2020.

Selling, general and administrative expenses increased by $295 thousand, or 63%, to $766 thousand for the three months ended March 31, 2022, as compared to $471 thousand for the three months ended March 31, 2021.

The increase in Selling, general and administrative expenses is primarily attributable to the factors described below.

Compensation and benefits increased by $63 thousand, or 71%, to $152 thousand for the three months ended March 31, 2022, as compared to $89 thousand for the three months ended March 31, 2021.

The number of employees increased compared to the prior period and officer compensation increased in conjunction with contract renewals.

Share-based compensation decreased by $90 thousand, or 100%, to $0 thousand for the three months ended March 31, 2022, as compared to $90 thousand for the three months ended March 31, 2021.

The share-based compensation related to the issuance of stock options and restricted awards to our officers, employees, and advisors in the prior year period.

Other Expenses and professional fees increased by $346 thousand, or 131%, to $611 thousand for the three months ended March 31, 2022 from $265 thousand for the three months ended March 31, 2021.

Other Selling, general and administrative expenses generally consist of costs associated with our selling efforts and general management, including information technology, travel, training and recruiting.

We continued to incur legal, accounting and consulting fees associated with public company governance requirements, however, the decrease in professional fees compared to the prior year period was the primary result in the cost reduction, offset by professional fees incurred in preparation for a planned exchange listing.

Furthermore, an increase of on-line sales commissions is reflective of sales growth through Amazon.

We continued to incur legal, accounting and consulting fees associated with public company governance requirements, however, the increase in professional fees compared to the prior year period was the primary an increase in professional fees in connections with our in the NASDAQ up-listing on December 27, 2021.

However, for the remainder of the year, the Company anticipates managing general and administrative cost at current or potentially decreased costs compared to this current quarter.

Research and development expenses .

Research and development expenses were $24 thousand and $7 for the three months ended March 31, 2022 and March 31, 2021, respectively.

Liquidity and Capital Resources

As of September 30, 2021, we had $1.3 million of cash, compared to $32 thousand of cash at December 31, 2020.

Net cash used in operating activities was $1.5 million and $1.4 million for the nine months ended September 30, 2021 and 2020, respectively.

Net cash used in investing activities during the nine months ended September 30, 2021 was $390 thousand related to facility upgrade costs.

Net cash used in investing activities was $152 thousand for the nine months ended September 30, 2020 related to equipment purchases.

Net cash provided by financing activities for the nine months ended September 30, 2021 was $3.2 million which is attributable to the issuance of common stock of $285 thousand and proceeds of notes payable of $15 thousand and proceeds from the PPP loan of $128 thousand and convertible notes payable of $2.8 million.

Net cash provided by financing activities for the nine months ended September 30, 2020 was $1.4 million which is attributable to the issuance of common stock of $1.0 million and proceeds of a notes payable of $408,000.

At September 30, 2021, current assets totaled $1,810,000 and current liabilities totaled $2,409,000, as compared to current assets totaling $363,000 and current liabilities totaling $1,331,000 at December 31, 2020.

As a result, we had working capital deficit of $599,000 at September 30, 2021, compared to a working capital deficit of $887,000 at December 31, 2020.

The decrease in the working capital deficit as of September 30, 2021 is primarily attributable to the capital raised and additional convertible notes payable due in March 2022 and September 2022.

On September 2, 2021, the Company entered into a securities purchase agreement pursuant to which the Company issued to twenty investors a 12% senior secured convertible promissory note in the principal amount of $1,814,000, including Original Issue Discount (OID) of $194,400, which is convertible into shares of the Company's common stock at a price per share of $0.15.

The net proceeds received by the Company were $1,504,400 after deducting fees and expenses related to the transaction.

On March 11, 2021, the Company entered into a securities purchase agreement with Auctus Fund, LLC, a Delaware limited liability company (“Auctus”), pursuant to which the Company issued to Auctus a 12% senior secured convertible promissory note in the principal amount of $1,680,000, including Original Issue Discount (OID) of $180,000, which is convertible into shares of the Company’s common stock at a price per share of $0.10.

The net proceeds received by the Company were $1,337,000 after deducting fees and expenses related to the transaction.

(in thousands)

Net cash used in operating activities

Net cash used in investing activities

Net cash provided by financing activities

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of year

Cash and cash equivalent at end of year

As of March 31, 2022, we had $10.5 million of cash, compared to $13.4 million of cash at December 31, 2021.

Net cash used in operating activities was $797 thousand and $345 thousand for the three months ended March 31, 2022 and 2021, respectively.

Net cash used in investing activities was $0 thousand and $267 thousand for the three months ended March 31, 2022 and 2021, respectively.

Net cash used by financing activities for the three months ended March 31, 2022 was $2.0 million which is attributable to the principal payments of convertible notes of $2.0 million.

For the three months ended March 31, 2021 cash flows from financing activities were $1.7 million which is attributable to the issuance of common stock of $285 thousand and proceeds of a notes payable of $15 thousand and proceeds from the PPP loan of $128 thousand and convertible notes payable of $1.34 million, offset by repayments of notes payable of $115 thousand.

At March 31, 2022, current assets totaled $11.1 million and current liabilities totaled $1.8 million, as compared to current assets totaling $13.9 million and current liabilities totaling $2.9 million at December 31, 2021.

As a result, we had working capital of $9.3 million at March 31, 2022, compared to a working capital of $11.0 million at December 31, 2021.

The decrease in the working capital as of March 31, 2022 is primarily attributable to the repayment of convertible notes payable of $2.0 million in the current period.

On December 27, 2021, the Company sold an aggregate of 2,585,000 units at a price to the public of $5.50 per unit (the “Offering”), each unit consisting of one share of the Company’s common stock, par value $0.001 per share (the “Common Stock”), and a warrant to purchase one share of Common Stock at an exercise price of $5.50 per share (the “Warrants”), pursuant to that certain Underwriting Agreement, dated as of December 21, 2021 (the “Underwriting Agreement”), between the Company and Maxim Group LLC (the “Underwriter”).

In addition, pursuant to the Underwriting Agreement, the Company granted the Underwriter a 45-day option to purchase up to 387,750 additional shares of Common Stock, and/or 387,750 additional Warrants, to cover over-allotments in connection with the Offering, which the Underwriter partially exercised to purchase 387,750 Warrants on the Closing Date.

The Common Stock and the Warrants were offered and sold to the public pursuant to the Company’s registration statement on Form S-1 (File No.

333-260897), filed by the Company with the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended (the “Securities Act”), on November 9, 2021, as amended, and the Company’s registration statement on Form S-1MEF (File No.

333-261821), filed by the Company with the SEC on December 21, 2021, each of which became effective on December 21, 2021.

On the Closing Date, the Company received gross proceeds of approximately $14.2 million, before deducting underwriting discounts and commissions of seven percent (7%) of the gross proceeds and estimated Offering expenses.

Pursuant to the Underwriting Agreement, the Company also agreed to issue to the Underwriter warrants (the “Underwriter’s Warrants”) to purchase up to a total of 155,100 shares of Common Stock (6% of the shares of Common Stock sold in the Offering).

The Underwriter’s Warrants are exercisable at $6.1875 per share of Common Stock and have a term of five years.

The Underwriter’s Warrants are subject to a lock-up for 180 days from the commencement of sales in the Offering, including a mandatory lock-up period in accordance with FINRA Rule 5110(e), and will be non-exercisable for six (6) months after December 21, 2021.

On September 2, 2021, the Company entered into a securities purchase agreement pursuant to which the Company issued to twenty investors a 12% senior secured convertible promissory note in the principal amount of $1.8 million, including $194 thousand (which represents the twelve months of guaranteed interest which was earned in full as of September 2, 2021), which is convertible into shares of the Company's common stock at a price per share of $5.25 subject to certain adjustments as discussed herein in Note 13 in the Notes to the Consolidated Financials.

The net proceeds received by the Company were $1.5 million after deducting fees and expenses related to the transaction.

The purchasers in the September 2021 securities purchase agreement also received warrants to purchase shares of our common stock.

On January 25, 2022, the Company repaid an investor in full with a one-time cash payment of $300 thousand of outstanding principal and accrued but unpaid interest the September 2 Offering.

The Company did incur a 105% pre-payment penalty of $16,800 with respect to the repayment of the investor’s note and the repayment extinguished the note in its entirety.

On March 11, 2021, the Company entered into a securities purchase agreement with Auctus Fund, LLC, a Delaware limited liability company (“Auctus”), pursuant to which the Company issued to Auctus a 12% senior secured convertible promissory note in the principal amount of $1.6 million, including $180 thousand (which represents the twelve months of guaranteed interest which was earned in full as of March 11, 2021), which is convertible into shares of the Company’s common stock at a price per share of $3.50 subject to certain adjustments as discussed herein in Note 13 in the Notes to the Consolidated Financials.

The net proceeds received by the Company were $1.3 million after deducting fees and expenses related to the transaction.

Auctus also received warrants to purchase shares of our common stock.

The $1.6 million note payable was repaid in full in March 2022.

On March 4, 2021, the Company received a second PPP Loan in the amount of $127 thousand under Phase II of the Paycheck Protection Program which commenced on January 13, 2021 and allowed certain businesses that received an initial PPP Loan to seek a second draw PPP Loan.

On January 19, 2021, the Company issued a $15,000 secured convertible promissory note which was convertible into shares of the Company’s common stock at a price per share of $0.03.

The note was due on or before March 19, 2021 and fully-repaid (including all accrued but unpaid interest) on March 14, 2021.

From January 1, 2021 through March, 2021, the Company entered into Securities Purchase Agreements with certain accredited investors whereby we sold 101,786 shares of our common stock at a price per share equal to $2.80 for an aggregate purchase price of $285,000.

Proceeds from these offerings are expected to be used for working capital, new product development and testing, and general business operations.

We have never declared or paid any cash dividends on our common stock.

For the foreseeable future, we anticipate that all available funds and any earnings generated in our business will be used to finance the growth of our business and will not be paid out as dividends to our shareholders.

For the foreseeable future, we anticipate that all available fund and any earnings generated in our business will be used to finance the growth of our business and will not be paid out as dividends to our shareholders.

Any future determination related to our dividend policy will be made at the discretion of our Board of Directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements, contractual restrictions, business prospects and other factors our Board of Directors may deem relevant.

The Company is in the process of expanding its customer base to increase revenue in order to alleviate the current going concern.

Management is exploring new product channel sales in consumer products, such as cosmetics, athletic products, and proprietary medical devices.

1 unchanged sentence

This customer base expansion will enable us to provide financial stability for the foreseeable future, expand our current processes, and position us for long-term shareholder value creation.

Moving forward, the Company will potentially be raising additional capital and focusing on increasing revenues for the business to stabilize and become profitable.

The Company will maintain and attempt to grow the existing contract manufacturing business.

The Company plans to continue building and developing its catalog of consumer products for sale to branding partners.

Thirdly, we will use our in house capabilities to create and test market additional branded products.

These products will be target marketed and sold online through social media, television and online market places.

We expect to continue incurring losses for the near-term future and may need to raise additional capital to support ongoing operations.

Our ability to continue to operate as a going concern is dependent upon our ability to raise additional capital and to ultimately achieve profitable operations.

Management is evaluating various options to raise capital to funds the Company’s working capital requirements through equity offerings.

There can be no assurances, however, that management will be able to obtain sufficient additional funds when needed, or that such funds, if available, will be obtained on terms satisfactory to us.

These factors raise substantial doubt as to our ability to continue as a going concern.

We have sufficient capital to maintain as a going concern due to the capital raise that occurred on December 27, 2021.

We intend to maintain and attempt to grow our existing contract manufacturing business.

We also plan to continue building and developing its catalog of consumer products for sale to branding partners and to use our in-house capabilities to create and test market additional branded products.

These products will be target marketed and sold online through social media, television and online marketplaces.

Furthermore, the Company plans to develop its own proprietary medical devices and explore drug delivery programs for its technology.

Additionally, the Company continues to evaluate strategic initiatives (e.g., acquisitions) and additional capital raises through debt or equity may be necessary to achieve these objectives.

We expect to continue incurring losses for the near-term future.

Our ability to continue to operate as a going concern in the long-term is dependent upon our ability to manage and grow our current products and to ultimately achieve profitable operations.

Management may consider various options to raise capital to fund potential acquisitions through equity or debt offerings.

There can be no assurances, however, that management will be able to obtain sufficient additional funds, if needed, or that such funds, if available, will be obtained on terms satisfactory to us.

The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets and liabilities that might be necessary should we be unable to continue as a going concern.

On January 30, 2020, the World Health Organization declared the coronavirus outbreak a "Public Health Emergency of International Concern"

and on March 10, 2020, declared it to be a pandemic.

Actions taken around the world to help mitigate the spread of the coronavirus include restrictions on travel, and quarantines in certain areas, and forced closures for certain types of public places and businesses.

The coronavirus and actions taken to mitigate it have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the geographical area in which the Company operates.

While it is unknown how long these conditions will last and what the complete financial effect will be to the Company, to date, the Company could experience declining revenue, labor and supply shortages, or difficulty in raising additional capital.

Our concentrations with a few customers and one supplier make it reasonably possible that we are vulnerable to the risk of a near-term severe impact.

Additionally, it is reasonably possible that estimates made in the financial statements have been, or will be, materially and adversely impacted in the near term as a result of these conditions, including the recoverability of long-lived assets.

Off Balance Sheet Arrangements

As of September 30, 2021, we had no off-balance sheet arrangements in the nature of guarantee contracts, retained or contingent interests in assets transferred to entities (or similar arrangements serving as credit, liquidity or market risk support to entities for any such assets), or obligations (including contingent obligations) arising out of variable interests in entities providing financing, liquidity, market risk or credit risk support to us, or that engage in leasing, hedging or research and development services with us.

As of March 31, 2022, we had no off-balance sheet arrangements in the nature of guarantee contracts, retained or contingent interests in assets transferred to entities (or similar arrangements serving as credit, liquidity or market risk support to entities for any such assets), or obligations (including contingent obligations) arising out of variable interests in entities providing financing, liquidity, market risk or credit risk support to us, or that engage in leasing, hedging or research and development services with us.

Critical Accounting Policies and Estimates

26 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis