UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended March 31, 2020

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period from __________ to _________

 

Commission file number: 000-29381

 

MEDTAINER, INC. 

(Exact name of registrant as specified in its charter)

 

Florida		65-0207200
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

1620 Commerce St., Corona, CA		92880
(Address of principal executive offices)		(zip code)

 

(844) 226-5649 

(Registrant’s telephone number, including area code)

 

(Former Name, former address and former fiscal year, if changed since last report)

 

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 period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post 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” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☒
		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 issuer is a shell company (as defined in rule 12b-2 of the Exchange Act) Yes ☐  No ☒

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS

 

Check whether the registrant filed all documents and reports required by Section 12, 13, or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court Yes ☐ No ☐

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

As of June 24, 2020, there were 77,085,272 shares of the Registrant’s Common Stock outstanding.

 

 

	MEDTAINER, INC.
	QUARTERLY REPORT ON FORM 10-Q
	for the Quarterly Period Ended March 31, 2020

 

TABLE OF CONTENTS		Page
PART I - FINANCIAL INFORMATION		1
Item 1.	Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	17
Item 4.	Controls and Procedures	17
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	18
Item 1A.	Risk Factors	18
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19
Item 3.	Defaults on Senior Securities	19
Item 4.	Mine Safety Disclosures	19
Item 5.	Other Information	19
Item 6.	Exhibits	19
SIGNATURES		20

 

THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. SUCH STATEMENTS ARE BASED ON CURRENT EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND PROJECTIONS ABOUT THE COMPANY AND ITS INDUSTRY. FORWARD-LOOKING STATEMENTS ARE SUBJECT TO KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE ACTUAL RESULTS, LEVELS OF ACTIVITY, PERFORMANCE, ACHIEVEMENTS AND PROSPECTS TO BE MATERIALLY DIFFERENT FROM THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS FOR ANY REASON EVEN IF NEW INFORMATION BECOMES AVAILABLE OR OTHER EVENTS OCCUR IN THE FUTURE.

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

MEDTAINER, INC.

CONSOLIDATED BALANCE SHEETS

 

		March 31,				December 31,
		2020				2019
ASSETS		(Unaudited)				(Audited)
CURRENT ASSETS:
Cash		$	31,377			$	17,982
Accounts receivable			129,405				108,836
Inventories			80,125				85,215
Prepaid expenses			—				8,967
TOTAL CURRENT ASSETS			240,907				221,000
Property and equipment, net of accumulated depreciation of $124,053 and $118,459, respectively			29,690				35,280
Intangible assets, net of accumulated amortization of $146,524 and $126,322			1,385,476				1,405,678
Goodwill			1,020,314				1,020,314
Security deposits			7,699				7,699
TOTAL ASSETS		$	2,684,086			$	2,689,971
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses		$	367,724			$	234,635
Accrued interest payable			142,035				142,464
Payroll liabilities payable			195,150				162,409
Customer deposits payable			60,745				97,310
Convertible notes payable			81,172				81,172
Notes payable			373,959				373,959
Loan payable – stockholder			676,796				627,162
TOTAL CURRENT LIABILITIES			1,897,581				1,719,111
STOCKHOLDERS’ EQUITY
Preferred stock, without par value, 10,000,000 shares authorized: none issued			—				—
Common stock, $0.00001 par value, 100,000,000 shares authorized:
56,700,979 shares issued and outstanding shares at March 31, 2020, and
December 31, 2019.			567				567
Additional paid-in capital			6,054,693				5,905,656
Accumulated deficit			(5,268,755	)			(4,935,363	)
TOTAL STOCKHOLDERS’ EQUITY			786,505				970,860
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	2,684,086			$	2,689,971

 

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

 

 

MEDTAINER, INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Quarter Ended March 31,
		2020				2019
Sales		$	556,129			$	604,437
Cost of sales			275,989				263,159
Gross profit			280,140				341,278
Operating expenses:
Advertising and marketing			13,349				15,673
Depreciation and amortization expense			24,674				27,824
Professional fees			64,890				3,829
Share-based compensation			149,037				420,642
Payroll expenses			285,298				293,357
General and administrative			66,531				41,627
Total operating expenses			603,779				802,952
Loss from operations			(323,639	)			(461,674	)
Non-operating expense:
Interest expense			(9,753	)			(9,884	)
Total non-operating expense			(9,753	)			(9,884	)
Loss before income taxes			(333,392	)			(471,558	)
Income tax provision			—				—
Net loss		$	(333,392	)		$	(471,558	)
Basic and diluted loss per common share		$	(0.01	)		$	(0.01	)
Basic weighted average common shares outstanding			56,700,979				56,250,784
Diluted weighted average common shares outstanding			57,086,933				56,999,130

 

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

 

 

MEDTAINER, INC. 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Quarter Ended March 31,
		2020				2019
OPERATING ACTIVITIES:
Net loss		$	(333,392	)		$	(471,558	)
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Depreciation expense			5,590				7,622
Share-based compensation			149,037				420,642
Amortization expense			20,202				20,202
Decrease (Increase) in operating assets:
Accounts receivable			(20,569	)			(54,743	)
Inventories			5,090				15,448
Prepaid expenses			8,967				(3,074	)
Increase (Decrease) in operating liabilities:
Accounts payable and accrued expenses			133,089				58,859
Accrued interest payable			(429	)			9,503
Payroll liabilities payable			32,741				17,395
Customer deposits payable			(36,565	)			23,687
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES			(36,239	)			43,983
INVESTING ACTIVITIES:
Acquisition of property and equipment			—				(1,165	)
NET CASH USED IN INVESTING ACTIVITIES			—				(1,165	)
FINANCING ACTIVITIES:
Principal payments on capital lease obligations			—				(5,619	)
Proceeds from stockholder loan			60,238				124,483
Repayment of stockholder loan			(10,604	)			(88,483	)
NET CASH PROVIDED BY FINANCING ACTIVITIES			49,634				30,381
INCREASE IN CASH			13,395				73,199
CASH - BEGINNING OF PERIOD			17,982				17,374
CASH - END OF PERIOD		$	31,377			$	90,573

 

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

 

 

 

MEDTAINER, INC.

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(Unaudited)

 

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE QUARTER ENDED MARCH 31, 2019:

 

		Common Stock								Paid in				Accumulated
		Shares				Amount				Capital				Deficit				Total
Balances - December 31, 2018			55,499,106			$	555			$	5,034,636			$	(3,526,913	)		$	1,508,278
Common stock issued in reverse split			1,873				—				—				—				—
Share-based compensation			900,000				9				420,633				—				420,642
Net loss			—				—				—				(471,558	)			(471,558	)
Balances at March 31, 2019			56,400,979			$	564			$	5,455,269			$	(3,998,471	)		$	(1,457,362	)

  

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE QUARTER ENDED MARCH 31, 2020:

 

		Common Stock								Paid in				Accumulated
		Shares				Amount				Capital				Deficit				Total
Balances - December 31, 2019			56,700,979			$	567			$	5,905,656			$	(4,935,363	)		$	970,860
Share-based compensation			—				—				149,037				—				149,037
Net loss			—				—				—				(333,392	)			(333,392	)
Balances at March 31, 2020			56,700,979			$	567			$	6,054,693			$	(5,268,755	)		$	786,505

 

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

 

 

MEDTAINER, INC.

 

Notes to Financial Statements

 

March 31, 2020

(Unaudited)

 

Note 1 – Business

 

Medtainer, Inc. (the “Company”) is in the business of designing, manufacturing, branding and selling proprietary plastic medical grade containers that can store pharmaceuticals, herbs, teas and other solids or liquids and can grind solids and shred herbs, the business of private labeling and branding for purchasers of containers and other products, and the sale of other products. Prior to January 1, 2019, it conducted these businesses through wholly owned subsidiaries; from and after that date, it has conducted them itself.

 

Note 2 – Summary of Significant Accounting Policies

 

Accounting Principles

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the United States Securities and Exchange Commission (the “SEC”). Accordingly, they do not contain all information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of the Company’s management, the accompanying unaudited consolidated financial statements contain all the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of March 31, 2020, and the results of operations and cash flows for the periods presented. The results of operations for the quarter ended March 31, 2020, are not necessarily indicative of the operating results for the full fiscal year or any future period. These unaudited consolidated financial statements should be read in conjunction with the financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on May 28, 2020.

 

Principles of Consolidation

 

The unaudited consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.

 

Use of Estimates

 

The preparation of the financial statements in conformity with GAAP 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 dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. Certain of the Company’s estimates could be affected by external conditions, including those unique to its industry, and general economic conditions. It is possible that these external conditions could have an effect on the Company’s estimates that could cause actual results to differ from its estimates. The Company re-evaluates all its accounting estimates at least quarterly based on these conditions and record adjustments when necessary.

 

Significant estimates relied upon in preparing these unaudited consolidated financial statements include revenue recognition, accounts receivable reserves, inventory and related reserves, valuations and purchase price allocations related to business combinations, expected future cash flows used to evaluate the recoverability of long-lived assets, estimated fair values of long-lived assets used to record impairment charges related to intangible assets and goodwill, amortization periods, accrued expenses, share-based compensation, and recoverability of the Company’s net deferred tax assets and any related valuation allowance.

 

Cash

 

The Company considers all short-term highly liquid investments with an original maturity at the date of purchase of three months or less to be cash equivalents.

 

 

Accounts Receivable

 

Included in “Accounts receivable” on the consolidated balance sheets are amounts primarily related to customers. The Company estimates losses on receivables based on known troubled accounts and historical experience of losses incurred. Receivables are considered impaired and written off when it is probable that all contractual payments due will not be collected in accordance with the terms of the related agreement. Based on experience and the judgment of management, the allowance for doubtful accounts was $0 as of March 31, 2020, and December 31, 2019.

 

Inventories

 

Inventories, which consist of products held for resale, are stated at the lower of cost, determined using the first-in first-out and net realizable value methods. Net realizable value is the estimated selling price, in the ordinary course of business, less estimated costs to complete and dispose of the product.

 

If the Company identifies excess, obsolete or unsalable items, its inventories are written down to their realizable value in the period in which the impairment is first identified. Shipping and handling costs incurred for inventory purchases and product shipments are recorded in cost of sales in the Company’s statements of operations.

 

Property and Equipment

 

Property and equipment are stated at cost less accumulated depreciation. Depreciation is provided for on a straight-line basis over the useful lives of the assets. For furniture and fixtures the useful life is 5 years, Leasehold Improvements are depreciated over the 2-year lease term. Expenditures for additions and improvements are capitalized; repairs and maintenance are expensed as incurred.

 

Goodwill and Intangible Assets

 

Goodwill and intangible assets that have indefinite useful lives are not amortized but are evaluated for impairment annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company records intangible assets at fair value, estimated using a discounted cash flow approach. The Company amortizes its intangible assets that have finite lives using either the straight-line method or based on estimated future cash flows to approximate the pattern in which the economic benefit of the assets will be utilized. Amortization is recorded over the estimated useful lives ranging from 14 to 20 years. The Company reviews intangible assets subject to amortization quarterly to determine if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment or a change in the remaining useful life. Conditions that would indicate impairment and trigger a more frequent impairment assessment include, but are not limited to, a significant adverse change in legal factors or business climate that could affect the value of an asset, or an adverse action or assessment by a regulator. If the carrying value of an asset exceeds its undiscounted cash flows, the Company will write-down the carrying value of the intangible assets to its fair value in the period identified. The Company generally calculates fair value as the present value of estimated future cash flows to be generated by the asset using a risk-adjusted discount rate. If the estimate of an intangible asset’s remaining useful life is changed, the Company will amortize the remaining carrying value of the intangible asset prospectively over the revised remaining useful life. Consistent with the prior year, the Company conducted its annual impairment test of goodwill during the fourth quarter of the year ended December 31, 2019. The Company operates as a single operating segment with one reporting unit and consequently evaluates goodwill for impairment based on an evaluation of the fair value of the Company as a whole. The estimate of fair value requires significant judgment.

 

Any loss resulting from an impairment test would be reflected in operating income in the Company’s consolidated statements of income. The annual impairment testing process is subjective and requires judgment at many points throughout the analysis. If these estimates or their related assumptions change in the future, the Company may be required to record impairment charges for these assets not previously recorded.

 

In January 2017, FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which simplifies accounting for goodwill impairment. It requires a hypothetical purchase price allocation. It is mandatory for fiscal years beginning after December 14, 2019. As permitted, the Company adopted ASU 2017-04 for fiscal periods beginning January 1, 2018.

 

There was no impairment of intangible assets, long-lived assets or goodwill during the quarter ended March 31, 2020.

 

Convertible Instruments

 

The Company evaluates and accounts for conversion options embedded in convertible instruments in accordance with ASC 815, Derivatives and Hedging Activities.

 

GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not remeasured at fair value under other GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.

 

 

The Company accounts for convertible instruments (when it has been determined that the embedded conversion options should not be bifurcated from their host instruments) as follows: the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated date of redemption.

 

The Company accounts for the conversion of convertible debt when a conversion option has been bifurcated using the general extinguishment standards. The debt- and equity-linked derivatives are removed at their carrying amounts and the shares issued are measured at their then-current fair value, with any difference recorded as a gain or loss on extinguishment of the two separate accounting liabilities.

 

Revenue Recognition

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No. 20 l4-09, Revenue from Contracts with Customers (Topic 606), which supersedes all existing revenue recognition requirements, including most industry specific guidance. This standard requires a company to recognize revenues when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. FASB subsequently issued the following amendments to ASU No. 2014-09 that have the same effective date and transition date: ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations; ASU No. 20l6-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing; ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients; and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. The Company adopted these amendments (collectively, the “new revenue standards”) with ASU 2014-09.

 

The new revenue standards became effective for the Company on January 1, 2018 and were adopted using the modified retrospective method. The adoption of the new revenue standards did not change the Company’s revenue recognition as the majority of its revenues continue to be recognized when the customer takes control of its product. As the Company did not identify any accounting changes that impacted the amount of reported revenues with respect to its product revenues, no adjustment to retained earnings was required upon adoption.

 

Under the new revenue standards, the Company recognizes revenues when its customer obtains control of promised goods or services, or when they are shipped to that customer, in an amount that reflects the consideration which it expects to receive in exchange for them. The Company recognizes revenues following the five-step model prescribed under ASU No. 2014-09: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) the Company satisfies its performance obligation.

 

Revenues from product sales are recognized when the customer obtains control of the Company’s product, which occurs at a point in time, typically upon shipment or delivery to the customer. The Company expenses incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that it would have recognized is one year or less or the amount is immaterial.

 

The following table summarizes revenue from contracts with customers for the quarter ended March 31, 2020, and March 31, 2019:

 

			Quarter Ended March 31,
			2020				2019
Products			$	542,875			$	582,404
Services				13,254				22,033
Totals			$	556,129			$	604,437

 

Share-Based Payments

 

In June 2018, FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which aligns accounting for share-based payments issued to nonemployees to that of employees under the existing guidance of Topic 718, with certain exceptions. This update supersedes previous guidance for equity-based payments to nonemployees under Subtopic 505-50, Equity—Equity-Based Payments to Non-Employees. This guidance became effective for the Company as of January 1, 2019. Based on the completed analysis, the Company has determined the guidance did not have a material impact on the financial statements.

 

Fair Value Measurements

 

The Company has adopted the provisions of ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value, and expands disclosure of fair value measurements.

 

 

The estimated fair value of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are carried at historical cost basis, which approximates their fair values because of the short-term nature of these instruments. The carrying amounts of the Company’s short- and long-term credit obligations approximate fair value because the effective yields on these obligations, which include contractual interest rates taken together with other features such as concurrent issuances of warrants and/or embedded conversion options, are comparable to rates of returns for instruments of similar credit risk.

 

ASC Topic 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC Topic 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC Topic 820 describes three levels of inputs that may be used to measure fair value:

 

Level 1 – Quoted prices in active markets for identical assets or liabilities

 

Level 2 – Quoted prices for similar assets and liabilities in active markets or inputs that are observable

 

Level 3 – Inputs that are unobservable (for example cash flow modeling inputs based on assumptions)

  

Advertising

 

Advertising and marketing expenses are charged to operations as incurred.

 

Income Taxes

 

The Company uses the asset and liability method of accounting for income taxes in accordance with ASC Topic 740, Income Taxes. Under this method, income tax expense is recognized for: (i) taxes payable or refundable for the current year and (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if based on the weight of the available positive and negative evidence, it is more likely than not some portion or all the deferred tax assets will not be realized.

 

ASC Topic 740.10.30 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740.10.40 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company has no material uncertain tax positions.

 

Concentration of Credit Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash accounts in a financial institution, which at times, may exceed the Federal depository insurance coverage of $250,000. The Company has not experienced losses on these accounts and management believes that the Company is not exposed to significant risks on such accounts. Also, the Company has not experienced losses on accounts receivable and management believes that the Company is not exposed to significant risks with respect to them.

 

Accounting for Leases

 

In February 2016, FASB issued ASU 2016-02, Leases (Topic 842), which requires recognition of lease liabilities, representing future minimum lease payments, on a discounted basis, and a corresponding right-of-use assets on a balance sheet for most leases, along with requirements for enhanced disclosures to enable the assessment of the amount, timing and uncertainty of cash flows arising from leasing arrangements. This ASU became effective for the Company on January 1, 2019. The Company has determined that the impact of this guidance is immaterial. The Company had entered into a 24-month equipment lease in May 2017, which had only five remaining payments of $2,000 each as of December 31, 2018; therefore, the Company determined that the impact of this guidance is immaterial. The Company also had entered into a building lease September 1, 2018, which expired August 31, 2019. The building lease was renewed on September 1, 2019 and expires on August 31, 2020. Because the building lease has an initial term of 12 months or less and there is no assurance the Company will remain in the current location after the lease term has expired, the Company has concluded that this ASU does not apply to this lease.

 

Note 3 – Going Concern

 

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. At March 31, 2020, the Company had a working capital deficit of $1,656,674. In addition, the Company has generated operating losses since inception and has notes payable that are currently in default. These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the successful execution of its operating plan which includes increasing sales of existing products while introducing additional products and services, controlling operation expenses, negotiating extensions of existing loans and raising either debt or equity financing. There is no assurance that the Company will be able to increase sales or to obtain or extend financing on terms acceptable to us or at all or successfully execute any of the other measures set forth in the previous sentence.

 

 

Note 4 – Intangible Assets

 

Intangible assets that are subject to amortization are reviewed for potential impairment whenever events or circumstances indicate that carrying amounts may not be recoverable. Assets not subject to amortization are tested for impairment at least annually. The Company has intangible assets subject to amortization as described in the next paragraph. These costs were included in intangible assets on the balance sheet and amortized as indicated in the next paragraph.

 

On June 8, 2018, the Company acquired certain patents and patent applications, a trademark and an internet domain related to “Medtainer®” pursuant to an Asset Purchase Agreement, dated as of April 16, 2018, and amended on June 8, 2018, by and between the Company and an unrelated party, in consideration of the issuance of 2,631,252 shares of common stock. These assets and the associated goodwill have been apportioned as follows, based upon a report that the Company obtained from an independent valuation firm:

 

Balances at March 31, 2020:

 

		Weighted Average		Gross Carrying				Accumulated
Description		Estimated Useful Life		Value				Amortization				Net Amount
Certain U.S. patents		15 years		$	435,000			$	(51,701	)		$	383,299
Certain U.S. patents		15 years			435,000				(49,754	)			385,246
Certain Canadian
Patents		20 years			260,000				(23,457	)			236,543
Certain European
Patents		14 years			30,000				(3,783	)			26,217
Molds		15 years			150,000				(17,829	)			132,171
Trademark		Indefinite life			220,000				—				220,000
Domain name		Indefinite life			2,000				—				2,000
Intangible Totals				$	1,532,000			$	(146,524	)		$	1,385,476
Goodwill				$	1,020,314			$	—			$	1,020,314

 

Balances at December 31, 2019:

 

		Weighted Average		Gross Carrying				Accumulated
Description		Estimated Useful Life		Value				Amortization				Net Amount
Certain U.S. patents		15 years		$	435,000			$	(44,571	)		$	390,429
Certain U.S. patents		15 years			435,000				(42,895	)			392,105
Certain Canadian
Patents		20 years			260,000				(20,224	)			239,776
Certain European
Patents		14 years			30,000				(3,262	)			26,738
Molds		15 years			150,000				(15,370	)			134,630
Trademark		Indefinite life			220,000				—				220,000
Domain name		Indefinite life			2,000				—				2,000
Intangible Totals				$	1,532,000			$	(126,322	)		$	1,405,678
Goodwill				$	1,020,314			$	—			$	1,020,314

 

 

Note 5 – Convertible Notes Payable and Promissory Notes Payable

 

As of March 31, 2020, and December 31, 2019, the Company had the following convertible notes and promissory notes outstanding:

  

			March 31, 2020								December 31, 2019
			Principal				Accrued Interest				Principal				Accrued Interest
Convertible Notes Payable
July 2014 $75,000 note, convertible into common stock at $5.00 per share, 10% interest, currently in default (a)		$	66,172			$	25,366			$	66,172			$	23,712
July 2014 $15,000 note, convertible into common stock at $5.00 per share, 10% interest, currently in default (a)			15,000				9,750				15,000				9,125
		$	81,172			$	35,116			$	81,172			$	32,837
Notes Payable
November 2014 $300,000 note, due February 2019, 10% interest, currently in default (b)		$	298,959			$	31,919			$	298,959			$	34,627
August 2015 $75,000 note, with one-time interest charge of $75,000, currently in default (c)			75,000				75,000				75,000				75,000
			373,959				106,919				373,959				109,627
Total		$	455,131			$	142,035			$	455,131			$	142,464

 

 

a.

The Company entered into promissory note conversion agreements in the aggregate amount of $90,000. Payments of $8,828 have been made on these notes as of March 31, 2019. These notes are convertible into shares of the Company’s common stock at a conversion price of $5.00 per share. The loans under these agreements are non-interest-bearing and have no stated maturity date; however, the Company is accruing interest at a 10% nominal annual rate.

 

b.

On November 3, 2014, the Company made a promissory note in the principal amount of $300,000 in favor of an unrelated person (the “Old Note”). On February 22, 2018, the Company repaid $100,000 on the principal of the Old Note and made a new promissory note, dated February 22, 2018, in the principal amount of $298,959 in favor of said party (the “New Note”) in satisfaction of the Old Note, which principal amount comprised the unpaid principal amount of $200,000 due on the Old Note after the repayment, and $98,959 of accrued interest on the Old Note. At March 31, 2019, accrued interest on this note was $32,387. The outstanding balance of this note was $298,959 at March 31, 2020, and December 31, 2019. The New Note was due on February 22, 2019. This note is in default and the Company is negotiating an extension. The Company made interest payments in the amount of $20,182 and $10,182 to the noteholder during the 12 months ended December 31, 2019, and the quarter ended March 31, 2020, respectively.

 

c.

On August 15, 2015, the Company made a promissory note in the amount of $150,000 in favor of an unrelated party. The note bears interest at 0.48% per annum, provided that the note is paid on or before maturity date, or 2 percentage points over the Wall Street Journal Prime Rate, if it is not repaid on or before the maturity date. This note matured on August 11, 2016. Upon an event of default, as defined in the note, interest shall be compounded daily. The Company is currently negotiating an extension of the maturity date for the balance. During the year ended December 31, 2017, the holder of this note agreed to exchange $75,000 of principal and $663 of interest accrued on this note for 500,000 shares of common stock. This exchange was accounted for as an extinguishment of debt resulting in a loss of $683,337. In connection with this exchange, the Company agreed to pay the holder a fee of $75,000 in consideration of his waiving the default under the promissory note, as additional consideration for his agreeing to the exchange and as compensation for his foregoing the interest that would have accrued on the promissory note at the default rate but for the waiver. At March 31, 2020, and December 31, 2019, the note had a balance of $75,000 in addition to the $75,000 fee included in accrued interest.

 

 

Note 6 – Stockholders’ Equity

 

On March 22, 2019, the Company implemented a reverse split of its common stock on the basis of one new share of common stock for each 100 shares of common stock then outstanding. Also, on that date, the Company reduced the number of shares of its authorized common stock from 6,000,000,000 to 100,000,000. All references to common shares have been adjusted for the effects of the reverse split. The number of authorized shares of preferred stock remained 10,000,000.

 

Note 7 – Share-Based Compensation

 

The Company’s 2018 Incentive Award Plan (the “2018 Plan”) became effective on December 1, 2018, under which the Company may issue up to 2,000,000 shares of common stock, which the Company reserved, as incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, and other forms of compensation to employees, directors and consultants. In addition, the 2018 Plan provides for the grant of performance cash awards to employees, directors and consultants. All these shares were reserved on that date.

 

On December 1, 2018, 1,350,000 shares of common stock were awarded to employees in the form of restricted shares and 335,000 shares of common stock were awarded to consultants as compensation. The fair value of these shares on the grant date was $0.01 per share. As of December 31, 2018, 185,000 shares awarded to consultants were vested and none of the shares awarded to employees were vested. During the quarter ended March 31, 2019, all of the 335,000 shares awarded to consultants were vested and 750,000 of the shares awarded to employees were vested.

 

The Company made no awards in any other form during the quarters ended March 31, 2020, and March 31, 2019. The Company expensed $149,037 and $420,642 for share-based compensation in the quarters ended March 31, 2020, and March 31, 2019, for its employees and nonemployees in the accompanying consolidated statements of operations.

 

The following table summarizes vesting for financial reporting purposes under GAAP of the Common Stock shares issued under the 2018 Plan:

 

		Shares of Common Stock
Vesting Dates		Employees				Consultants
December 31, 2018			—				185,000
January 1, 2019			750,000				—
March 31, 2019			—				150,000
June 30, 2019			300,000				—
Total vested at March 31, 2020			1,050,000				335,000

  

Note 8 – Income Taxes

 

As of December 31, 2019, the Company had approximately $3,248,000 of net operating loss carryforwards (“NOLs”) that are available to reduce future taxable income and that begin to expire in 2035. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based on the assessment, management has established a full valuation allowance against all the deferred tax assets for every period because it is more likely than not that all the deferred tax assets will not be realized.

 

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) was signed into law, making significant changes to the Internal Revenue Code. Changes include a federal corporate tax rate decrease from 35% to 21% for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system and a one-time transition tax on the mandatory deemed repatriation of foreign earnings. The Company has estimated its provision for income taxes in accordance with the 2017 Tax Act and the guidance available and has kept the full valuation allowance. As a result, the Company recorded no income tax expense during the quarter ended March 31, 2020.

 

Note 9 – Capital Leases

 

During each of the years ended at December 31, 2017, and December 31, 2016, the Company entered a capitalized equipment lease. Each of these leases was payable in 24 monthly installments of $2,000, including interest at the rate of 19.87% per annum. The lessor under these leases was a related party. The Company made its final payments for these leases during June 2018 and May 2019, respectively.

 

Note 10 – Related-Party Transactions

 

Loans

 

The Company has received loans from its officers and directors from time to time since 2014. During the quarter ended March 31, 2020, the Company received loans of $60,239 from its officers and directors. During the quarter ended March 31, 2020, the Company repaid $10,603 of the loans. The balances of these loans at March 31, 2020, and December 31, 2019, was $676,796 and $627,162, respectively. All of these loans are non-interest-bearing and have no fixed maturity date. The Company expects to repay of these loans when cash flows become available.

 

11 

 

 

Contracts

 

The Company makes capital lease payments for equipment, building lease payments, and products for resale from an entity owned by a related party, who is also one of its executive officers.

 

Payments made to the related party for the quarters ended March 31, 2020, and March 31, 2019, are as follows:

 

		Quarter Ended March 31,
		2020				2019
Capital lease payments		$	—			$	6,000
Building lease payments			21,521				25,921
Purchase of products for resale			26,942				30,221
Total paid to related party		$	48,463			$	62,142

Note 11 – Concentrations

 

For the quarter ended March 31, 2020, and March 31, 2019, one of the Company’s customers accounted for approximately 6% and 18% of sales, respectively.

 

For the quarter ended March 31, 2020, and March 31, 2019, the Company respectively purchased approximately 48% and 36% of its products from one distributor.

 

As of March 31, 2020, four of the Company's customers accounted for 29%, 28%, 14%, and 13% of accounts receivable. As of December 31, 2019, three of the Company's customers accounted for 34%, 21%, and 18% of its accounts receivables.

 

Note 12 – Commitments

 

The Company was committed under an operating lease for its premises, under which it made monthly payments of $7,500 plus 100% of operating expenses, until the lease expired June 30, 2018. On September 1, 2018, the Company entered a new operating lease with an entity owned by a related party (see Note 10) calling for monthly payments of $8,641 plus 100% of operating expenses, for a term expiring on August 31, 2019. On September 1, 2019, the lease of the Company’s premises was amended such that it expires on August 31, 2020, and the rent thereunder was increased to $8,967 per month.

 

In conjunction with the Asset Purchase Agreement referred to in Note 4, the Company agreed to purchase a minimum of 30,000 units of product per month, subject to an increase of 1% of the agreed purchase on each anniversary of said agreement. The minimum purchase will increase by 1% every anniversary of its effective date. The agreement expires on April 30, 2031.

 

Note 13 – Subsequent Events

 

In December 2019, an outbreak of a novel strain of coronavirus known as COVID-19 originated in Wuhan, China, and has spread to other countries, including the United States. On March 11, 2020, the World Health Organization declared the outbreak to be a pandemic. A number of jurisdictions in the United States, including the State of California, have declared a state of emergency. Further, the governor of the State of California, where the Company’s headquarters, all of its employees and the manufacturer of its Medtainer^® products are located, has issued an executive order pursuant to that declaration mandating that all individuals living in the state stay at home or at their places of residence, except as needed to maintain the continuity of operations in certain sectors, in none of which the Company operates. As a result, for an unknown but possibly extended period, the following, among others, may be substantially and adversely affected to an extent that the Company cannot presently predict: the Company’s ability to conduct its operations, including its financial reporting systems, internal control over financial reporting and disclosure controls and procedures; its financial condition and results of operations; its capital and financial resources, including its liquidity; its balance sheet and its ability to account timely for those assets; demand for its products and services; the ability of its suppliers to manufacture and deliver the products that it sells; its ability to deliver its products; the valuation of its goodwill, intangible assets and long-lived assets; its ability to display and sell its products at trade shows and similar events; its ability to conduct meetings with existing and prospective customers and suppliers; the ability of the Company and its customers to meet their financial obligations to one another and to others; travel restrictions and border closures; and, if its employees were to contract coronavirus, their ability to work. The Company has been able to continue operating, but on a limited basis.

 

On May 4, 2020, the Company made a note in favor of Customers Bank in the principal amount of $137,690 pursuant to the terms of the Paycheck Protection Program authorized by the Coronavirus Aid, Relief, and Economic Security (CARES) Act and pursuant to all regulations and guidance promulgated or provided by the Small Business Administration (the “SBA”) and other federal agencies that are now, or may become, applicable to the loan. The loan bears interest at the rate of 1% per annum and has a 2-year term. On June 5, 2020, the CARES Act was amended by the Paycheck Protection Program Flexibility Act of 2020.

 

12 

 

 

Under the CARES Act, as so amended,

 

•	The loan will be forgiven if its proceeds are used for payroll, mortgage interest, rent, and utilities during the 24-week period beginning on May 4, 2020, although the Company may elect to utilize the 8-week period that was in effect prior to the amendment (such 24- or 8-week period being the “covered period”). The Company has not determined whether it will make this election. The amount of loan forgiveness will be reduced if less than 60% of the funds is expended for payroll over the covered period.
•	No interest or principal will be required until the date on which the amount of forgiveness determined is remitted to the lender, although interest will continue to accrue over this deferral period. After the deferral period and after taking into account any loan forgiveness applicable to the loan pursuant to the program, as approved by the SBA, any remaining principal and accrued interest will be payable in substantially equal monthly installments over the remaining loan term, in the amount and according to the payment schedule provided by the lender.
•	Under the amendment to the CARES Act, the Company may apply to the lender to extend the term of the loan to 5 years and expects to do so, but no assurance can be given that the lender will agree to the extension.
•	The Company may delay the payment of employer payroll taxes until December 31, 2021, with respect to up to 50% of the amounts due and December 31, 2022, with respect to the remaining amounts due up to 50%.

 

On May 21, 2020, the Company issued 20,000,000 shares of Common Stock to an unrelated party in consideration of $200,000.

 

Management evaluated all other subsequent events when these financial statements were issued and determined that none of them requires this disclosure herein.

 

13 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY’S FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS AND OTHER FINANCIAL INFORMATION APPEARING ELSEWHERE IN THIS REPORT.

 

The financial data discussed below are derived from the unaudited consolidated financial statements of the Company as at March 31, 2020, which were prepared and presented in accordance with United States generally accepted accounting principles for interim financial statements. These financial data are only a summary and should be read in conjunction with the financial statements and related notes contained herein, which more fully present the Company’s financial condition and operations as at that date, and with its audited financial statements and notes thereto contained in its Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on May 28, 2020. Further, the Company urges caution with respect to the forward-looking statements that are contained in this report because they involve risks, uncertainties and other factors affecting its operations, market growth, service, products and licenses. The risk factors set forth in the section captioned “Risk Factors” in Part II, Item 1A, of this report, as well as other cautionary language in this report, describe such risks, uncertainties and events that may cause the Company’s actual results and achievements, whether expressed or implied, to differ materially from the results discussed in forward-looking statements. The occurrence of any of the events described as risk factors could have a material adverse effect on the Company’s business, results of operations and financial position.

 

Overview

 

As indicated in Note 3 of the Notes to Consolidated Financial Statements set forth in Part I, Item 1 –. Financial Statements, there is substantial doubt as to the ability of the Company to continue as a going concern. The Company has generated material operating losses since inception and its ability to continue as a going concern is dependent on the successful execution of its operating plan, which includes increasing sales of existing products while introducing additional products and services, controlling cost of goods sold and operation expenses, negotiating extensions of existing loans, and raising either debt or equity financing. The Covid-19 pandemic is expected materially to impede the execution of the Company’s operating plan.

 

On May 4, 2020, the Company made a note in favor of Customers Bank in the principal amount of $137,690 pursuant to the terms of the Paycheck Protection Program authorized by the Coronavirus Aid, Relief, and Economic Security (CARES) Act and pursuant to all regulations and guidance promulgated or provided by the Small Business Administration (the “SBA”) and other federal agencies that are now, or may become, applicable to the loan. The loan (the “PPP Loan”) bears interest at the rate of 1% per annum and has a 2-year term. On June 5, 2020, the CARES Act was amended by the Paycheck Protection Program Flexibility Act of 2020.

 

Under the CARES Act, as so amended,

 

•	The loan will be forgiven if its proceeds are used for payroll, mortgage interest, rent, and utilities during the 24-week period beginning on May 4, 2020, although the Company may elect to utilize the 8-week period that was in effect prior to the amendment (such 24- or 8-week period being the “covered period”). The Company has not determined whether it will make this election. The amount of loan forgiveness will be reduced if less than 60% of the funds is expended for payroll over the covered period. Because the Company may not require a number of employees such that it would expend these funds for payroll to that extent, a substantial portion of the loan may not be forgiven. However, loan forgiveness will be determined without regard to a proportional reduction in the number of “full-time equivalent employees” if the Company in good faith documents (i) both the inability to rehire persons who were employees on February 15, 2020, and the inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020, or (ii) its inability to return to the same level of business activity at which it operated at or before February 15, 2020, due to compliance with requirements established or guidance issued by the Department of Health and Human Services, the Centers for Disease Control or the Occupational Safety and Health Administration from March 1, 2020, through December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19. The amount of the loan to be forgiven and other terms of the loan may also be affected by regulations and interpretations that have not yet been adopted or, if presently adopted, are changed.
•	No interest or principal will be required until the date on which the amount of forgiveness determined is remitted to the lender, although interest will continue to accrue over this deferral period. If the Company fails to apply for forgiveness within 10 months of the last day of the covered period, payments of principal, interest, and fees will begin on the day which is not earlier than the date that is 10 months after the last day of the covered period. After the deferral period and after taking into account any loan forgiveness applicable to the loan pursuant to the program, as approved by the SBA, any remaining principal and accrued interest will be payable in substantially equal monthly installments over the remaining loan term, in the amount and according to the payment schedule provided by the lender.
•	Under the amendment to the CARES Act, the Company may apply to the lender to extend the term of the loan to 5 years and expects to do so, but no assurance can be given that the lender will agree to the extension.
•	The Company may delay the payment of employer payroll taxes until December 31, 2021, with respect to up to 50% of the amounts due and December 31, 2022, with respect to the remaining amounts due up to 50%.

 

On May 21, 2020, the Company issued 20,000,000 Shares of Common Stock to an unrelated party in consideration of $200,000.

 

14 

 

 

Notwithstanding the loan and issuance of Common Stock described in the previous two paragraphs, the Company needs a substantial amount of additional capital to fund its business, including expansion of its operations, and for payment of its debts, in addition to the capital raised through the. No assurance can be given that any additional capital can be obtained or, if obtained, will be adequate to meet its needs and the Company may need to take certain measures to remain a going concern. If adequate capital cannot be obtained on a timely basis and on satisfactory terms, the Company’s operations could be materially negatively impacted, or it could be forced to terminate operating.

 

Impact of the Covid-19 Pandemic

 

The Covid-19 pandemic, its disruption of the Company’s business and its effect on the economy generally have adversely impacted and constitute a material risk to the Company. See Part II, Item 1A – Risk Factors. The Company’s business, financial condition, results of operations and liquidity have been and will continue for an indefinite period to be substantially and adversely affected by this pandemic.”

 

The Company believes that its results for the quarter ended March 31, 2020, were affected, to an unascertainable extent, by the Covid-19 pandemic. The Company further believes that its results for the quarter ending June 30, 2020, for the balance of 2020 and perhaps beyond will continue to be affected by the Covid-19 pandemic to a material but presently unquantifiable extent. In particular, while the Company has reduced its expenses substantially, as described below, it expects to record substantial operating and net losses for these periods.

 

As of June 19, 2020, year-to-date revenues were approximately $849,000, cost of sales $398,000 and operating expenses $806,000. At that date, the Company had a cash balance of approximately $167,000 and receivables of $128,000, which is insufficient for it to meet its current obligations. These receivables may be collected more slowly than prescribed by their payment terms and some may prove to be uncollectible.

 

To mitigate losses during the Covid-19 pandemic and the ensuing recovery period, the Company has furloughed or terminated most of its 18 employees, such that it now has 6 employees, including officers, which are the minimum necessary to maintain limited operations. Its executive officers have waived their salaries from April 15, 2020, through May 4, 2020, and have agreed to a reduced salary for an undetermined time. In addition, the Company is deferring employer payroll taxes, as permitted by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The Company is also purchasing from Polymation fewer Medtainers^® than required under the Production Contract; while doing so enables the Company to preserve cash, it also subjects it to claims for breach of that agreement.

 

Results of Operations

 

Comparison of the Quarter ended March 31, 2020, and March 31, 2019

 

The following table sets forth information from the statements of operations for the quarter ended March 31, 2020, and March 31, 2019.

 

		Quarter Ended March 31,
		2020				2019
Revenues		$	556,129			$	604,437
Cost of sales			(275,989	)			(263,159	)
Gross profit			280,140				341,278
Operating expenses			603,779				802,952
Gain (Loss) from operations			(323,639	)			(461,674	)
Non-operating income (expense):
Interest expense			(9,753	)			(9,884	)
Net income (loss)		$	(333,392	)		$	(471,558	)

 

Revenue

 

Revenue was $556,129 and $604,437 for the quarter ended March 31, 2020, and March 31, 2019, respectively. This decrease in revenues was due to a $62,715 decrease in revenues from containers, $8,254 decrease in revenues from printing and $1,766 decrease in revenues from plastic lighter holders. This decrease in revenues was partially offset by a $45,817 increase in revenues from humidity packs.  

 

15 

 

 

Cost of Sales

 

Cost of sales for the quarters ended March 31, 2020, and March 31, 2019, were $275,989 and $263,159, respectively. This increase in cost of sales was primarily due to a $36,789 increase in the cost of sales of humidity packs. This increase in cost of sales was partially offset by a $12,388 decrease in cost of sales of containers.

 

Operating Expenses

 

Operating expenses for the quarters ended March 31, 2020, and March 31, 2019, consisted of the following:

 

		Quarter ended March 31
		2020				2019
Advertising and marketing expense		$	13,349			$	15,673
Depreciation and amortization expense			24,674				27,824
Professional fees			64,890				3,829
Share-based compensation			149,037				420,642
Payroll expenses			285,298				293,357
General and administrative expenses			66,531				41,627
Total operating expenses		$	603,779			$	802,952

 

Operating expenses for the quarters ended March 31, 2020, and March 31, 2019, were $603,779 and $802,952, respectively. The decrease in operating expenses is attributable to a $271,605 decrease in share-based compensation, a $8,059 decrease in payroll expense and a $2,324 decrease in advertising and marketing expense. These decreases were offset by a $24,904 increase in general and administrative expense, due to a $61,061 increase for professional fee expenses.

 

Loss from Operations

 

Loss from operations decreased from a loss of $461,674 for the quarter ended March 31, 2019, to a loss of $323,639 for the quarter ended March 31, 2020, primarily due to the decrease in sales and increase in cost of goods sold and a decrease in operating expenses that principally resulted from a decrease of $271,604 in share-based compensation, offset by an increase of $85,964 in general and administrative expense.

 

Interest Expense

 

For the quarters ended March 31, 2020, and March 31, 2019, interest expense was $9,753 and $9,884, respectively.

 

Net Income (Loss)

 

The net loss for the quarter ended March 31, 2020, was $333,392 ($149,038 of which was noncash expense for share-based compensation), versus a net loss of $471,558 for the quarter ended March 31, 2019. As more fully described above, the principal reason for this difference was the decrease of $271,604 in share-based compensation, a decrease of $3,149 in depreciation expense, together with the decrease in sales and the increase in cost of sales.

 

Liquidity and Capital Resources

 

At March 31, 2020, the Company had $31,377 in cash and accounts receivable of $129,405. At March 31, 2020, and December 31, 2019, the Company had negative working capital of $1,656,674 and $1,498,111, respectively. As of March 31, 2020, the Company had no commitments for capital expenditures. As of March 31, 2020, the Company had inventory of approximately 59,000 units of Medtainer® products and approximately 64,000 units of other products.

 

During the quarter ended March 31, 2020, the Company experienced negative cash flow from operations of $36,239 while adding $49,634 of cash flows from financing activities. Cash provided in operating activities was $43,983 for the quarter ended March 31, 2019, while adding $30,381 of cash flow from financing activities. Cash provided by operating activities was primarily a result of the Company’s increase in operating liabilities, which was offset by a decrease in customer deposits. Cash provided from financing activities increased from $30,381 for the quarter ended ended March 31, 2019, to $49,634 for the quarter ended March 31, 2020, primarily due to an increase in proceeds from stockholder loans.

 

The Company has generated material operating losses since inception. The Company anticipates raising additional capital within the next 12 months from investors for working capital as well as business expansion, although the Company can provide no assurance that additional investor funds will be available on terms acceptable to the Company. If the Company is unable to obtain additional financing to meet its working capital requirements, it may have to curtail its business. Although the Company is seeking to raise additional capital and has engaged in numerous discussions with investment bankers and investors, the Company has not received firm commitments for the required funding.

 

 

16 

 

In addition to $137,690 from the PPP Loan, the Company received $200,000 from the sale of 20,000,000 shares of Common Stock to a private investor on May 21, 2020. The Company believes that most of the proceeds of the PPP Loan and the sale of shares will not be expended to reduce its existing obligations. The Company also believes that it will require approximately $1,300,000 in additional funding for the next 12 months, including approximately $600,000 to repay loans and interest that are past due, assuming that the Company’s operating loss remains at the same level. The Company plans to seek extensions of these loans, in which case, the amount of such funding will be reduced, but cannot give assurance as to the extent that it will be successful. The Company plans to fund its activities through loans from banks and other financial institutions and the sale of debt or equity securities to private investors. There is no assurance that such the funding will be available on acceptable terms, or available at all. If the Company is unable to raise sufficient funds when required or on acceptable terms, it may have to reduce significantly, or discontinue, its operations. To the extent that funds are raised by issuing equity securities or securities that are convertible into the Company’s equity securities, its stockholders may experience significant dilution.

 

Off-Balance Sheet Arrangements

 

The Company currently does not have any off-balance sheet arrangements.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

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

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures.

 

The Company’s management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act as of March 31, 2020. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were not effective as of such date, at a reasonable level of assurance, in ensuring that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is: (i) accumulated and communicated to management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in internal control over financial reporting during the quarter ended March 31, 2020, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

17 

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

None.

 

Item 1A. Risk Factors.

 

While the Company is a smaller reporting company as defined by Rule 12b-2 promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”) and is not required to provide information under this item, it calls attention to the following risks, which it believes are especially significant:

 

If the Company cannot raise capital, it may have to curtail it operations or could fail.

 

As described in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources, the Company requires substantial additional capital. In the event that it cannot raise such capital, it may have to curtail its operations or could fail.

 

The Company’s business, financial condition, results of operations and liquidity could be substantially and adversely affected by the Covid-19 pandemic.

 

In December 2019, an outbreak of a novel strain of coronavirus known as COVID-19 originated in Wuhan, China, and has spread to other countries, including the United States. On March 11, 2020, the World Health Organization declared the outbreak to be a pandemic. A number of jurisdictions in the United States, including the State of California, have declared a state of emergency. Further, the governor of the State of California, where the Company’s headquarters, all of its employees and the manufacturer of its Medtainer^® products are located, has issued an executive order pursuant to that declaration mandating that all individuals living in the state stay at home or at their places of residence, except as needed to maintain the continuity of operations in certain sectors, in none of which the Company operates. As a result, for an unknown but possibly extended period, the following, among others, may be substantially and adversely affected to an extent that the Company cannot presently predict: the Company’s ability to conduct its operations, including its financial reporting systems, internal control over financial reporting and disclosure controls and procedures; its financial condition and results of operations; its capital and financial resources, including its liquidity; its balance sheet and its ability to account timely for those assets; demand for its products and services; the ability of its suppliers to manufacture and deliver the products that it sells; its ability to deliver its products; the valuation of its goodwill, intangible assets and long-lived assets; its ability to display and sell its products at trade shows and similar events; its ability to conduct meetings with existing and prospective customers and suppliers; the ability of the Company and its customers to meet their financial obligations to one another and to others; travel restrictions and border closures; and, if its employees were to contract coronavirus, their ability to work. To the extent that the Company will be able to continue operating, it may incur additional costs in order to do so.

 

See Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation – Impact of the Covid-19 Pandemic for further information.

 

The Company sells products that may be used for cannabis-related purposes.

 

The Company does not market or sell cannabis, but many of its products can be used for cannabis-related purposes. In light of the fact that the possession and use of cannabis has been legalized, subject to varying restrictions, in many states and that several other states are considering such legalization, the Company believes that its products may be of interest to a large number of users of cannabis. The Company does advertise its products on the Company’s website and elsewhere as suitable for that purpose. The Company believes that marketing these products subjects the Company to certain risks, including:

 

●

The use of cannabis for medical and recreational use is lawful in many states, but under United States federal law and the laws of the other states, the possession, use, cultivation, storage, processing and/or transfer of cannabis is illegal. Federal and state law enforcement authorities have prosecuted persons engaged in these activities. While the Company does not believe that it engages in these activities, any of these law enforcement authorities might bring an action against the Company including, but not limited to, a claim of aiding and abetting criminal activities. Such an action would have a material and adverse effect on the Company’s business and operations.

 

●

Under United States federal law, it is unlawful to sell or offer for sale, to use the mails or any other facility of interstate commerce to transport or to import or export drug paraphernalia. The term “drug paraphernalia” includes any equipment, product or material of any kind which is primarily intended or designed for use in manufacturing, compounding, converting, concealing, producing, processing, preparing, injecting, ingesting, inhaling, or otherwise introducing into the human body a controlled substance. One of the factors that these authorities may consider in determining whether the Company’s products are drug paraphernalia is its national and local advertising concerning its use. The Company has advertised its products as usable for cannabis-related purposes. However, the Company does not believe that its products were designed or are intended for illegal purposes, or that its products are drug paraphernalia, as defined in federal law. The Company is promoting its products primarily to be used for other purposes. During the administration of President Barack H. Obama, enforcement of such federal law was relaxed, and the administration of President Donald J. Trump has indicated that it will not enforce federal cannabis laws against companies that comply with state law. If in the future federal authorities were to take a different view, they might bring a criminal action against the Company. Such an action would have a material and adverse effect on the Company’s business and operations.

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

On May 21, 2020, the Company issued 20,000,000 Shares of Common Stock to an unrelated party in consideration of $200,000. The shares are restricted securities, as defined in Rule 144, promulgated under the Securities and were offered and sold without registration under the Securities Act in reliance on the exemption from registration afforded by Section 4(a)(2) thereof and by Rule 506(c) promulgated thereunder, inasmuch as the sale was a transaction by an issuer not involving a public offering.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

Exhibit
Number		Title
10.1		Separation Agreement, dated as of June 15, 2020, by and between the Registrant and Curtis Fairbrother. Filed herewith.
31		Rule 13a-14(a)/15d-14(a) Certification
32		Section 1350 Certification

 

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SIGNATURES

 

Pursuant to the requirements 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.

 

Dated: June 24, 2020

 

By: /s/ Douglas Heldoorn

Douglas Heldoorn

Principal Executive Officer and Principal Accounting Officer

 

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