Notes to Financial Statements
October 31, 2021
(Unaudited)
NOTE 1 - ORGANIZATION AND BUSINESS OPERATIONS; BASIS OF PRESENTATION
Bakhu Holdings Corp. (formerly Planet Resources, Corp.) (the “Company”) was incorporated under the laws of the State of Nevada, U.S. on April 24, 2008. In May 2009, the Company began to look for other types of business to pursue that would benefit the stockholders. To pursue businesses outside the mining industry the name of the Company was changed with the approval of the directors and stockholders to Bakhu Holdings, Corp. on May 4, 2009.
The Company has not generated any revenue to date, and consequently, its operations are subject to all risks inherent in establishing a new business enterprise. For the period from inception, April 24, 2008, through October 31, 2021, the Company had accumulated losses of $23,899,181.
The Company holds a license from Cell Science Holding Ltd., an affiliate (“Cell Science”), to plant cell replication technology and related proprietary equipment, processes, and formulations to produce, manufacture, and sell cannabis-related byproducts—sometimes referred to as cannabinoids—exclusively in North and Central America and the Caribbean for medical, food additive, and recreational uses.
On August 9, 2019, the Company formed Cell Science CBD International, Inc., a California corporation as a wholly owned subsidiary to commercialize use of the licensed technology to produce and manufacture cannabis and their byproducts that have measurable tetrahydrocannabinol (THC) concentration potency less than 3% on a dry weight basis. This subsidiary had no active operations as of July 31, 2021. When used herein, the “Company” includes this consolidated subsidiary.
In the opinion of management, the Company’s financial statements reflect all adjustments that are of a normal recurring nature necessary for presentation of financial statements for interim periods in accordance with U.S. generally accepted accounting principles (GAAP) and with the instructions to Form 10-Q in Article 10 of SEC Regulation S-X. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. As used in this report, the term the “Company” means Bakhu Holdings Corp. and its subsidiary, unless the context indicates otherwise.
The Company condensed or omitted certain information and footnote disclosures normally included in our annual audited financial statements, which the Company prepared in accordance with GAAP. Our interim financial statements should be read in conjunction with our annual report on Form 10-K for the year ended July 31, 2021.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America and are presented in US dollars.
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BAKHU HOLDINGS CORP.
Notes to Financial Statements
October 31, 2021
(Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Going Concern
The financial statements have been prepared on a going concern basis which assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. The Company has incurred losses since inception resulting in an accumulated deficit of $23,899,181 as of October 31, 2021 and further losses are anticipated in the development of its business raising substantial doubt about the Company’s ability to continue as a going concern.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with a maturity of three months or less at the time of issuance to be cash equivalents.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Foreign Currency Translation
The Company’s functional currency and its reporting currency is the United States dollar.
Financial Instruments
The carrying value of the Company’s financial instruments approximates their fair value because of the short maturity of these instruments.
Stock-based Compensation
At January 31, 2021, the Company had one stock-based compensation plan, the 2020 Long-Term Incentive Plan (“2020 Plan”), which is more fully described in Note 3.
On September 22, 2020, the Company granted to each of its directors, Thomas K. Emmitt, Peter Whitton, Aristotle Popolizio and Evripides Drakos, a non-qualified stock option to purchase 300,000 shares of common stock, for a total of 1,200,000 shares, at an exercise price of $5.10 per share, representing the current price at which the Company is offering and selling its restricted shares for cash in its capital raising efforts. Such Options shall be exercisable for a period of seven years. Twenty percent (20%) (i.e. 60,000) of the options shall vest and be exercisable immediately with the remaining 240,000 options vesting at the rate of 1/12 (i.e. 20,000 shares) per month so that all options shall be fully vested and exercisable on the first anniversary of the Grant Date. The fair value of each option grant issued under the 2020 Plan was estimated using the Black-Scholes option pricing model. Assumptions used to estimate the fair value of options granted include (1) stock price of $5.10 per share, (2) exercise price of $5.10 per share, (3) expected life of 1 year, (4) expected volatility of 146.49% and (5) risk free interest rate of 0.12%.
On September 16, 2021, the Company granted to its Chief Executive Office, Teddy Scott, a non-qualified stock option to purchase 5,000,000 shares of common stock at an exercise price of $4.50 per share, representing the current market price on the date of the issuance of the option. Such Options shall be exercisable for a period of ten years. Six hundred twenty-five thousand (625,000) of the options shall vest and be exercisable immediately with the remaining options vesting at the rate of ninety-three thousand eighty-five (93,085) shares per month over a period of forty-seven (47) months. The fair value of each option grant issued under the 2020 Plan was estimated using the
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BAKHU HOLDINGS CORP.
Notes to Financial Statements
October 31, 2021
(Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Black-Scholes option pricing model. Assumptions used to estimate the fair value of options granted include (1) stock price of $4.50 per share, (2) exercise price of $4.50 per share, (3) expected life of 1 year, (4) expected volatility of 145.96% and (5) risk free interest rate of 0.07%.
Based on the above assumptions, the Company recognized stock-based compensation of $2,165,350 which is included in Consulting fees on the Statement of Operations for the three months ended October 31, 2021. As of October 31, 2021, there was $10,301,975 of total unrecognized stock-based compensation that is expected to be recognized over the 47-month vesting period.
Income Taxes
Income taxes are accounted for under the assets and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.
Basic and Diluted Net Loss per Share
The Company computes net loss per share in accordance with ASC 105, “Earnings per Share.” ASC 105 requires presentation of both basic and diluted earnings per share (EPS) on the face of the income statement.
Basic EPS is computed by dividing net loss available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all potentially dilutive common shares outstanding during the period. Diluted EPS excludes all potentially dilutive shares if their effect is anti-dilutive.
Professional fees
Professional fees presented in the financial statements represent accounting fees, audit fees and legal fees associated with the filing of reports with the Securities and Exchange Commission and legal fees associated with documenting our intellectual property rights and preparing to launch a sublicensing program. Also included in professional fees are fees paid to the stock transfer agent. The fees are expensed as incurred.
Fiscal Periods
The Company’s fiscal year end is July 31.
Recently Issued Accounting Pronouncements
The Company has reviewed accounting pronouncements issued during the past two years and have adopted any that are applicable to the Company. The Company has determined that none had a material impact on our financial position, results of operations, or cash flows for the periods presented in this report.
NOTE 3 - PREFERRED AND COMMON STOCK
On August 8, 2018, the Board of Directors of the Company approved the amendment and restatement of the Company’s Articles of Incorporation. The purpose of the amendment and restatement of the Articles of Incorporation was to:
(i)Increase the number of authorized shares of Common Stock to 500,000,000;
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BAKHU HOLDINGS CORP.
Notes to Financial Statements
October 31, 2021
(Unaudited)
NOTE 3 - PREFERRED AND COMMON STOCK (continued)
(ii)Increase the number of authorized shares of Preferred Stock to 50,000,000;
(iii)Grant the Board of Directors the rights to designate classes of preferred stock, and to define the powers, preferences, rights, and restrictions thereof;
The preferred and common stock has a par value of $0.001 per share.
On March 9, 2020, the Company issued 11,061,816 restricted shares of Common Stock to the OZ Corporation, in consideration of ongoing consulting and advisory services provided to the Company, on terms as previously agreed to the Company and the OZ Corporation. The securities were issued pursuant to an exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933. The OZ Corporation is intimately acquainted with the Company’s business plan and proposed activities at the time of issuance and possessed information on the Company necessary to make an informed investment decision. The estimated fair value of the stock was $99,556 and has been expensed and included in “Consulting fees” in the three months ended October 31, 2020.
On July 24, 2020, the Company issued 88,334 restricted shares of common stock to five accredited investors, for cash at a price of $3.00 per share for aggregate consideration of $265,000.
In October 2021, the Company issued 485,001 restricted shares of Common Stock to eight accredited investors for cash at $3.00 per share for aggregate consideration of $1,456,003.
Stock Option Plan
On September 22, 2020, the board of directors adopted the 2020 Long-Term Incentive Plan (“2020 Plan”), under which 20,000,000 shares of our common stock were reserved for issuance by us to attract and retain employees and directors and to provide such persons with incentives and awards for superior performance and providing services to us. The 2020 Plan is administered by a committee comprised of our board of directors or appointed by the board of directors, which has broad flexibility in designing stock-based incentives. The board of directors determines the number of shares granted and the option exercise price pursuant to the 2020 Plan.
On April 27, 2021, the Company issued an aggregate of 495,646 restricted shares of Common Stock upon the cashless exercise of 800,000 vested options at an exercise price of $5.10 per share on April 22, 2021. Based on the closing price of the Company’s Common Stock of $12.00 on April 22, 2021, 304,354 shares were canceled in payment of the aggregate exercise price of $4,080,000, resulting in the issuance of the 495,646 shares.
The following table summarizes the stock option award activity under the 2020 Plan during the three months ended October 31, 2021:
|
| Number of options
|
Outstanding at July 31, 2021
|
| 400,000
|
Granted
|
| 5,000,000
|
Exercised
|
| -
|
Forfeited
|
| -
|
Outstanding at October 31, 2021
|
| 5,400,000
|
Warrants
On September 11, 2021, the Company and Fourth and G Holdings, LLC, amended their June 2021 agreement to reduce the number of warrants issuable on specified benchmarks from warrants to purchase 30,000,000 shares to 15,000,000 shares, of which warrants to purchase 300,000 shares were vested on signing the initial agreement.
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BAKHU HOLDINGS CORP.
Notes to Financial Statements
October 31, 2021
(Unaudited)
NOTE 3 - PREFERRED AND COMMON STOCK (continued)
See Stock-based Compensation under Note 2 for description of options granted.
NOTE 4 - INCOME TAXES
As of October 31, 2021, the Company had net operating loss carry forwards that may be available to reduce future years’ taxable income. Future tax benefits which may arise as a result of these losses have not been recognized in these financial statements, as their realization is determined not likely to occur and accordingly, the Company has recorded a valuation allowance for the deferred tax asset relating to these tax loss carry-forwards.
NOTE 5 - NOTES PAYABLE – RELATED PARTIES
On August 1, 2019, the Company executed a promissory note in favor of the Company’s controlling shareholder, The OZ Corporation, to evidence monies loan to the Company from December 26, 2018 through July 31, 2019 in the amount of $147,513, and to evidence any additional amounts that may be loaned to the Company thereafter. Pursuant to the terms of the promissory note, the principal and unpaid accrued simple interest at the rate of 6.0% per annum shall be due and payable on or before December 31, 2019. The promissory note also provides that the Company may extend the maturity date for an additional 12 months, until December 31, 2020, by paying an extension fee of 1.00% of the outstanding principal loan balance, which may at the lenders’ option be advanced and added to the then outstanding principal balance. The principal amount of the promissory note shall be increased by the amount of any additional advances of funds made by The OZ Corporation to the Company, from time to time, from the date of such advance. Under the terms of the promissory note, The OZ Corporation, at its option may, at any time, convert all or any portion of the then unpaid principal balance and any unpaid accrued interest into shares of the Company’s common stock. The number of shares of common stock to be issued upon such conversion shall be equal to the quotient obtained by dividing (i) the then unpaid principal balance and any unpaid accrued interest of the promissory note being converted by (ii) 80% of the average closing price of the common stock of the Company, for the ninety (90) trading days before the conversion date, rounded up to the nearest whole share. The principal balance and accrued interest due on the note were $2,137,290 and $109,614, respectively, as of October 31, 2021.
The Company did not assign any value to the conversion feature of the Note because the 80% of the common stock of the Company had a negative book value of as of October 31, 2021. Furthermore, the Company has not generated any revenue to date.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Under the April 2020 strategic alliance agreement and related sublicense between the Company’s subsidiary, CBD Biotech, Inc., and Integrity Cannabis Solutions, Inc. (“ICS”), the Company is obligated to issue to ICS that number of shares of Bakhu common stock equal to 0.5% of the number of shares outstanding as of the date that the production facility of ICS is completed and commences production. Further, if the sublicense is terminated, CBD Biotech will be obligated to repay to ICS its initial $250,000 license fee and reimburse ICS for the cost of the laboratory operational equipment used in its production facility, which thereafter will be owned and managed jointly by ICS and CBD Biotech.
As a result of successfully completing the efficacy demonstration of our licensed technology in July 2021, we became obligated to issue to Cell Science, the licensor, a one-year note for an agreed one-time payment of $3.5 million, less certain credits. The amount of the credits to the note had not been determined, so the note had not been issued as of October 31, 2021.
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BAKHU HOLDINGS CORP.
Notes to Financial Statements
October 31, 2021
(Unaudited)
NOTE 7 – SUBSEQUENT EVENTS
Appointment of Director
On December 3, 2021, the Company appointed an additional director and granted him a seven-year stock option to purchase 300,000 shares of common stock at an exercise price per share of $3.00 per share which was approximately equal to the closing price for our common stock on the date of grant.
Employment of Chief Financial and Accounting Officer Director and Director
On December 6, 2021, the Company appointed a new Chief Financial and Accounting Officer and director of the Company at an annual base salary of $60,000 and grant him a seven-year stock option to purchase 300,000 shares of common stock at $3.40 per share, which was approximately equal to the closing price for our common stock on the date of grant.
Consulting Agreements with Science Team
On December 7, 2021 the Company entered into Consulting Agreements with two consultants to assist the Science team Pursuant to the Consulting Agreements, the Company granted each Consultant a seven-year stock option to purchase 200,000 shares of Common Stock at an exercise price of $3.40 per share, which was approximately equal to the closing price for our common stock on the date of grant.
Grant of Stock Options to Chief Executive Officer and Vice President
On January 5, 2022, in consideration of the services of our Chief Executive Officer and our Vice President and Secretary of the Company, we granted them each a seven-year stock option to purchase 700,000 shares of common stock at $2.60 per share which was approximately equal to the closing price for our common stock on the date of grant.
January 2021 Amendment to Integrated License Agreement
On January 31, 2022, the Company and Cell Science entered into the Third Amendment to the December 20, 2018, Patent and Technology License Agreement, as subsequently amended. with Cell Science in which the Company agreed as follows:
·There would be no reduction and offset against the $3.5 million One-time Payment for certain costs paid by the Company or on its behalf. Therefore, the Company issued a $3.5 million promissory note, bearing interest at the applicable federal short-term rate of 0.44% under IRC Section 1274(d), payable in January 2023.
·In lieu of any offset and reduction against the One-Time Payment Note, Cell Science agreed to convey to the Company the lease on the California laboratory in which the efficacy demonstration was conducted, including all related equipment, improvements, supplies, and related tangible and intangible assets.
·Cell Science and OZ Corporation would execute and deliver to the Company a similar conveyance of all rights to the California laboratory.
·The Integrated License Agreement was clarified to provide that all improvements to the licensed technology made by the Company would be owned by Cell Science and included in the licensed technology.
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BAKHU HOLDINGS CORP.
Notes to Financial Statements
October 31, 2021
(Unaudited)
NOTE 7 – SUBSEQUENT EVENTS (continued)
Appointment of Deputy Chief Executive Officer
On February 11, 2022, the Company appointed a new Deputy Chief Executive Officer and granted him a seven-year stock option to purchase 2,000,000 shares of common stock at an exercise price per share of $3.00 per share which was approximately equal to the closing price for our common stock on the date of grant.
Consulting Agreement
On February 11, 2022 the Company entered into a Consulting Agreement with an advisor to the board, and granted the consultant a seven-year stock option to purchase 3,500,000 shares of common stock at an exercise price per share of $3.00 per share which was approximately equal to the closing price for our common stock on the date of grant.
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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act relating to future events or our future performance. The following discussion should be read in conjunction with our consolidated financial statements and notes to our financial statements included elsewhere in this report. This discussion contains forward-looking statements that relate to future events or our future performance. Although management believes that the assumptions made and expectations reflected in the forward-looking statements are reasonable, we cannot assure that the underlying assumptions will, in fact, prove to be correct or that actual results will not be different from expectations expressed in this report.
Business Overview
Since December 2018, we have focused on testing and commercializing cannabis plant cell-extraction and replication technologies under a technology license granted by Cell Science. This licensed technology uses plant cell-extraction and replication technology and related proprietary equipment, processes, and medium formulations in a commercially-sized bioreactor laboratory to produce, manufacture, and sell plant-based cannabis products—sometimes referred in the industry as cannabinoids—exclusively in North and Central America and the Caribbean for medical, food additive, and recreational uses.
During our fiscal quarter ended October 31, 2021, we undertook additional work to determine the limits of the technology, maximize production efficiency, and reduce production costs, which we believe will enhance our commercialization efforts. Subject to successfully completing our ongoing work, we intend to seek to commercialize the licensed technology through joint ventures, strategic partners, sublicenses, and other arrangements that may enable us to take advantage of the technical experience, regulatory relationships, and financial resources of experienced cannabinoid production firms. We intend to authorize these third parties to incorporate the technology into production facilities they fund, build, and operate to produce medical, food additive, and recreational cannabis-related products in compliance with applicable state and federal law. We will need additional financing from external sources to begin these commercialization efforts.
During the last three fiscal years and the recently completed quarter, we have not generated revenue and have devoted our limited management, technical, and financial resources to pay general and administrative expenses in order to position us to be able to commercially exploit the licensed technology after completion of the efficacy testing required to demonstrate its commercial viability, organize our corporate structure, and seek substantial amounts of additional capital required to implement our business plan.
Results of Operations
Following is management’s discussion of the relevant items affecting results of operations for the three months ended October 31, 2021 and 2020.
Revenues. We generated no net revenues during the three months ended October 31, 2021 and 2020. We do not expect to generate revenues until we launch our proposed commercialization program. We cannot predict whether or when that may occur.
Consulting Fees. Consulting fees were $2,360,386 and $58,725 for the three months ended October 31, 2021, and 2020, respectively. We recognized stock-based compensation of $2,165,350 for the three months ended October 31, 2021, attributable to the issuance of options to purchase 5,000,000 shares of common stock. As of October 31, 2021, there was $10,301,975 of total unrecognized stock-based compensation that is expected to be recognized over the 47-month remaining vesting period.
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Professional Fees. Professional fees were $248,654 and $97,575 for the three months ended October 31, 2021 and 2020, respectively. Professional fees for legal and accounting fees associated with our reporting obligations under federal securities laws and the filing of a registration statement for the resale of outstanding securities.
Selling, General and Administrative Expenses. Selling, general, and administrative expenses were $382,096 and $22,585 for the three months ended October 31, 2021, and 2020, respectively. The increase in SG&A expenses is a result of an increase in our operations and increased laboratory expenses, including office facility charges, insurance, equipment, staff and other related laboratory costs, which we expect will continue.
Other Income (Expenses). We had net other expenses of $27,627 and $6,590 for the three months ended October 31, 2021, and 2020, respectively. Other expenses incurred were comprised of interest expenses related to our notes payable to related parties. The increase in interest expenses is a result of the increase in loans and notes payable due to related parties. These borrowed funds were used for operating expenses.
Net Loss. We had a net loss of $3,018,763 for the three months ended October 31, 2021, compared to $185,475 for the three months ended October 31, 2020. The increase in net loss was mainly due to the stock options issued during the period, increased laboratory expenses discussed above, and other related laboratory costs incurred during the three months ended October 31, 2021.
Liquidity And Capital Resources
As of October 31, 2021
As of October 31, 2021, our primary source of liquidity consisted of $1,158,899 in cash and cash equivalents. Since inception, we have financed our operations through a combination of short and long-term loans and through the private placement of our common stock.
For the three months ended October 31, 2021, cash increased $1,111,970 from $46,929 at July 31, 2021, to $1,158,899 at October 31, 2021.
Net cash used in operating activities was $550,540 during the three months ended October 31, 2021, with a net loss of $3,018,763, stock-based compensation of $2,165,350, an increase in accounts payable of $275,246, and an increase in accrued liabilities of $27,627.
During the three months ended October 31, 2021, we had no net cash flows from investing activities.
During the three months ended October 31, 2021, $1,662,510 in net cash was provided by financing activities which consisted of proceeds from notes payable – related parties in the amount of $206,507 and proceeds from the sale of common stock of $1,456,003.
Future Capital Requirements
Our ability to continue as a going concern is contingent upon our ability to obtain capital through the sale of equity or issuance of debt, and ultimately attaining profitable operations. We expect that any financing we receive will be similar to what we have heretofore received over the previous two years to enable us to operate, which financing consists of short-term loans from related parties at negotiated rates of interest. We cannot assure you that we will be able to successfully complete any of these activities.
We are presently seeking additional debt and equity financing to provide sufficient funds for payment of obligations incurred and to fund our ongoing business plan. We expect to generate revenue pursuant to our new business plan, dependent on the results on the Efficacy Demonstration now underway. We cannot assure you, however, that any such financings will be available or will otherwise be made on terms acceptable to us or that our present shareholders might suffer substantial dilution as a result.
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We estimate that we will require approximately $8.5 million in external capital to fund our activities during the next 12 months. This consists of $1.1 million and $1.4 million during the next twelve months for our planned laboratory work to improve and customize our licensed processes. The actual amount of work completed will depend on the amount of capital available for those expenditures. Reductions in available capital would correspondingly delay and disrupt laboratory plans and, in turn, the commencement of our commercialization program that we anticipate will lead to recurring revenue. In addition to the above, we expect that operating capital for planned regular, non-laboratory corporate operations with require between approximately $5.8 million and $6.2 million during the next 12 months. Less available capital will require us to implement cost-cutting measures and may delay planned activities.
To fund the above requirements, we are currently seeking between $12.0 and $15.0 million through the sale of common stock or convertible debt. We have received $1,420,000 from the sale of common stock following July 31, 2021. We have no commitments or agreements to complete the offering.
We may also seek additional debt and equity financing to fund payment of additional trade and other obligations incurred and costs of implementing our business plan. Our ability to attract debt financing will be substantially impaired by our current lack of both revenues and a robust, viable trading market for our common stock. Accordingly, any debt financing will likely be convertible to common stock, at the lender’s option, at prices discounted to our stock trading price at the time of conversion, which could dilute the interests of existing stockholders. We cannot assure that any such financings will be available, or can be completed on terms acceptable, to us. Any transaction involving the issuance of preferred or common stock, or securities convertible into common stock, would result in dilution, possibly substantial, to our current security holders.
Critical Accounting Pronouncements
Our financial statements and related public financial information are based on the application of generally accepted accounting principles in the United States (“GAAP”). GAAP requires the use of estimates, assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risks, and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.
Our significant accounting policies are summarized in Note 2 of our financial statements included in our July 31, 2021, Form 10-K. While these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates. Our management believes that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause a material effect on our results of operations, financial position or liquidity for the periods presented in this report.
Recent Accounting Pronouncements
See Note 2 in the Notes to the Financial Statements. We have reviewed accounting pronouncements issued during the past two years and have adopted any that are applicable to the Company. We have determined that none had a material impact on our financial position, results of operations, or cash flows for the periods presented in this report.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities” (“SPE”s).
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PART II - OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS
None.
ITEM 1A.RISK FACTORS
Notwithstanding that we are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this Item 1A, in light of the current COVID-19 pandemic, the Company is including the following Risk Factor in its Quarterly Report.
The COVID-19 global pandemic has had an adverse effect on our operations and the potential commercialization of the licensed intellectual property.
On March 11, 2020, the World Health Organization characterized COVID-19 as a global pandemic. We are monitoring the situation closely and our response to the COVID-19 pandemic continues to evolve. Our principal responsive measures include implementing a mandatory work from home policy when possible, restricting airplane travel, rescheduling inspections for required regulatory clearances and permits, delaying sublicense marketing efforts, and updating our planning for future events in recognition of the fact that potential commercial partners will likely experience similar operating difficulties. We are also evaluating the impact of the pandemic on required
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equipment, components, and supplies that we and potential commercial partners will require. We actively monitor COVID-19-related developments and may take further actions that alter our business operations as may be required by federal, state, or local authorities or that we determine are in the best interests of our personnel, commercial partners, vendors, and stockholders. The effects of these operational modifications will be reflected in current and future reporting periods.
For us, the COVID-19 pandemic substantially delayed the efforts to put the efficacy testing laboratory in full service as we worked to complete regulatory inspections and clearances, obtain necessary equipment and supplies, and assemble required international technical expertise, consultants, and personnel. These delays resulted in additional costs and delays in completing the planned testing and, in turn, submitting applications for required regulatory approvals.
The duration and magnitude of the impacts from the COVID-19 pandemic impacts on our business operations and overall financial performance are unknown at this time and will depend on numerous circumstances outside our control or the ability of anyone to predict accurately. The secondary and tertiary unpredictable adverse economic effects on our business and on the worldwide economy are proving to be ongoing and broad. There are high probabilities of reoccurrences of widespread or localized virus outbreaks that may continue for many months, likely resulting in further government-ordered vaccination mandates, lockdowns, stay-home or shelter-in-place orders, social distancing; restrictions on travel; and other extensive measures. Government-approved vaccines have not been accepted by many people and are not widely available in all countries. A full array of effective treatments for those infected by the virus have not been developed, may not be widely available, and may not be widely accepted. We cannot predict the effect of these circumstances on us and our vendors, suppliers, and potential commercial partners; the global economy and political conditions; and the health of our personnel, consultants, and their families; all of which will affect how quickly and to what extent normal economic and operating activities can resume.
Even if the COVID-19 pandemic subsides, we may continue to experience an adverse effect on our business because of its global economic impact, labor shortages, and supply chain disruptions, as well as the prospect of inflation or a recession. These circumstances will likely exert similar hardships on those with which we deal, such as vendors, shippers, distributors, and potential commercial partners. As a result, we will need to continue to adjust, our business and expenditures to correlate our activities with business exigencies, including restrictions on executive and employee travel, hiring freezes or delays, and limitations on marketing. The ultimate financial impact and duration of the foregoing cannot now be predicted and may well exceed our expectations or our ability to cope with them.
ITEM 2.UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
In October 2021, we issued 485,001 restricted shares of common stock to eight accredited investors for cash at $3.00 per share for aggregate consideration of $1,456,003 No underwriters were involved in the transaction. The shares were issued pursuant to an exemption from registration under Section 4(a)(2) and Rule 506 of the Securities Act of 1933.
ITEM 3.DEFAULTS UPON SENIOR SECURITIES
None
ITEM 5.OTHER INFORMATION
Departure of Thomas Emmitt as Director and President and Chief Executive Officer
On September 16, 2021, we accepted the resignation of Thomas K. Emmitt as a director and as our President and Chief Executive Officer. As of the date of his resignation Mr. Emmitt held options to purchase 20,000 shares that were unvested and would have vested on September 22, 2021. In the light of Mr. Emmitt’s long-standing service to us, we agreed to accelerate the vesting of the remaining 20,000 options, Therefore, Mr. Emmitt currently holds vested options to purchase 100,000 shares, exercisable until September 16, 2022.
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Appointment and Resignation of Teddy C. Scott as Chair of the Board of Directors and Chief Executive Officer
On September 16, 2021, we appointed Teddy C. Scott, Jr. as a director, the Chairman of the Board of Directors and as Chief Executive Officer. In conjunction with such appointment, we entered into an executive employment agreement in which we agreed pay Dr. Scott an annualized base salary of $1.00 and granted him a non-qualified stock seven-year option to purchase 5,000,000 of common stock at $4.50 per share, which was approximately equal to the closing price for our common stock on the date of grant, pursuant to the terms of our 2020 Long-Term Incentive Plan. Options to purchase 625,000 shares vested immediately, and options to purchase 93,085 shares will vest monthly thereafter, with the balance of the options to vest on the 48th month.
Subsequent Events
Resignation of Teddy C. Scott as Chair of the Board of Directors and Chief Executive Officer
Dr. Scott resigned as a director and chief executive officer on November 10, 2021. As of the date of his resignation options to purchase 718,085 shares were vested, and are exercisable through September 16, 2031, except in the event of his death, in which case such options will terminate if not exercised within six months. The remaining options to purchase 4,281,915 shares terminated upon Dr. Scott’s resignation as a director.
Appointment of Evripides Drakos as Chair of the Board of Directors, President and Interim Chief Executive Officer
On November 11, 2021, we appointed Evripides (Roy) Drakos, a current member of the board, to serve as our Chairman of the Board, President and interim Chief Executive Office.
Appointment of Sagi Rami Rozen as a Director
On December 3, 2021, the Company appointed Sagi Rami Rozen to serve as a director. In conjunction with his appointment we granted Mr. Rozen a non-qualified stock option under our 2020 Long-Term Incentive Plan (the “2020 Plan”), to purchase 300,000 shares of common stock at an exercise price per share of $3.00 per share representing the closing price of the Common Stock as reported by the OTC Markets Pink Sheet Tier on the Grant Date. The options are be exercisable for seven (7) years. Subject to the Plan, options to purchase 60,000 shares vested at grant, and options to purchase 20,000 shares vest monthly thereafter.
Appointment of Juan Carlos Garcia La Sienra Garcia as a Director and Chief Financial Officer
On December 6, 2021, the Company appointed Juan Carlos Garcia La Sienra Garcia to serve as a director and our Chief Financial and Accounting Officer. Pursuant to Mr. Garcia’s employment agreement, Mr. Garcia is an “at will” employee at an annual salary of $60,000. If we terminate Mr. Garcia’s employment for any reason, we will be obligated to pay him : (i) any unpaid base salary earned through the date of termination; (ii) reimbursement for unreimbursed business expenses; and (iii) such equity compensation, if any, to which Mr. Garcia may be entitled as of the date of termination of employment. We granted Mr. Garcia a non-qualified stock option under our 2020 Plan, to purchase 300,000 shares of common stock at an exercise price per share of $3.40 per share representing the closing price of the Common Stock as reported by the OTC Markets Pink Sheet Tier on the Grant Date. The options are be exercisable for seven (7) years. Subject to the Plan, options to purchase 60,000 shares vested at grant, and options to purchase 20,000 shares vest monthly thereafter.
The foregoing summary descriptions of the terms of the Employment Agreement is a summary only and does not purport to be complete, may not contain all information that is of interest to the reader and is qualified i its entirety by reference to the full text of the Employment Agreement, attached hereto as Exhibit 10.01, to the Current Report on Form 8-K that we filed on December 21, 2021.
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Consulting Agreements
On December 7, 2021, we entered into 11-month consulting agreements with each of Damian Solomon and Sean Akhavan. These consultants will join our science team in the refinement and customization of our cell replication technology. We granted each consultant non-qualified seven-year options to purchase 200,000 shares of common stock at an exercise price of $3.40 per share, representing the closing price of the common stock, as reported on the OTC Markets, on December 7, 2021. Options to purchase 18,500 shares vested immediately, and options to purchase 16,500 shares will vest monthly thereafter.
The foregoing summary descriptions of the terms of the Consulting Agreements is a summary only and does not purport to be complete, may not contain all information that is of interest to the reader and is qualified in its entirety by reference to the full text of the Consulting Agreements, attached as Exhibit 10.02 and Exhibit 10.03, to the Current Report on Form 8-K that we filed on December 21, 2021.
Grant of Stock Options to Chief Executive Officer and Vice President
On January 5, 2022, in consideration of the services of Evripides (Roy) Drakos as our Chief Executive Officer and Aristotle Popolizio as the Vice President and Secretary, we granted to each of Messrs. Drakos and Popolizio, seven-year non-qualified stock options under our 2020 Long-Term Incentive Plan, to purchase 700,000 shares of common stock at an exercise price per share of $2.60, representing the closing price of the common stock as reported by the OTC Markets Pink Sheet Tier on the grant date.. The options will vest at the rate of 1/12 (i.e., 58,333 shares) per month on the last day of each month following the grant date. .
January 22, 2022 Amendment to Integrated License Agreement
On January 31, 2022, we and Cell Science entered the Third Amendment to Integrated License Agreement in which we agreed:
·There would be no reduction and offset against the $3.5 million One-time Payment for certain costs paid by us or on our behalf. Therefore, we issued a $3.5 million promissory note, bearing interest at the applicable federal short-term rate of 0.44% under IRC Section 1274(d), payable in January 2023.
·In lieu of any offset and reduction against the One-Time Payment Note, Cell Science agreed to convey to us the lease on the California laboratory in which the efficacy demonstration was conducted, including all related equipment, improvements, supplies, and related tangible and intangible assets.
·Cell Science and OZ Corporation would execute and deliver a similar conveyance of all rights to the California laboratory.
·The Integrated License Agreement was clarified to provide that all improvements to the licensed technology made by us would be owned by Cell Science and included in the licensed technology.
The foregoing summary descriptions of the terms of the Third Amendment is a summary only and does not purport to be complete, may not contain all information that is of interest to the reader and is qualified in its entirety by reference to the full text of the Third Amendment, attached hereto as Exhibit 10.01 to the Current Report on Form 8-K that we filed on February 3, 2022.
Appointment of Dr. Michael R. Hawthorne as the Deputy Chief Executive Officer
On February 11, 2022, we appointed Dr. Michael R. Hawthorne as the Deputy Chief Executive Officer of the Company and concurrently therewith entered into an employment agreement with Dr. Hawthorne.
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Dr. Hawthorne’s employment with the Company will be considered “at-will” employment, and either the Company or Dr. Hawthorne may terminate the Agreement with or without cause. Other than a termination during the first 90 days, in the event of Dr. Hawthorne’s termination of employment, for any reason, the Company shall pay to Dr. Hawthorne: (i) any base salary earned, but unpaid, through the date of termination of employment; (ii) reimbursement for unreimbursed business expenses properly incurred by Dr. Hawthorne, which shall be subject to and paid in accordance with the Company’s expense reimbursement policy; and (iii) such equity compensation, if any, to which Dr. Hawthorne may be entitled as of the date of termination of employment.
The Company shall pay Dr. Hawthorne an annualized base salary of $1.00. Effective February 11, 2022, the Company granted Dr. Hawthorne a non-qualified stock option to purchase two million (2,000,000) shares of the Company’s common stock, with an exercise price equal to $3.00, (i.e., the closing price of the Common Stock of the Company as reported by the OTC Markets Pink Sheets, as of the date immediately preceding the Effective Date. Such options shall be exercisable for seven (7) years. Subject to the Plan, the options shall vest at the rate of 1/48 per month on the last day of each month following the Grant Date, with all unvested options vesting on the fourth anniversary date of the Grant Date.
The foregoing summary descriptions of the terms of the Employment Agreement is a summary only and does not purport to be complete, may not contain all information that is of interest to the reader and is qualified in its entirety by reference to the full text of the Employment Agreement, attached hereto as Exhibit 10.01 to the Current Report on Form 8-K that we file on February 17, 2022.
Consulting Agreement with Mitch Kahn
On February 11, 2022 the Company entered into a Consulting Agreement with Badger Real Estate Advisors, LLC (the “Consultant”), which is owned and controlled by Mitch Kahn. Mr. Kahn, a seasoned executive and entrepreneur, through his entity, will advise the Company on various projects and undertakings, in furtherance of the Company’s long-term objectives, growth and optimizing the value of the Company.
Pursuant to the Consulting Agreement, in consideration for certain services rendered by the Consultant, the Company granted Consultant a non-qualified stock option o purchase three million five (3,500,000) shares of the Company’s common stock with an exercise price of $3.00 per share, (i.e., equal to the closing price of the Common Stock of the Company as reported by the OTC Markets Pink Sheets, as of the date immediately preceding the Effective Date. The Option shall be comprised of 2,500,000 Base Options and 1,000,000 Bonus Options which vest as provided in the Consulting Agreement. Concurrently with the Consulting Agreement, the Company and Consultant entered into a Confidentiality and Proprietary Rights Agreement and Mutual Agreement to Arbitrate Claims.
The foregoing summary description of the terms of the Consulting Agreement is a summary only and does not purport to be complete, may not contain all information that is of interest to the reader and is qualified in its entirety by reference to the full text of such Consulting Agreement, attached hereto as Exhibit 10.02 to the Current Report on Form 8-K that we filed on February 17, 2022.
ITEM 6.EXHIBITS
1. Financial Statements.
·The unaudited Consolidated Balance Sheet as of October 31, 2021 and the audited balance sheet as of July 31, 2020;
·the unaudited Consolidated Statements of Operations for the three and nine-month periods ended October 31, 2021 and 2020;
·the unaudited Consolidated Statements of Cash Flows for the nine-month periods ended October 31, 2021 and 2020; and
·the unaudited Consolidated Statement of Stockholders’ Equity (Deficit) for the nine-month periods ended October 31, 2021 and 2020, together with
·the notes thereto, are included in this Quarterly Report on Form 10-Q.
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3. Exhibits. The following exhibits are either filed as a part hereof or are incorporated by reference. Exhibit numbers correspond to the numbering system in Item 601 of Regulation S-K.
Exhibit
Number*
|
|
Description of Exhibit
|
3(i)
|
| Amended and Restated Articles of Incorporation of Bakhu Holdings Corp. (1)
|
3(ii)
|
| Amended and Restated By-Laws of Bakhu Holdings Corp. (1)
|
4(i)
|
| Certificate of Designation of Series A Preferred Stock (1)
|
4(ii)
|
| Certificate of Designation of Series B Preferred Stock (1)
|
10.1
|
| Patent and Technology License Agreement dated December 20, 2018 (2)
|
10.2
|
| Amended and Restated Patent and Technology License Agreement dated December 31, 2019 (3)
|
10.3
|
| Strategic Alliance Agreement between CBD Biotech Inc and ICS dated April 17, 2020
|
10.4
|
| Sublicense Agreement between CBD Biotech and ICS dated April 22, 2020
|
10.6
|
| Efficacy Demonstration Laboratory Agreement dated June 10, 2020 (5)
|
10.7
|
| Amendment to Amended and Restated License Agreement dated September 22, 2020 (6)
|
10.8
|
| Agreement, Assignment Waiver and Estoppel dated September 22, 2020 (6)
|
10.9
|
| Form of Indemnification Agreement entered into between the Company and directors Thomas Emmitt, Peter Whitton, Aristotle Popolizio and Euripides Drakes on September 22, 2022, and with Teddy Scott on September 16, 2021(6)
|
10.10
|
| Assignment and Assumption Agreement dated September 22, 2020 (6)
|
10.11
|
| Office Cost Sharing Agreement dated September 22, 2020 (6)
|
10.12
|
| Bakhu 2020 Long-Term Incentive Plan (6)
|
10.13
|
| Audit Committee Charter (6)
|
10.14
|
| Consulting Agreement with Fourth and G Holdings, LLC dated June 7, 2021(7)
|
10.15
|
| Tranche 1 Warrant issued to Fourth and G Holdings, LLC dated June 7, 2021(7)
|
10.16
|
| Tranche 2 Warrant issued to Fourth and G Holdings, LLC dated June 7, 2021(7)
|
10.17
|
| First Amendment to Amended and Restated License Agreement dated February 12, 2021(12)
|
10.18
|
| Second Amendment to Amended and Restated License Agreement dated July 12, 2021(8)
|
10.19
|
| Consulting Agreement with Damian Solomon dated July 28, 2021(9)
|
10.20
|
| Consulting Agreement with Sean Akhavan dated July 28, 2021(9)
|
10.21
|
| First Amendment to Consulting Agreement and Warrants dated September 12, 2021(10)
|
10.22
|
| Executive Employment Agreement with Teddy Scott dated September 16, 2021(11)
|
10.23
|
| Third Amendment to Integrated License Agreement dated January 31, 2022(13)
|
10.24
|
| Employment Agreement dated February 11, 2022(14)
|
10.25
|
| Consulting Agreement dated February 11, 2022(14)
|
14.01
|
| Code of Ethics (6)
|
21
|
| Subsidiaries (5)
|
31(i)
|
| CEO certification pursuant to Section 302 of the Sarbanes – Oxley Act of 2002 (15)
|
31(ii)
|
| CFO certification pursuant to Section 302 of the Sarbanes – Oxley Act of 2002 (15)
|
32
|
| CEO and CFO certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (15)
|
101**
|
| The following materials from the Company's Annual Report on Form 10-K for the year ended July 31, 2020 formatted in Extensible Business Reporting Language ("XBRL"): (i) the balance sheets (unaudited); (ii) the statements of operations (unaudited); (iii) the statements of cash flows (unaudited); and, (iv) related notes.
|
101.INS
|
| XBRL Instance Document
|
101.SCH
|
| XBRL Taxonomy Extension Schema
|
101.CAL
|
| XBRL Taxonomy Extension Calculation Linkbase
|
101.DEF
|
| XBRL Taxonomy Extension Definition Linkbase
|
101.LAB
|
| XBRL Taxonomy Extension Label Linkbase
|
(1)Previously filed on Form 8-K on August 22, 2018
(2)Previously filed on Form 8-K on December 27, 2018
(3)Previously filed on Form 8-K on January 14, 2020
(4)Previously filed on Form 8-K on April 27, 2020
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(5)Previously filed on Form 8-K on June 12, 2020
(6)Previously filed on Form 8-K on October 1, 2020
(7)Previously filed on Form 8-K on June 16, 2021
(8)Previously filed on Form 8-K on July 12, 2021
(9)Previously filed on Form 8-K on August 2, 2021
(10)Previously filed on Form 8-K on September 14, 2021
(11)Previously filed on Form 8-K on September 21, 2021
(12)Previously filed on Form 10-Q on January 11, 2022
(13)Previously filed on Form 8-K on February 3, 2022
(14)Previously filed on Form 8-K on February 17, 2022
(15)Filed herewith
*
| All exhibits are numbered with the number preceding the decimal indicating the applicable SEC reference number in Item 601 and the number following the decimal indicating the sequence of the particular document.
|
**
| Users of this data are advised that, pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or Annual Report for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Exchange Act of 1934 and otherwise are not subject to liability.
|
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