ITEM 1. BUSINESS
Change in Fiscal Year End
On February 16, 2021, our board of directors approved a change in our fiscal year end from March 31 to December 31. As a result of this change, we are filing this Transition Report on Form 10-K for the nine-month transition period ended December 31, 2020.
Overview
We are an innovative biotech company specializing in aerosol delivery of non-psychoactive cannabinoids (NPC)1 to the blood stream though the pulmonary route of administration. We were founded to identify new ways to leverage aerosol devices known as pressurized meter dose inhalers, otherwise referred to as pMDI or just MDI, in our daily lives, which create effective delivery systems for many types of phytocannabinoids (cannabinoids that occur naturally in the hemp plant).
The Company’s founders believed that hemp phytoextracts (extracts from the hemp plant) specifically, but not limited to, NPCs, could possibly help individuals find a new way to manage or support the treatment of chronic pain, post-traumatic stress disorder (PTSD), insomnia, surgery recovery, and a wide range of other ailments. What started as an idea of using an inhaler to deliver a potential pain reliever CBD, has grown into a company that produces many different NPCs and/or blends thereof, which can safely, efficiently, and cost effectively, be delivered to consumers.
We use the highest quality ingredients and manufacturing practices to ensure consumers get the purest possible product that is produced according to good manufacturing practices, otherwise known as GMP. The Company recognized very early that aerosol manufacturing, in combination with new unique proprietary technology and formulations, would meet the needs of consumers looking for a better way to utilize hemp products.
New and more effective delivery systems for active pharmaceutical ingredients (“API”) or supplements have been a growth engine for brands and companies for years. In this vein, we believe that providing consumers with safer, faster and more efficient ways to deliver NPCs will drive the growth of our business.
At the heart of our mission is ensuring that we are constantly striving to maintain the highest level of quality and compliance in our formulations and manufacturing practices so that we can ensure a long-term sustainable pipeline of products that will benefit our customers and consumers.
Our product lines focus on safe, legal and effective API. The Company exclusively uses API consisting of our proprietary blend of isolate (crystalline solid or powder) derived NPCs. We have named our NPC blend N-PsicanTM. As a result of a recently completed vertical acquisition, we own the process and extraction method we believe will result in the highest pharmaceutical grade NPCs available now and in the future. This ability to source, manufacture and sustain our own API ingredients is expected to result in lowering costs and providing a consistent and measured dose for consumers. In addition, we anticipate that this will allow for a higher degree of safety because we will control the entire manufacturing process.
As such, we now manufacture our own pharmaceutical grade NPCs s. These products are ultra-pure and unadulterated. As such, using our own NPCs derived from our proprietary processes which we control quality and purity of to an extreme degree, and which we plan to take steps to patent.
Using our own NPCs as the API, we manufacture our own branded MDI under the nhālerTM brand name using our proprietary blends. NPCs and their substrates are legal for manufacturing and human consumption in Texas under House Bill 1325 (discussed below). None of our products contain any psychoactive cannabinoids or tetrahydrocannabinol (THC) compounds of any amount.
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1.NPCs include, but are not limited to, cannabidiol (“CBD”), cannabigerol (“CBG”), cannabichromene (“CBC”), and cannabinol (“CBN”).
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The Company believes it is unique in the emerging hemp industry in that it does not use “full spectrum” oil, nor does it use compressed air as a propellant. Full spectrum oil is an industry term that means the composite hemp plant crude extract has been liquified using a solvent. The amounts and quantity of any API in full spectrum oil is not readily ascertainable, nor is the consumer usually aware of what solvents are used to liquify the extracts. Accordingly, we do not believe that it is possible to manufacture a safe MDI using full spectrum oil as the product could be adulterated or even toxic, depending upon how the extracted crude is handled and prepared. Any impurity, contaminants, or solvents used in full spectrum oil can endanger a consumer and cause any number of ailments, including laryngospasms, bronchospasms, or lipoid pneumonia. The Company has identified these issues and has consistently worked to avoid any toxicity, impurities or contaminants in its products.
In furtherance of our commitment to safety and purity, the Company’s MDI are made using U.S. The Food and Drug Administration (FDA) listed cans, valves, actuators, propellant and excipients following GMP. All of these parts are manufactured under GMP in accordance with each manufacturer’s requirements which are listed in master drug files with the FDA. We purchase these parts and inert ingredients directly from one or two of the largest suppliers of FDA listed consumables in the world. We also only use cGMP HFA-134a propellant which is listed with the FDA and approved for humans in our products. The technology we use is safe if properly applied and has been researched over more than 70 years with hundreds of drugs. At no time does the Company use THC in its products. The Company is certified by the Cannabinoid MDI Certification Board (CMDICB) with respect to manufacturing of its MDI.
We believe we are the only company in the world that is manufacturing an MDI with an NPC API safe for human consumption. To this end we have hired an experienced pharmaceutical industry veteran (Dr. Duane Drinkwine, our Chief Science Officer (a non-executive position)), who has years of experience with companies such as GlaxoSmithKline, Pfizer and Bayer manufacturing APIs for prescription inhalers. Dr. Drinkwine brings over a decade of isolate API production experience to the Company and provides expertise in manufacturing, oversight of safety and compliance related to prescription medication.
The Company has test marketed its MDI products directly to pharmacies and physicians who treat a wide range of ailments including, but not limited to, general anxiety disorder (GAD), post-traumatic stress disorder (PTSD) and pain management. During this period, we collected feedback and suggestions for product enhancement and consumer satisfaction.
Consistent with the entire hemp space, none of our products are approved by the FDA or under the Federal Food, Drug and Cosmetic Act (FFDCA). We always encourage consumers to do their own research regarding all cannabinoids and our products. We make no claims about therapeutic benefits of our products. None of our products are intended to diagnose, treat, cure or prevent any disease. We recommend any consumer always consult a physician prior to using any cannabinoid product. Any consumer who uses hemp products might have an adverse reaction and/or a drug interaction with another medication and if so, should stop use immediately and seek appropriate medical attention.
Early cannabinoid MDIs introduced to the marketplace and to our knowledge, those of our current competitors, caused side effects such as irritation of the throat, vocal cords and esophagus, which consumers have not reported in connection with our MDIs.
Our core business model includes a new marketing and sales approach to the medical community that is primarily based upon tried and proven sales techniques used in the pharmaceutical industry. We applied these sales techniques and found that they worked well with our product. Unfortunately, this marketing and sales campaign was interrupted in December 2019 when a novel strain of coronavirus, which causes the infectious disease known as COVID-19, was first reported in Wuhan, China. The World Health Organization declared COVID-19 a “Public Health Emergency of International Concern” on January 30, 2020, and a global pandemic on March 11, 2020. As a result, in March and April 2020, many U.S. states and local jurisdictions began issuing ‘stay-at-home’ orders. When this occurred our ability to access physicians’ and other health care providers’ offices was negatively affected. However, we pivoted to product development and began successfully seeking acquisition of an isolate manufacturer that could produce a secure supply of high-quality pharmaceutical grade NPCs, which acquisition we completed in November 2020 (see “Additional Recent Acquisition and Transactions”, below). In addition, during this time we took the opportunity to adjust our formula to eliminate any and all possible adulteration from our products and to reduce the possibility of any adverse side-effects associated with the use of our MDI. More recently, we have started the process of planning to travel to physician’s offices with the current declines in the spread of COVID-19.
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From day one we have placed great emphasis on manufacturing a product that meets cGMP. “cGMP” means current good manufacturing practice regulations promulgated by the FSA under the authority of the FFDCA. These regulations, which have the force of law, require that manufacturers, processors, and packagers of drugs, medical devices, some food, and blood take proactive steps to ensure that their products are safe, pure, and effective. This goal of being fully compliant is being pursued at a high rate and we apply appropriate measures to reduce risk of non-compliance. Our filling facility or MDI laboratory is certified to cleanroom classifications ISO 6 and 7, which are a measure of how clean a cleanroom is (ISO levels are from 1 to 9, with 1 being the ‘cleanest’). These control rooms allow us to formulate and manufacture our products in a sterile environment.
As such, with a product offering that is pure, safe and efficient, we plan to begin a renewed marketing and sales campaign in 2021, as COVID-19 hopefully winds down, and vaccines make it safer for our sales team to meet with our primary marketing targets. Our initial post-COVID-19 product marketing campaign is planned to focus on safe, legal and effective NPCs as the API. We believe that the ability to source and sustain our own ingredients will result in lowering our costs and providing a consistent and measured dose for consumers.
Our Products
As our primary product, we offer MDIs, which are devices that deliver a measured amount of medication in a mist to the lungs. The mist is in the form of a short burst of aerosolized inhalant that is usually self-administered by the user via inhalation. As secondary products, we also offer a sublingual oral spray device and water-soluble CBD and CBG isolates.
Our MDIs contain an API of a proprietary NPC isolate blend including, but not limited to, CBD and/or CBG. The product is sold under the nhālerTM brand name.
The API is delivered to a user in a mist when inhaled. The droplet size of the liquid solution in the mist is engineered through a proprietary process to be of a size that the individual droplet can be absorbed directly into the blood stream through the cellular wall of the alveoli (the tiny air sacs of the lungs) and its surrounding blood vessels. This process is known as the pulmonary route of administration. If the droplet size is too large to enter the alveoli it is considered topical in nature and is of lower bioavailability and efficacy. If the droplet size is too small, the droplet is not heavy or dense enough to be absorbed and will be exhaled, thereby lowering bioavailability and efficacy. As such, the proprietary knowledge needed to engineer an appropriate droplet size is crucial to manufacturing an effective MDI.
Our cans, valves, actuators and filling equipment are all on file with the FDA. We further attempt to fully comply with all GMP requirements followed by the manufacturers of our consumables and equipment except for the API.
Our pharmaceutical grade propellant and CBD isolate are considered non-toxic by the FDA. We use a small amount of medical inhalation grade ethanol. Further, with our MDI, there is no smell and it will keep working even if submerged in water.
Finally, bioavailability (the proportion of a drug or other substance which enters the circulation when introduced into the body and is able to have an active effect) is very high in a properly designed and formulated MDI, such as ours. As bioavailability decreases, a consumer must consume more of the substance to achieve the desired amount in the blood stream. Accordingly, lower bioavailability means more of the substance is lost and therefore more must be purchased and consumed. Our bioavailability is generally believed to exceed any other route of administration of NPC in the hemp market.
Our MDI is engineered, formulated and manufactured using the strictest aerosol device standards and GMP guidelines to ensure efficacy and quality. Our API is derived from high quality pharmaceutical grade cannabinoid isolates. Our API is made on custom fabricated equipment that is exclusive to our Company, which we plan to take steps to patent.
Our product’s main positioning will focus on the superior delivery system of the MDI (ultra-high bioavailability) and the quality of the NPC API.
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Our nhālerTM MDI provides:
·100 metered doses.
·5mg of our proprietary API pure cannabinoid isolate blend of NPC known as N-PsicanTM.
·500mg of API per MDI.
·Zero THC.
Our recently introduced sublingual oral spray device (which is applied under the tongue) utilizes essentially the same manufacturing technology and equipment that is used in our MDI’s. However, for those users who would prefer oral or sublingual routes of administration, it delivers a uniform mist of a consistent dosage inside the mouth which is easily absorbed in the tissues of the mouth and gums or swallowed. We developed this new product through our own recent research efforts as a way to eliminate potential discomfort associated with the delivery of pharmaceutical grade isolate through an inhaler. Our sublingual spray is currently available for sale to the public.
Our proprietary pharmaceutical isolate is available to be purchased by manufacturers of non-competing products lines that use CBD.
Finally, as previously mentioned, we have also developed another new secondary product offering in the form of water soluble CBD isolates. This new product consists of isolates which are extracted using our proprietary technology resulting in an NPC that is dissolvable in a solution, thus offering a much higher absorption rate and which does not require a solvent. This technology is related to nano particles of NPC combined with other well-known safe organic chemicals used in the pharmaceutical space.
We plan to offer these new isolate products in conjunction with the anticipated startup of our new manufacturing facility in Plano, Texas, which is planned to go live in the second or third quarter of calendar 2021.
Our Competitive Strengths
We believe our business has, and our future success will be driven by, the following competitive strengths:
·Emphasis on Precision, Quality and Consistency in our Manufacturing. While most companies in the space have focused on getting low-cost low quality CBD products to market in an effort to turn a quick profit, our focus has been on our science and manufacturing practices. We built ISO 6 and 7 control rooms to ensure our manufacturing practices, product development and safety protocol all follow GMP. Our acquisition of assets from Razor Jacket, LLC (“Razor Jacket”, as discussed below) ensures that our products will contain some of the highest quality NPC APIs available in the CBD and hemp market places.
·Differentiated Business Model. In our experience, most companies in the cannabinoid industry only focus on direct to consumer and potentially store/dispensary sales. We have built our business more in line with those of true pharmaceutical and consumer product brands. Our plan is to focus our MDI sales efforts in more direct sales models, such as the following:
-Doctor detailing
-Healthcare Group and Clinic Direct Sales
-Traditional Retail Sales
-Direct to Consumer (with professional recommendation)
As an aerosol business we also have plans to extend our product lines to leverage other “safe for inhalation” APIs in the future. We expect that this ability to provide a new, better delivery system to established supplements and medications will drive our growth.
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·Superior Delivery System with Proven Efficacy History. MDIs have been in use for over 70 years and we believe they are the best way to get safe to use inhalants into a user’s blood stream outside of an IV. We have spent substantial time and resources perfecting the technology to ensure that our devices operate as designed. This involves ensuring the parts and machines are pharmaceutical grade, our lab is up to GMP standards, our dosing is accurate and measured and we believe our API are the highest medical quality. In short, the MDI we build are believe to be safe and unadulterated.
·Proprietary Active Pharmaceutical Ingredients (API). The acquisition of assets from Razor Jacket allows the Company to bring the production of medical grade API production in-house. Our now in-house production of isolate was developed by experienced industry professions exclusively for MDI use.
·Long Term Supplier Relationships. We are invested in long term relationships with our pharmaceutical providers for cans, valves, actuators and technical equipment. This allows us to be able to expand our manufacturing capacity quickly and scale up to meet customer demand. One of our affiliates (an entity controlled by Mr. Schmidt, our Chief Executive Officer and director) is also the only authorized dealer of medical/pharmaceutical grade propellent in the hemp space meaning that we will always have access to one of the main ingredients to ensure our devices work properly.
·Market Knowledge and Understanding. With over 30 years combined experience in the development of NPC API, our team has a high level of industry knowledge. Our team has vast experience and extensive industry contacts to assist in the procurement of raw materials in the hemp space. Our leadership team has experience building, scaling and taking businesses public. We also have extensive technical expertise in the manufacturing of API and metered dose inhalers. In addition, we are experienced in consumer deliverables and training.
·FDA. The Company is pursuing FDA registration. The Company has engaged consultants to assist with this process under a multi-year contract. In addition, these consultants are overseeing implementation of the Company’s quality control system in both manufacturing of MDI and production of isolates in moving towards certified laboratories.
·Clinical Trials. The Company has begun the process of clinic trials of its MDI. It will be testing the product’s effects related to pain, PTSD, anxiety, insomnia, inflammation and recovery related to long haul effects of COVID-19.
Competitive Landscape
The Company believes its MDI is unmatched in the current CBD product marketplace. The combination of our proprietary NPC API and our unique MDI delivery system create a suite of products that are highly differentiated from any other product on the market. To our knowledge, at the current time, we do not have any direct competitors who offer the same type of product.
However, there are other so-called cannabinoid inhalers offered in the marketplace, and there is an abundance of other cannabinoid products available. We face competition from manufacturers of other cannabinoid inhalers.
The market for the sale of CBD and other non-THC-based cannabis products is fragmented and intensely competitive. We plan to compete based upon the quality of our products and method of delivery and eventually on our brand name recognition. We expect that the quantity and composition of the competitive environment will continue to evolve as the industry matures and new customers enter the marketplace.
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Our Targeted Customers
We plan to focus our sales and marketing efforts towards three types of target customers:
1)Medical Providers, and licensed professionals. We plan to hire a team of direct sales representatives to target both local clinics and national medical chains, leveraging their previous relationships to facilitate business directly to their patients/customers. Our efforts will be directed toward a broad group of licensed medical professionals, including physicians (doctor of medicine’s (MD’s) and doctors of osteopathic medicine (DO’s)), medical technologists, chiropractors, physical therapists and others. The Company’s primary marketing focus will be on this sales channel, as we strive to have these types of licensed medical providers endorse our products to their patients/customers.
2)Pharmacies and specialty retailers. We anticipate a secondary sales team will be hired to target pharmacies which include regional and local chains as well as walk-in compounding pharmacies for behind the counter sales of MDI. Next, this same team is expected to target specialty retailers such as CBD shops, smoke shops, convenience stores, country club pro shops and gyms and/or work out facilities with our new oral spray.
3)Business to Consumer (“B2C”). We plan to hire a marketing team to create consumer response and direct impressions to our online marketplace where consumers will go to purchase our nhālerTM and other products. We plan to target these consumers through direct-to-consumer digital campaigns as well as through physician recommendations. We have hired a consultant to oversee the strategy, and oversee hiring, training, and implementation to facilitate our sales and marketing efforts for our target customers, which is subject to the Company raising adequate funds.
Marketing
Our plans are to employ a three-prong marketing approach: (1) generate leads for our direct sales team in the medical space, (2) generate consumer interest in our products to purchase MDI at pharmacies and/or oral sprays online, or through flex stores and specialty retailers, and (3) achieve customer retention and build upon the nhālerTM brand.
Direct sales team leads, direct consumer sales, branding, and customer retention will predominantly be initially generated through the use of both inbound and outbound marketing and are planned to include: Industry organizations, trade shows, public relations, paid advertising, online presence, search engine optimization, social media, email database marketing, and customer relationship management (CRM).
Search Engine Optimization (SEO) will be a high priority of ours to ensure that certain selected search engine keywords will direct online users to our family of websites. SEO is planned to be achieved through the use of proper meta tags, title tags, keyword density, keyword frequency, and every other aspect as recognized by the major search engines. We also plan to internally employ a team of SEO programmers to work to ensure that our websites are, to the extent possible, listed near the top of the first page of major search engines when selected keywords are requested in a consumer search.
Our Growth Strategy
Our growth strategy is expected to build on what we believe is a superior delivery system that delivers a superior API, that together increases performance and safety of our products. We plan on growing our business in three main ways:
1.Capturing market share in the hemp space. Due to the fact that we believe our products create higher value for consumers based on the bioavailability of our ingredients, are faster acting and accurate in dosing, we believe that we will be able to increase our consumer pool and to provide top line growth for our retail and clinic customers.
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2.Increasing penetration of hemp user. There is a decreasing stigma around the use of cannabis products as our society and legal view on these is rapidly evolving. There are still some people and physicians unwilling to use these products largely based on the inability to achieve accurate and controlled dosing. Our product lines are meticulously manufactured to ensure an accurate and measured dose with every actuation. We believe that this will allow us to provide consumers and medical practitioners with the peace of mind that they can utilize our products safely and effectively and thus bring new consumers into the category.
3.Expand our product portfolio. Our growth focus in product portfolio expansion will focus on identifying “safe for inhalation” ingredients which are currently being used in less efficacious delivery methods and put them into our delivery device.
4.Cannabinoids, the FDA, and Clinical Testing. At this point the cannabinoid and hemp marketplace are still somewhat devoid of medical substantiation. There have been very few products that have started to undergo medical testing in the hopes of gaining information around benefits, dosing and potential FDA approval. Our goal is to start to explore the medical opportunity by conducting voluntary clinical testing on our nhālerTM branded products. We have partnered with a healthcare group who has a captive patient population to test our nhālerTM brand with patients presenting with clinical diagnosis around pain, anxiety, PTSD, insomnia and long haul COVID-19 problems. This testing is scheduled to start as soon as our existing products liability carrier approves the physicians and testing groups involved in the trials as additional insureds. In addition to clinical testing, we have engaged with a group of FDA consultants to help us position our manufacturing and formulations with the future goal of filing a New Drug Application (NDA) with the FDA.
5.Legal Status. Our products are not FDA approved. CBD is considered a drug by the FDA and no CBD product except one prescription product is approved by the FDA for use in humans. Nevertheless, the FDA generally has not interfered in the commercial sale of CBD products to the public unless a manufacturer or marketer of such products make therapeutic or false claims about their products. This position has been publicly stated by the FDA in writing. As such, we make no therapeutic claims whatsoever. In addition, the FDA does not consider CBD to be a dietary substance and presently may not be labeled as such. Finally, our MDI is considered a class II medical device and the FDA considers such devices, when not properly manufactured or if adulterated, to be potentially dangerous to the public at large.
6.Pending Legislation. There is a bill pending in the 117th Congress (United States House of Representatives H.R. 841) introduced on February 4, 2021 entitled:” Hemp and Hemp-Derived CBD Consumer Protection and Market Stabilization Act of 2021”. The purpose of the bill is to make hemp, cannabidiol derived from hemp, and any other ingredient derived from hemp lawful for use under the Federal Food, Drug, and Cosmetic Act, as a dietary ingredient in a dietary supplement, and for other purposes. Although this bill is promising, there is no guarantee this bill will pass Congress or be signed into law by the President or that our products would qualify as dietary supplements.
7.International Expansion. We plan to eventually seek to expand our marketing and sales to outside of the United States, potentially beginning at the end of 2021, funding permitting, and assuming further declines in the spread of COVID-19.
Scale-Up Manufacturing
Manufacturing production at our current facility can produce up to 3.6 million MDI units per year. This assumes a single daily 8-hour shift. If sales and demand for our product outpaces current manufacturing capabilities, we plan to increase production by:
·Increasing manufacturing shifts to two and then three in our current manufacturing laboratory per day.
·Increasing the amount of manufacturing equipment and employees.
·Expanding on the size of a new facility which incorporates semi-robotic filling equipment.
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Presently, our isolate manufacturing laboratory can produce more API than we can utilize for our MDI.
CBD Industry Market Overview
According to a report published in December 2019, by Grand View Research, entitled “Cannabidiol Market Size, Share & Trends Analysis Report By Source Type (Hemp, Marijuana), By Distribution Channel (B2B, B2C), By End Use, By Region, And Segment Forecasts, 2019 - 2025”, “[t]he global cannabidiol market was valued at USD 4.6 billion in 2018 and is expected to grow at a compound annual growth rate (CAGR) of 22.2% from 2019 to 2025.” The Company operates in the cannabidiol market, marketing its pMDI’s as a delivery method for cannabidiols. The Company competes in the market with other pMDI makers and other producers of alternative cannabidiol delivery systems, such as oral, nasal, or topical.
CBD has driven the hemp boom for a decade now, and that trend is expected to continue for years to come, according to Nielsen Global Connect, a division of The Nielsen Co. which focuses on data for manufacturers and retailers. The rise is driven by increasing acceptance of CBD as a dietary supplement, especially as a global pandemic and economic stressors have consumers reaching for products thought to boost wellness and immunity and enhance relaxation. Nielsen projects that hemp’s 2020 sales of $1.9 billion will balloon to $6.9 billion in 2025, a threefold increase over five years. Inhalable CBD (such as the MDI offered by the Company) is also expected to show significant growth, from $267 million in 2020 to $793 million in 2025 (an increase of 197%).
Intellectual Property
Our intellectual property includes the content of our websites, our registered domain names, our registered and unregistered trademarks, and certain trade secrets. We believe that our intellectual property is an essential asset of our business and that our registered domain names and our technology infrastructure will give us a competitive advantage in the marketplace. We plan to rely on a combination of patent, trademark, copyright, trade secret, including federal, state and common law rights in the United States and other countries, nondisclosure agreements, and other measures to protect our intellectual property. We require our employees, consultants, and advisors to execute confidentiality agreements and to agree to disclose and assign to us all inventions conceived under their respective employment, consultant, or advisor agreement, using our property, or which relate to our business. Despite any measures taken to protect our intellectual property, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Our business is affected by our ability to protect against misappropriation and infringement of our intellectual property, including our trademarks, service marks, patents, domain names, copyrights and other proprietary rights.
Our primary web properties are:
·www.nhaler.com, and
·www.rtslco.com
Patent Applications
Moving forward, we plan to file patent applications for various of our processes and manufacturing methods, provided that none have been filed or granted to date.
Trademarks and Copyrights
Although we have not sought copyright registration for our technology or works to date, we rely on common law copyright and trade secret protections in relation to our nhālerTM MDI and our N-PsicanTM API, as well as our RxoidTM.
In addition, while we believe that our current product and service capabilities are highly novel and compelling, we do not intend to be complacent. We plan to continue to learn from our customers and from the market, and if there is an opportunity to deploy a new and improved version of one of our offerings or if we decide there is room in the market for a new type of solution, we fully intend to diligently explore those possibilities to augment our existing business and grow our reach.
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Property, Employees and Human Capital Resources
As of the date of this Report, we have eight full-time employees in Dallas, Texas. Our CFO works remotely from Houston, Texas. We have numerous outside consultants that have exclusive agreements with us for their professional services including physicians. We have a corporate office located at 5580 Peterson Ln., Ste. 200, Dallas, Texas, that is provided free of charge by our CEO. Our laboratory to fill MDI located in Addison, Texas (the amounts due under the lease are guaranteed by our Chief Executive Officer, Donal R. Schmidt, Jr.), and we are planning to lease a new facility to finish reassembling our isolate lab which has been moved from Oregon to Dallas. We plan to eventually move our MDI laboratory to this new location. We may also pursue additional warehousing capabilities. None of our employees are subject to collective bargaining agreements. We consider our relationship with our employees to be good.
Our human capital resources objectives include, as applicable, identifying, recruiting, retaining, incentivizing and integrating our existing and new employees, advisors and consultants.
Corporate History
We were incorporated on February 22, 2013 as PowerMedChairs, a Nevada corporation. Since the time of our incorporation until February 2018, our plan of operation was to re-build primarily electric/power wheelchairs in disrepair. On June 2, 2017, we changed our name to Holly Brothers Pictures, Inc. In February 2018, we ceased this business and commenced a blockchain mining business through our acquisition of Power Blockchain, LLC (“Power Blockchain”) described below. We have since ceased all electric/power wheelchair and blockchain mining operations and no longer hold any of the prior assets associated with such businesses. No agreements or operations exist relating to our prior business operations as of the date of this Report.
On February 1, 2018, we entered into an exchange agreement pursuant to which we acquired 100% of the equity interests in Power Blockchain from the two owners of that company in exchange for the issuance of convertible notes in the aggregate principal amount of $2.2 million (of which $165,240 of such convertible notes remains outstanding as of December 31, 2020). Upon consummation of the exchange agreement, Power Blockchain became our wholly-owned subsidiary. This transaction resulted in the transition from the Company’s business of repairing and selling wheelchairs to a new business of mining crypto-currency. On February 14, 2018, we were granted permission from the Kingdom of Lesotho in Africa to conduct crypto-currency mining operations in that country. Shortly thereafter, we acquired and shipped a total of 70 owned crypto-currency miners to Lesotho in order to commence crypto-currency mining operations there. However, due to rapidly declining economic and market conditions in that business, we were never able to commence any mining operations and decided to suspend our mining operations in the middle of 2018.
Effective November 15, 2019, the Company and Texas MDI, Inc., a Texas corporation, which is controlled by Donal R. Schmidt, Jr., the Chief Executive Officer and Director of the Company (“TMDI”), entered into a sublicense agreement (the “Sublicense Agreement”) whereby the Company acquired a sublicense from TMDI to use certain technology regarding metered dose inhalers (MDI) that TMDI has licensed from EM3 Methodologies, LLC (“EM3”) and the right to use the RxoidTM brand name owned by TMDI. TMDI had exclusive rights to research, develop, make, have made, use, offer to sell, sell, export and/or import and commercialize, the ‘Desirick Procedure’, which is a proprietary process owned by EM3 for producing MDI using hemp (and other) derivatives in the States of Texas, California, Florida and Nevada, pursuant to an Exclusive License Agreement dated October 1, 2019, by and between TMDI and EM3 (the “EM3 Exclusive License”). Pursuant to the Sublicense Agreement the Company obtained substantially the same rights that TMDI had under the EM3 Exclusive License, as to the use of the ‘Desirick Procedure’ for the manufacturing of pressured MDI’s (pMDI) containing hemp extract or hemp isolates or a combination thereof in any legal jurisdiction in consideration for 140,000,000 shares of the Company’s common stock (issued in November 2019).
The term of the Sublicense Agreement was from November 15, 2019 until the expiration of the EM3 Exclusive License Agreement. Pursuant to an amendment to the EM3 Exclusive License Agreement entered into in June 2020, all improvements to the ‘Desirick Procedure’ created by TMDI during the term of such agreement belonged to TMDI, in consideration for 100,000 shares of the Company’s common stock (the “First Amendment”).
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During the term of the Sublicense Agreement, the Company was required to advance payments to TMDI that TMDI was required to make to EM3, pursuant to the EM3 Exclusive License Agreement. The Company’s obligation to make such advancements to TMDI was conditioned upon TMDI providing the Company with an advance notice requesting such payments, along with an accounting showing the calculations for such payments. Accordingly, the Company had an obligation to advance TMDI an amount of $200,000 as a license fee covering the first two years of the Sublicense Agreement and to pay an additional $200,000 each 2 years thereafter (unless at least 100,000 MDI consumables are purchased from EM3 for use in such states during the preceding year). The Company partially satisfied this obligation by making an equipment purchase on behalf of TMDI in the amount of $135,000, and agreed to pay the remaining license fee of $65,000 in cash within a 24-month period. The Company recorded the entire $200,000 license fee as an intangible asset and was amortizing it to expense on a straight-line basis over a 24-month period. The Sublicense Agreement and EM3 Exclusive License were terminated in connection with the parties’ entry into the Settlement Agreement discussed below.
Effective on November 30, 2020, the Company acquired 100% of Rxoid Health Solutions, LLC (“Rxoid Health”), a Texas limited liability company, pursuant to a Membership Interest Purchase Agreement entered into with TMDI, which previously owned such entity, for $100. Rxoid Health owns the right to the RxoidTM brand name, which as of November 30, 2020, is owned and controlled by the Company, and no longer licensed from TMDI. TMDI is controlled by Mr. Schmidt, our Chief Executive Officer and director. RxoidTM Health will be the holding company which will own all intellectual property of the Company, including, but not limited to, that being developed under its isolate operations acquired from Razor Jacket, LLC.
Subsequently, in December 2020, as part of a contemplated liquidation of TMDI, its owners were distributed all of TMDI’s 140,000,000 shares of stock which is subject to Trading Agreements entered into between the Company and the prior shareholders of TMDI.
On February 9, 2021, the Company entered into a Settlement and Mutual Release Agreement dated February 9, 2021 (the “Settlement Agreement”) with TMDI, Diamond Head Ventures, LLC, an entity owned and controlled by Mr. Schmidt and a predecessor to TMDI (“Diamond Head”), EM3, the owner of EM3, Richard Adams (“Adams”) and Holly Brothers Pictures, LLC, an entity co-owned by Mr. Schmidt and Mr. Adams (“Holly”). The Settlement Agreement was entered into in order to settle certain disputes which had arisen between the parties relating to the Sublicense Agreement, EM3 Exclusive License, and related agreements. Pursuant to the Settlement Agreement, the parties agreed to (a) terminate the Sublicense Agreement, EM3 Exclusive License, and a separate Sales and Licensing Agreement dated November 21, 2018, pursuant to which EM3 agreed to sell certain consumables to Diamond Head and provide a license to use certain intellectual property in connection therewith; (b) Adams agreed that the Company was no longer required to issue him 100,000 shares of the Company’s common stock, which were to be issued to him pursuant to the terms of the First Amendment (which have not been issued to date); (c) EM3 and Adams agreed to enter into a new Exclusive License Agreement with the Company (discussed below); (d) each of the parties to the Settlement Agreement, other than the Company, agreed that the Company was the rightful owner of all improvements to the Licensed IP (as defined below), which was created by TMDI, Diamond Head or the Company, prior to, and after the date of the parties’ entry into the Settlement Agreement; (e) Holly Brothers agreed to transfer to Adams ownership of a touring coach; and (f) each of TMDI, Diamond Head and the Company provided a general release to EM3 and Adams and EM3 and Adams provided a general release to each of TMDI, Diamond Head, and each of their officers, directors and related parties. As a result of the release, the Company no longer owes TMDI (or EM3) any license fees under the Sublicense Agreement or EM3 Exclusive License (including, but not limited to the $65,000 previously owed under the terms of the Sublicense Agreement, which amount was previously accrued).
Also, on February 9, 2021, as a required term and condition of the Settlement Agreement, the Company, EM3, and Adams entered into a new Exclusive License Agreement dated February 9, 2021 (the “New EM3 License”). Pursuant to the New EM3 License, EM3 provided us a royalty-free, perpetual license to use the Desirick Procedure or any derivation thereof and its application and use, including, but not limited to, related consumables (cans, valves, and actuators), filling equipment for pressurized MDIs (pMDIs), and/or plastic testing vials and training, support or maintenance thereon of any combination thereof, and all intellectual property of EM3 relating to the foregoing (collectively, the “Licensed IP”), on an exclusive basis in the states of Texas, California, Florida and Nevada (subject to pre-existing licensing rights which have been provided by EM3 in such jurisdictions), and on a non-exclusive basis throughout the rest of the world, in consideration for $10. The New EM3 License provides our right of ownership of any improvements to the Licensed IP, requires EM3 to indemnify us against any claims associated with EM3’s breach of the agreement (including in the event any third-party claims to own the Licensed
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IP), and contains non-circumvention provisions. The New EM3 License continues in place until such time, if ever, as we terminate the agreement. In the event we terminate the New EM3 License, we are provided the non-exclusive license to use the Licensed IP throughout the world for so long as we continue to manufacture and distribute products.
As a result of the Settlement Agreement and the New EM3 License, we no longer owe any obligations to TMDI or EM3 (other than the $10 and other consideration already paid), and have a royalty-free, perpetual exclusive license applicable to Texas, California, Florida, and Nevada from EM3 (subject to pre-existing licensing rights which have been provided by EM3 in such jurisdictions) to research, develop, make, have made, use, offer to sell, contract fill, export and/or import and commercialize the Licensed IP, which enables the production of a so-called metered dose inhaler using hemp cannabinoid derivatives under the RxoidTM brand or on a white label basis. A properly formulated and corrected manufactured MDI is a proven medical technology which is a complete replacement for vape cartridges and e-cigarettes. A cannabinoid MDI which is properly developed and manufactured delivers medication directly to a user’s blood stream through the pulmonary tract. MDIs are generally sterile, stable, will not oxidize and have a long shelf life not affected by light or temperature. MDIs require neither heat nor batteries. MDIs are efficient devices to deliver medication to humans whether systemically or topically. The Company uses only U.S. Food and Drug Administration (FDA) listed consumables (cans, valves, actuators, and propellant) and equipment in compliance with cGMP to produce its products. The use of excipients in the manufacture of inhalants has long been held to be generally recognized as safe (GRAS). The Company currently has over a dozen proprietary blends of cannabinoids derived from hemp containing cannabidiol, CBD, CBG, cannabinol and/or proprietary terpenes (aromatic oils) which customers often use to help support many common complaints such as pain, inflammation, anxiety, sleep, exercise, recovery and allergies. These are sold under our nhᾱler brand, and under the product names, “chill”, “focus”, and “move”. The Company makes no claims that any of its products have any therapeutic benefits or that they treat any diseases.
With execution of the Sublicense Agreement in November 2019, the Company adopted a new business strategy focused on developing potential commercial opportunities which will involve the rapid application of therapeutics using the RxoidTM MDI technology that is being licensed from EM3 with prospective healthcare providers, pharmacies and other parties in the United States and any foreign jurisdiction where hemp products are legal. Simultaneously with the entry into the Sublicense Agreement, the Company exited from its previous operations in the bitcoin mining business, which had been suspended since the middle of 2018.
Additional Recent Acquisition and Transactions
In November 2020, the Company completed its acquisition of Razor Jacket, LLC and the hiring of its owners, Frank Gill (“Gill”) and Ryan Johnson (“Johnson”). The Company purchased all of Razor Jacket’s equipment and all of its know-how relating to the manufacture of cannabinoid isolates and related products, including, but not limited to, terpenes, and the production of isolate and related products.
The Company paid $300,000 in cash, and issued 625,000 shares of restricted common stock to Gill and Johnson, and provided them the right to earn up to 16.5 million shares of Series A Preferred Stock of the Company, convertible for common stock on a one-for-one basis, subject to certain conditions.
As of the date of this filing, Gill and Johnson have complied with the majority of conditions under the Razor Jacket acquisition and the Company fully expects all conditions will have been met by June 30, 2021, which includes the construction of a new facility and completion of patent applications.
In addition, Gill and Johnson executed an Assignment of Intellectual Property Agreement in favor of the Company, assigning all of their and Razor Jacket’s intellectual property and rights associated with the process of converting raw hemp or cannabis crude into distinct isolates of NPC, THC2, and all other minor cannabinoids and/or associated terpenes including, but not limited to, the modification of existing commercial or specialty equipment fabricated and assembled to work in conjunction with Razor Jacket’s processes.
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2. The Company does not presently have any plans to process hemp for the production of any THC. Although the Company acquired proprietary rights to the methodologies to manufacture THC from Razor Jacket, this is not part of its business model.
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In connection with the closing, Gill entered into a Trading Agreement with the Company dated November 16, 2020 (the “Common Trading Agreement”), which restricts Gill’s ability to transfer or sell the Closing Shares (and any other shares of Company common stock which he may obtain during the term of such agreement), until October 31, 2023, provided that between October 31, 2021, and October 31, 2023, Gill may sell not more than 10% of the average daily aggregate trading volume of the Company’s common stock over the preceding 30 day rolling period, subject to certain other requirements.
Also in connection with the closing, Gill and Johnston entered into a separate Trading Agreement dated November 16, 2020 (the “Preferred Trading Agreement”), which restricts such person’s ability to transfer or sell any of the shares of common stock issuable upon conversion of the Series A Preferred Stock (and any other shares of Company common stock which they may obtain during the term of such agreement), until October 31, 2025, provided that between October 31, 2022, and October 31, 2025, each may sell not more than 10% of the average daily aggregate trading volume of the Company’s common stock over the preceding 30-day rolling period, subject to certain other requirements.
Subsequently, the Company has hired Dr. Duane Drinkwine, Ph.D. on January 26, 2021 to oversee all laboratory operations for the Company. Dr. Drinkwine has more than 30 years of experience in the pharmaceutical industry. Most importantly, he has significant experience in isolate crystallization, and he has perfected NPC crystallization for human consumption and ultimately for use in application to the FDA. He has significant experience in compliance with cGMP practices, OSHA and EPA lab regulations, and of course, FDA new drug applications.
Dr. Drinkwine was the lead engineer in designing the crystallization equipment for Razor Jacket's isolate extraction facility prior to the acquisition of Razor Jacket’s intellectual property by the Company.
As of March 11, 2021, we have formulated a new API for our MDI that we believe substantially reduces, or in most cases, completely eliminates any irritation of the nose, throat, larynx or bronchial tubes of the lungs. Irritation by inhalation of CBD has been identified as a primary problem of MDI by industry participants and the FDA. We plan to explore patenting this new API moving forward.
Novel Coronavirus (COVID-19)
In December 2019, a novel strain of coronavirus, which causes the infectious disease known as COVID-19, was reported in Wuhan, China. The World Health Organization declared COVID-19 a “Public Health Emergency of International Concern” on January 30, 2020 and a global pandemic on March 11, 2020. In March and April, many U.S. states and local jurisdictions began issuing ‘stay-at-home’ orders. As disclosed above, the Company has recently adopted a new business strategy focused on developing potential commercial opportunities which will involve the rapid application of therapeutics using proprietary metered dose inhaler technology that the Company has recently licensed from a third party. This strategy includes typical pharmaceutical type marketing efforts (e.g., marketing directly to doctors) that has been shown to work with traditional drug product type sales, versus novelty type sales, which currently include cannabidiols. We are trying to move away from traditional internet type sales and marketing. To date COVID-19 has resulted in the Company being forced to temporarily suspend its marketing plans as the Company was not able to travel to meet with doctors directly. Moving forward, the range of possible impacts on the Company’s business in the event the coronavirus pandemic continues include: (i) changing demand for the Company’s products; (ii) rising bottlenecks in the Company’s supply chain; and (iii) increasing contraction in the capital markets. At this time, the Company’s sales have not been materially affected by the pandemic (as the Company has had only limited sales to date), and we believe it is premature to determine the potential impact on the Company’s business prospects from these or any other factors that may be related to the coronavirus pandemic; however, it is possible that COVID-19 and the worldwide response thereto, may have a material negative effect on our operations, cash flows and results of operations.
Through the date of this Report, we have been able to successfully support our operations with our cash on hand, through equity sales (which have to date been completed through private offerings and which in the future may be undertaken pursuant to private or public offerings), and borrowings. Moving forward, we believe that we will have sufficient resources, to support our operations for the foreseeable future; however, we will continue to evaluate our business operations based on new information as it becomes available and will make changes that we consider necessary in light of any new developments regarding the pandemic. Additionally, we anticipate requiring
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further funds in the future to grow our operations and produce additional product lines, which funds we anticipate raising through equity offerings, and if necessary, debt.
The future impact of COVID-19 on our business and operations is currently unknown. The pandemic is developing rapidly and the full extent to which COVID-19 will ultimately impact us depends on future developments, including the duration and spread of the virus, as well as potential seasonality of new outbreaks.
Regulation
The Controlled Substances Act (CSA), which became effective on May 1, 1971, is the statute establishing federal U.S. drug policy under which the manufacture, importation, possession, use, and distribution of certain substances is regulated. Under the CSA, drugs are placed into five ‘schedules’, based on varying qualifications. Two federal agencies, the Drug Enforcement Administration (DEA) and the Food and Drug Administration (FDA), determine which substances are added to or removed from the various schedules, provided that Congress can also amend the schedules through legislation.
Cannabis (cannabis sativa L.) generally falls within one of two categories under federal law: marijuana or hemp. Cannabis formally fell under Schedule I of the CSA. Schedule I drugs are those that have the following characteristics according to the DEA: (1) the drug or other substance has a high potential for abuse; (2) the drug or other substance has no currently accepted medical treatment use in the U.S.; and (3) it has a lack of accepted safety for use under medical supervision.
Notwithstanding the above, on December 20, 2018, the Agriculture Improvement Act of 2018 (the “Farm Bill”) went into effect, which regulates agricultural programs ranging from income support to rural development. The Farm Bill also legalized hemp cultivation and declassified hemp as a Schedule I controlled substance. The Farm Bill defines “hemp” as any part or derivative of the cannabis sativa L. plant containing less than 0.3 percent THC by weight. This definition includes hemp plants that produce the concentrated liquid extract known as cannabidiol (or CBD) oil. CBD oil is currently legal in a significant number of states and has gained market acceptance as a wellness and anti-inflammation product.
Subsequent to the passage of the Farm Bill, the FDA made clear that although hemp is no longer an illegal substance under federal law, the FDA continues to regulate hemp products under the FFDCA as well as other federal statutes. Therefore, any hemp product marketed with a claim of therapeutic benefit, regardless of whether it is hemp-derived, must be approved by the FDA before it can be sold.
Separately, various states have recently begun changing their laws to allow for hemp-related activities in compliance with such new state laws, which nonetheless still violate the CSA, which makes cannabis use and possession illegal as discussed above. To our knowledge, as of the date of this filing, 47 states have changed their laws to permit the use of hemp for medical purposes. Many other states legally allow the use of CBD oil, provided that to our knowledge, CBD is still illegal in Idaho, Iowa and South Dakota.
The State of Texas legalized the manufacturing, consumption and export of legal hemp products containing hemp extracts including, but not limited to, cannabidiol under Texas House Bill 1325 signed by Governor Abbott on June 10, 2019. Although the bill which is codified as Texas Health & Safety Code § 443 and requires a $258 license application. The Texas Department of State Health Services has begun processing applications to obtain the license for manufacture of legal hemp products. The Company has paid its fee and submitted all paperwork for such license. However, the State has yet to issue the Company a license. The Company has no reason to believe its license will not be granted and believes that any delay related to not having yet received the license is merely related to effects of COVID-19 shutdowns on various state agencies that are part of the approval process. Regardless, the Company believes it is in complete compliance with all other requirements of § 443. In addition to payment of the application fee, the Company's CEO, Donal Schmidt, has to satisfy a background check. While the Company believes that it meets all known requirements of a license for manufacture of legal hemp products, there is no guarantee that the State of Texas will issue such a license to the Company.
As described above, all of the Company’s products are made up of non-THC cannabinoids. While we believe our operations are compliant with applicable federal and state law, there are risks that our operations violate the CSA or other federal laws or state laws.
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Additionally, as of the date of this report, and based upon publicly available information, while, to our knowledge the FDA has not taken any enforcement actions against CBD companies that do not make therapeutic claims, the FDA has sent warning letters to and brought enforcement actions against companies demanding they cease and desist from the production, distribution, or advertising of CBD products, relating to instances that such CBD companies have made misleading and unapproved label claims.
As of the date of this filing, a Congressional bill has been introduced, H.R. 841, which if adopted into law, will make hemp, cannabidiol derived from hemp, and any other ingredient derived from hemp lawful for use under the Federal Food, Drug, and Cosmetic Act, as a dietary ingredient in a dietary supplement, and for other purposes. While there is no guarantee this bill will pass, if it does pass, it is anticipated to dramatically lower the regulatory risk of being in the hemp space.
It is worth noting that our new manufacturing facility in Plano, Texas, which is anticipated to reach startup in the second or third quarter of calendar 2020, will be “state of the art” from a regulatory compliance standpoint and will meet or exceed all applicable local, state and federal regulations.
ITEM 1A. RISK FACTORS
Summary Risk Factors
Our business is subject to numerous risks and uncertainties, including those described in this “Risk Factors” section below. These risks include, but are not limited to, the following:
·Our history of operating losses and limited operating history;
·Our need for significant additional financing, the availability and terms of such financing, and potential dilution which may be caused by such financing, if obtained through the sale of equity or convertible securities;
·Going concern issues raised by our independent auditor, as well as material weaknesses identified in our controls and procedures and internal control over financial reporting;
·Risks relating to our ability to compete against competitors and successfully grow our operations;
·Negative trends in the market for, the consumer acceptance of, and changes in public opinion associated with, cannabidiols and other cannabis-based products;
·Scrutiny we may face due to prior changes in our business strategy and as a result of previously operating in certain scrutinized industries;
·Risks associated with COVID-19, the spread of the virus, governmental responses thereto, and potential recessions and/or declines in economic activity and consumer spending caused thereby;
·The potential long-term health effects associated with cannabis-based products such as cannabidiols and our other products, product recalls and product liability associated therewith;
·Public opposition to the cannabis industry in general, and adverse changes in rules, laws and enforcement of rules and laws, which may have a negative effect on our operations and ability to operate in the cannabis industry;
·The regulation of our operations, sales and manufacturing;
·Our ability to obtain and maintain required licenses and permits;
·Our ability to legally advertise our products;
·Claims relating to alleged violations of intellectual property rights of others and our ability to maintain our intellection property rights;
·Technical problems with our websites;
·Risks relating to implementing our acquisition strategies;
·The need for additional financing;
·Our growth strategy and our ability to manage our growth;
·Changes in laws or regulations relating to our operations;
·Dependence on current management;
·The lack of a market for our securities and the volatility in the trading prices thereof caused thereby;
·The concentrated ownership of our common stock; and
·Other risks disclosed below.
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The following risks and uncertainties should be carefully considered in addition to the other information included in this Report. If any of the following occurs, our business, financial condition or operating results could be materially harmed. An investment in our securities is speculative in nature, involves a high degree of risk and should not be made by an investor who cannot bear the economic risk of its investment for an indefinite period of time and who cannot afford the loss of its entire investment.
Risks Relating to Our Business
Our business, financial condition and results of operations are subject to various risks and uncertainties, including those described below and elsewhere in this Report. This section discusses factors that, individually or in the aggregate, we think could cause our actual results to differ materially from expected and historical results, and consequently, could cause the value of our securities to decline in value. Our business, financial condition or results of operations could be materially adversely affected by any of these risks. It is not possible to predict or identify all such factors. Consequently, the following description of Risk Factors is not a complete discussion of all potential risks or uncertainties applicable to our business.
We have a history of operating losses, and we may not be able to achieve or sustain profitability; we have recently shifted to an entirely new business and may not be successful in this new business.
We are not profitable and have incurred an accumulated deficit of $5,653,540 since our inception. We expect to continue to incur losses for the foreseeable future, and these losses could increase as we continue to work to develop our business. We were previously engaged in pursuing the business of bitcoin mining and digital currency and were not successful in that business. In November 2019, we adopted a new business strategy focused on developing potential commercial opportunities involving the rapid application of therapeutics using inhaler technology that the Company has licensed for its use. We have yet to commence profitable operations in that business, therefore, the Company is continuing to incur operating losses. Even if we achieve profitability in the future by adopting this new business strategy, we may not be able to sustain profitability in subsequent periods.
We have a limited operating history and our business is in a relatively new consumer product segment, which is difficult to forecast.
The Company has a limited operating history, which can make it difficult for investors to evaluate our operations and prospects and may increase the risks associated with investment into the Company. Our business plan is subject to all business risks associated with new business enterprises, including the absence of any significant operating history upon which to evaluate an investment. The likelihood of our success must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered in connection with the formation of a new business, the development of new strategy and the competitive environment in which the Company will operate. It is possible that the Company will incur losses in the future. There is no guarantee that the Company will be profitable.
Additionally, our industry segment is relatively new, and is constantly evolving. As a result, there is a lack of available information with which to forecast industry trends or patterns. There is no assurance that sustainable industry trends or preferences will develop that will lead to predictable growth or earnings forecasts for individual companies or the industry segment as a whole. We are also unable to determine what impact future governmental regulation may have on trends and preferences or patterns within our industry segment.
We require additional financing, and we may not be able to raise funds on favorable terms or at all.
We anticipate requiring further funds in the future to grow our operations and produce additional product lines. The sources of additional capital are expected to be equity investments and potentially notes payable. Any sale of share capital will result in dilution to existing shareholders. Furthermore, we may incur debt in the future, and may not have sufficient funds to repay our future indebtedness or may default on our future debts, jeopardizing our business viability.
We may not be able to borrow or raise additional capital in the future to meet our needs or to otherwise provide the capital necessary to expand our operations and business, which might result in the value of our securities decreasing in value or becoming worthless. Additional financing may not be available to us on terms that are
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acceptable. Consequently, we may not be able to proceed with our intended business plans. Obtaining additional financing contains risks, including:
·additional equity financing may not be available to us on satisfactory terms and any equity we are able to issue could lead to dilution for current shareholders;
·current or future laws or regulations may make it impossible, or more difficult for the Company to raise funding, due to the fact that it operates in the cannabinoid industry;
·loans or other debt instruments may have terms and/or conditions, such as interest rate, restrictive covenants and control or revocation provisions, which are not acceptable to management or our directors;
·the current environment in capital markets combined with our capital constraints may prevent us from being able to obtain adequate debt financing; and
·if we fail to obtain required additional financing to grow our business, we would need to delay or scale back our business plan, reduce our operating costs, or reduce our headcount, each of which would have a material adverse effect on our business, future prospects, and financial condition.
Additionally, we may have difficulty obtaining additional funding, and we may have to accept terms that would adversely affect our shareholders. For example, the terms of any future financings may impose restrictions on our right to declare dividends or on the manner in which we conduct our business. Additionally, lending institutions or private investors may impose restrictions on a future decision by us to make capital expenditures, acquisitions or significant asset sales. If we are unable to raise additional funds, we may be forced to curtail or even abandon our business plan.
Our independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern.
Our historical financial statements have been prepared under the assumption that we will continue as a going concern. Our independent registered public accounting firm has issued a report on our financial statements for the period ended December 31, 2020, that includes an explanatory paragraph referring to our recurring operating losses and expressing substantial doubt in our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to obtain additional equity financing or other capital, attain further operating efficiencies, reduce expenditures, and, ultimately, generate revenue. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. However, if adequate funds are not available to us when we need it, we will be required to curtail our operations which would, in turn, further raise substantial doubt about our ability to continue as a going concern. The doubt regarding our potential ability to continue as a going concern may adversely affect our ability to obtain new financing on reasonable terms or at all. Additionally, if we are unable to continue as a going concern, our stockholders may lose some or all of their investment in the Company.
We have identified material weaknesses in our disclosure controls and procedures and internal control over financial reporting. If not remediated, our failure to establish and maintain effective disclosure controls and procedures and internal control over financial reporting could result in material misstatements in our financial statements and a failure to meet our reporting and financial obligations, each of which could have a material adverse effect on our financial condition and the trading price of our securities.
Maintaining effective internal control over financial reporting and effective disclosure controls and procedures are necessary for us to produce reliable financial statements. As reported in this Report, we have determined that our disclosure controls and procedures and our internal control over financial reporting were not effective at the reasonable assurance level, primarily due to a lack of segregation of duties in financial reporting, as of December 31, 2020, and continue to be ineffective. Separately, management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020, and determined that such internal control over financial reporting was not effective as a result of such assessment; and further have not been effective since prior to March 31, 2020.
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Additionally, in connection with the most recent year end audit, the Company’s independent auditors recommended that management improve their processes and identified certain material weaknesses in inventory control. The Company plans to address such material weaknesses and auditor recommendations once the Company has raised additional funding and is able to better segregate duties of personnel.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. Accordingly, a material weakness increases the risk that the financial information we report contains material errors. A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis.
Maintaining effective disclosure controls and procedures and effective internal control over financial reporting are necessary for us to produce reliable financial statements and the Company is committed to remediating its material weaknesses in such controls as promptly as possible. However, there can be no assurance as to when these material weaknesses will be remediated or that additional material weaknesses will not arise in the future. Any failure to remediate the material weaknesses, or the development of new material weaknesses in our internal control over financial reporting, could result in material misstatements in our financial statements and cause us to fail to meet our reporting and financial obligations on a timely and accurate basis. If our financial statements are not accurate, investors may not have a complete understanding of our operations or may lose confidence in our reported financial information. Likewise, if our financial statements are not filed on a timely basis as required by the SEC, OTC Markets, any stock exchange or The NASDAQ Capital Market (“NASDAQ”), as applicable, we could face severe consequences from those authorities. In any of these cases, it could result in a material adverse effect on our business, on our financial condition or have a negative effect on the trading price of our securities. Further, if we fail to remedy this deficiency (or any other future deficiencies) or maintain the adequacy of our disclosure controls and procedures and our internal controls, we could be subject to regulatory scrutiny, civil or criminal penalties or shareholder litigation against us or our management.
We can give no assurance that the measures we have taken and plan to take in the future will remediate the material weakness identified or that any additional material weaknesses or restatements of our financial statements will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting or circumvention of those controls.
Further, in the future, if we cannot conclude that we have effective internal control over our financial reporting, or if our independent registered public accounting firm is unable to provide an unqualified opinion regarding the effectiveness of our internal control over financial reporting, investors could lose confidence in the reliability of our financial statements, which could lead to a decline in our stock price. Failure to comply with reporting requirements could also subject us to sanctions and/or investigations by the SEC, OTC Markets, any stock exchange or NASDAQ, as applicable, or other regulatory authorities.
In addition, even if we are successful in strengthening our controls and procedures, those controls and procedures may not be adequate to prevent or identify irregularities or facilitate the fair presentation of our financial statements or our periodic reports filed with the SEC.
Because our business is dependent upon continued market acceptance by consumers, any negative trends will adversely affect our business operations.
We will be substantially dependent on continued market acceptance and proliferation of consumers of hemp related products-including our current products and any new products we offer. We believe that as hemp and hemp-derived cannabidiol becomes more accepted, the stigma associated with these sectors will diminish and as a result consumer demand will continue to grow. While we believe that the market and opportunity in the hemp space continues to grow, we cannot predict the future growth rate and size of the market. Any negative outlook on the industry will adversely affect our business operations. Additionally, the failure of the market to accept our current and any future products will have a material adverse effect on our revenues and prospects.
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We may not succeed in growing our sales and creating a viable market for our products, and our failure to do so would have a material adverse effect on our business, prospects, financial condition and operating results.
We are a new business operating in a relatively new market sector. As is typical in a new and rapidly evolving industry, demand and market acceptance for recently introduced products and services are subject to a high level of uncertainty and risk. Because the market for our products is new and evolving, it is difficult to predict with any certainty the size of this market and its growth rate, if any. A market for our products may not develop and/or demand for our products may not emerge or be sustainable. If the market fails to develop, develops more slowly than expected or becomes saturated with competitors, our business, financial condition and operating results would be materially adversely affected.
Changes in public opinion and perception could negatively affect our business operations.
Government policy changes or public opinion may also result in a significant influence over the regulation of the hemp industry in the United States or elsewhere. Public opinion and support for hemp and hemp products has traditionally been inconsistent and varies from jurisdiction to jurisdiction. While public opinion and support appears to be rising for legalizing hemp and hemp products, it remains a controversial issue subject to differing opinions surrounding the level of legalization. A negative shift in the public’s perception of hemp and hemp products in the United States or any other applicable jurisdiction could negatively affect current or future legislation or regulation.
Our change in our business strategy and name could subject us to increased SEC scrutiny.
We previously were engaged in the business of crypto-currency mining under our former corporate name. In November 2019, we adopted a new business strategy focused on developing potential commercial opportunities involving the rapid application of therapeutics using inhaler technology that the Company has licensed from a third party. In January 2020, we changed our corporate name to more closely reflect this new business strategy. The SEC has announced that it is scrutinizing public companies that change their name or business model in a bid to capitalize upon the hype surrounding new and emerging technologies, and has suspended trading of certain of such companies. As a result, we could be subject to substantial SEC scrutiny that could require devotion of significant management and other resources and potentially have an adverse impact on the trading of our stock.
The current outbreak of the novel coronavirus, or COVID-19, has caused severe disruptions in the global economy and may have an adverse impact on our performance and results of operations.
The current outbreak of the novel coronavirus, or COVID-19, which has been declared by the World Health Organization (WHO) to be a “pandemic”, has spread across the globe and is impacting worldwide economic activity. COVID-19 has severely restricted the level of economic activity around the world. A public health epidemic, including COVID-19, or the fear of a potential pandemic, poses the risk that we or our employees, contractors, suppliers, and other partners may be prevented from conducting business activities for an indefinite period of time, and our customers may be prevented from purchasing our products, due to shutdowns, “stay at home” mandates or other preventative measures that may be requested or mandated by governmental authorities. The governments of many countries, states, cities and other geographic regions have taken such preventative or protective actions, such as imposing restrictions on travel and business operations and advising or requiring individuals to limit or forego their time outside of their homes. Temporary closures of businesses have been ordered and numerous other businesses have temporarily closed voluntarily. Such actions are creating disruption in global supply chains, increasing rates of unemployment and adversely impacting many industries. To date the only effects of the pandemic on our operations, which have been fairly minor, is that the pandemic has prevented us from making sales calls to our primary client groups of physicians and other health and wellness providers, which has delayed our marketing plans. Notwithstanding that, the outbreak could have a continued adverse impact on economic and market conditions and trigger a period of global economic slowdown, which could affect the future sales of our products, which to date have been minimal.
If the pandemic persists, closures or other restrictions on the conduct of business operations of our third-party manufacturers, suppliers or vendors could disrupt our supply chain. Additionally, the increased global demand on shipping and transport services may cause us to experience delays in the future which could impact our ability to obtain materials or deliver our products in a timely manner. These factors could otherwise disrupt our operations and could have an adverse effect on our business, financial condition and results of operations-which disruptions, as discussed above, have been only minor to date.
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So long as measures to combat COVID-19 stay in effect, there is the possibility that COVID-19 will negatively affect our results of operations. If closures continue, we may be unable to market our product as planned which could negatively affect our revenues, growth and ability to raise capital. The global impact of COVID-19 continues to evolve rapidly, and the extent of its effect on our operational and financial performance will depend on future developments, which are highly uncertain, including the duration, scope and severity of the pandemic, the actions taken to contain or mitigate its impact, and the direct and indirect economic effects of the pandemic and related containment measures, among others.
Even after the pandemic subsides, our business could also be negatively impacted should the effects of COVID-19 lead to changes in consumer behavior, including as a result of a decline in discretionary spending. Moreover, future events could cause global financial conditions to suddenly and rapidly destabilize, and governmental authorities may have limited resources to respond to such future crises. Future crises may be precipitated by any number of causes, including natural disasters, geopolitical instability, changes to energy prices or sovereign defaults. Any sudden or rapid destabilization of global economic conditions could negatively impact our ability to obtain equity or debt financing. If increased levels of volatility continue, there is a rapid destabilization of global economic conditions or a prolonged recession resulting from the pandemic, it would likely materially affect our business and the value of our securities.
The long-term health impacts associated with use of hemp derivative products are unknown.
Although there is a long history of human consumption of hemp, there is little in the way of studies on the long-term effects of hemp products use on human health. As such, there are inherent risks associated with using the Company’s hemp products. Previously unknown or unforeseeable adverse reactions arising from human consumption of hemp products may occur and consumers should consume hemp products at their own risk or in accordance with the direction of a health care practitioner. Such adverse reactions could lead to litigation, and the Company could ultimately face significant damages and liability in certain cases in connection with such litigation and/or may have to expend significant resources defending itself against claims associated with its products and/or the health effects thereof.
Our products may be subject to recalls for a variety of reasons.
Manufacturers and distributors of products, such as the Company, are sometimes subject to the recall or return of their products for a variety of reasons, including product defects, such as contamination, unintended harmful side effects or interactions with other substances, packaging safety and inadequate or inaccurate labeling disclosure. If any of the products produced by us are recalled due to an alleged product defect or for any other reason, we could be required to incur the unexpected expense of the recall and any legal proceedings that might arise in connection with the recall. We may lose a significant number of sales and may not be able to replace those sales at an acceptable margin or at all. In addition, a product recall may require significant management attention. There can be no assurance that any quality, potency or contamination problems will be detected in time to avoid unforeseen product recalls, regulatory action or lawsuits, whether frivolous or otherwise. Additionally, if any of the products produced by us were subject to recall, the reputation and goodwill of that product and/or us could be harmed. A recall for any of the foregoing reasons could lead to decreased demand for our products and could have a material adverse effect on our business, financial condition and results of operations. Additionally, product recalls may lead to increased scrutiny of our operations by regulatory agencies, requiring further management attention, increased compliance costs and potential legal fees, fines, penalties and other expenses. Furthermore, any product recall affecting the hemp industry more broadly could lead consumers to lose confidence in the safety and security of our products, which could have a material adverse effect on our business, financial condition and results of operations.
We are subject to product liability regarding our products, which could result in costly litigation and settlements.
As a distributor of hemp products, the Company faces an inherent risk of exposure to product liability claims, regulatory action and litigation if its products are alleged to have caused significant loss or injury. In addition, the sale of our products involves the risk of injury to consumers due to tampering by unauthorized third parties or product contamination. Previously unknown adverse reactions resulting from human consumption of our products alone or in combination with other medications or substances could occur. We may be subject to various product liability claims, including, among others, that our products caused injury or illness, include inadequate instructions for use or include inadequate warnings concerning possible side effects or interactions with other substances. A product liability claim or regulatory action against the Company could result in increased costs, could
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adversely affect our reputation with our clients and consumers generally, and could have a material adverse effect on our results of operations and financial condition of the Company.
The hemp industry faces strong opposition.
It is believed by many that large, well-funded businesses may have a strong economic opposition to the hemp industry. The hemp industry could face a material threat from the pharmaceutical industry, should hemp cannabinoids displace other drugs or encroach upon the pharmaceutical industry’s products. The pharmaceutical industry is well funded with a strong and experienced lobby that has greater funding then the hemp industry. Any inroads the pharmaceutical industry could make in halting or impeding the hemp industry would harm our business, prospects, results of operation and financial condition.
The results of future clinical research may negatively impact our business.
Research in the U.S. and internationally regarding the medical benefits, viability, safety, efficacy, dosing and social acceptance of hemp isolated cannabinoids (such as CBD or CBG) remains in the early stages. There have been relatively few clinical trials on the benefits of hemp extracts or isolated cannabinoids (such as CBD and CBG). Future research studies and clinical trials may reach negative conclusions regarding the medical benefits, viability, safety, efficacy, dosing, social acceptance or other facts and perceptions related to hemp, which could have a material adverse effect on the demand for our products with the potential to lead to a material adverse effect on our business, financial condition, results of operations or prospects.
The lack of reliable data on the hemp industry may negatively impact our results of operations.
As a result of recent and ongoing regulatory and policy changes in the hemp industry, the market data available is limited and unreliable. Federal, and state laws prevent widespread participation and hinder market research. Therefore, market research and projections by the Company of estimated total retail sales, demographics, demand, and similar consumer research, are based on assumptions from limited and unreliable market data, and generally represent the personal opinions of our management team as of the date of this Report.
We operate in highly regulated industries where the regulatory environments are rapidly developing and we may not always succeed in complying fully with applicable regulatory requirements in all jurisdictions where we carry on business.
Our business and activities are heavily regulated and are subject to various laws, regulations and guidelines by governmental authorities (including, in the U.S., the Food and Drug Administration (FDA), the United States Department of Agriculture (USDA), Drug Enforcement Administration (DEA) and Federal Trade Commission (FTC) and analogous state agencies, including, but not limited to, the Texas Department of State Health Services), relating to, among other things, the manufacture, marketing, management, transportation, storage, sale, pricing and disposal of hemp-based products, and also including laws, regulations and guidelines relating to health and safety, insurance coverage, the conduct of operations and the protection of the environment (including relating to emissions and discharges to water, air and land, the handling and disposal of hazardous and non-hazardous materials and wastes). Our products are not approved by the FDA or under the Federal Food Drug and Cosmetics Act (FFDCA), or the state of Texas (or any other state). Our operations may also be affected in varying degrees by government regulations with respect to, but not limited to, price controls, export controls, controls on currency remittance, increased income taxes, restrictions on foreign investment and government policies rewarding contracts to local competitors or requiring domestic producers or vendors to purchase supplies from a particular jurisdiction. Laws, regulations and guidelines, applied generally, grant government agencies and self-regulatory bodies broad administrative discretion over our activities, including the power to limit or restrict business activities as well as impose additional disclosure requirements on our products and services.
Achievement of our business objectives is contingent, in part, upon compliance with regulatory requirements enacted by these governmental authorities and obtaining all necessary regulatory approvals for the production, storage, transportation, sale, import and export, as applicable, of our products. The hemp industry is still a new industry. The effect of relevant governmental authorities’ administration, application and enforcement of their respective regulatory regimes and delays in obtaining, or failure to obtain, applicable regulatory approvals which may be required may significantly delay or impact the development of markets, products and sales initiatives and could have a material adverse effect on our business, financial condition and results of operations. For example, in the U.S., registered federal trademark protection is only available for goods and services that can be lawfully used in
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interstate commerce; and the U.S. Patent and Trademark Office (USPTO) is not currently approving any trademark applications for hemp, or certain goods containing U.S. hemp-derived CBD.
The regulatory environment for our products is rapidly developing, and the need to build and maintain robust systems to comply with different and changing regulations in multiple jurisdictions increases the possibility that we may violate one or more applicable requirements. While we endeavor to comply with all relevant laws, regulations and guidelines, any failure to comply with the regulatory requirements applicable to our operations could subject us to negative consequences, including, civil and criminal penalties, damages, fines, the curtailment or restructuring of our operations, asset seizures, revocation or imposition of additional conditions on licenses to operate our business, the denial of regulatory applications (including, in the U.S., by other regulatory regimes that rely on the positions of the DEA, FDA and USDA in the application of their respective regimes), the suspension or expulsion from a particular market or jurisdiction or of our key personnel, or the imposition of additional or more stringent inspection, testing and reporting requirements, any of which could materially adversely affect our business and financial results. In the United States, failure to comply with FDA and USDA requirements (and analogous state agencies, including the requirements of the Texas Department of State Health Services) may result in, among other things, injunctions, product withdrawals, recalls, product seizures, fines and criminal prosecutions. The outcome of any regulatory or agency proceedings, investigations, audits, and other contingencies could harm our reputation, require us to take, or refrain from taking, actions that could harm our operations or require us to pay substantial amounts of money, harming our financial condition. Increasingly, communication and coordination among regulators has led in other industries to coordinated responses to regulatory and licensure applications. To the extent that regulators coordinate responses to license applications and regulatory conditions, limitations or denials of licenses in one jurisdiction may lead to denials in other jurisdictions. There can be no assurance that any pending or future regulatory or agency proceedings, investigations and audits will not result in substantial costs or a diversion of management’s attention and resources, negatively impact our future growth plans and opportunities or have a material adverse impact on our business and financial condition.
The State of Texas legalized the manufacturing, consumption and export of legal hemp products containing CBD under Texas House Bill 1325 signed by Governor Abbott on June 10, 2019. The bill which is codified as Texas Health & Safety Code § 443 and requires a $258 license application. The Texas Department of State Health Services has begun processing applications to obtain the license for manufacture of legal hemp products. The Company has paid its fee and submitted all paperwork for such license. However, the State has yet to issue the Company a license. The Company has no reason to believe its license will not be granted and believes that any delay related to not having yet received the license is merely related to the effects of COVID-19 shutdowns on various state agencies that are part of the approval process. Regardless, the Company believes it is in complete compliance with all other requirements of § 443. While the Company believes that it meets all known requirements of a license for manufacture of legal hemp products, there is no guarantee that the State of Texas will issue such a license to the Company. In the event the State of Texas fails to issue a license to the Company, or issues and then revokes such license, the Company may be forced to move its operations to another state or curtail its operations altogether. The cost of moving its operations and/or penalties or fines in connection with its failure to obtain a license, may have a material adverse effect on the Company’s results of operations and the value of its securities.
The Company is currently operating in Texas without a license to manufacture legal hemp products.
As discussed in the risk factor above, Texas Health & Safety Code § 443 requires the Texas Department of State Health Services to review and issue licenses for the manufacture of legal hemp products. The Company has paid its fee and submitted all paperwork for such license, but the State has yet to issue the Company a license. The Company has no reason to believe its license will not be granted and believes that any delay related to not having yet received the license is merely related to the effects of COVID-19 shutdowns on various state agencies that are part of the approval process. While the Company believes that it meets all known requirements of a license for manufacture of legal hemp products, there is no guarantee that the State of Texas will issue such a license to the Company. In the event the State of Texas fails to issue a license to the Company, or issues and then revokes such license, the Company may be forced to move its operations to another state or curtail its operations altogether. The cost of moving its operations and/or penalties or fines in connection with its failure to obtain a license, may have a material adverse effect on the Company’s results of operations and the value of its securities. Furthermore, it is possible that if the Company is found to be operating in violation of such Texas rules, that it could face penalties, fees, and other liabilities, and/or that a customer could potentially use the lack of such license against the Company to attempt to show non-compliance with laws and seek judgments against the Company for any damages they suffer from the use of the Company’s products.
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Hemp companies are subject to recent SEC investor fraud alerts and have been under greater scrutiny by the SEC than companies in other industries.
The SEC has issued an investor alert cautioning investors that scam artists often exploit “hot” industries to trick investors, including by making false promises of high returns with low risks, and that the SEC regularly receives complaints about marijuana-related investments. Consequently, such companies and offerings are often subject to heightened regulatory scrutiny. Regulators in various states in the United States have requested additional information on hemp company financings and in some cases have issued subpoenas for additional information. Due to these concerns the Company may face more scrutiny than it would if the Company was in another industry, and may become subject to proceedings, fines, and penalties in the future.
We may be unable to obtain our cleanroom ISO levels, which may lead to contamination of our products.
Our filling facility or MDI laboratory is certified to cleanroom classifications ISO 6 and 7, which are a measure of how clean a cleanroom is (ISO levels are from 1 to 9, with 1 being the ‘cleanest’). These control rooms allow us to formulate and manufacture our products in a sterile environment. In the event we fail to maintain clean room standards, we may be unable to prevent contaminants being introduced into our mixing or filling processes. Such contaminants may cause our products to be adulterated, which would be a violation of food and drug safety requirements for purity and which in turn could cause an adverse reaction in end users of our products, which could result in claims for damages and product safety, fines, damages, losses, and a negative effect on our brand name, any one of which could cause the value of our securities to decrease.
We are constrained by law in our ability to market and advertise our products.
Our marketing and advertising are subject to regulation by various regulatory bodies in the jurisdictions we operate. In the United States, our advertising is subject to regulation by the FTC under the Federal Trade Commission Act as well as the FDA under the FFDCA and USDA, including as amended by the Dietary Supplement Health and Education Act of 1994, and by state agencies under analogous and similar state and local laws. Some U.S. states also permit content, advertising and labeling laws to be enforced by state attorney generals, who may seek civil and criminal penalties, relief for consumers, Class Action certifications, class wide damages and recalls of products sold by us. There has also been a recent increase in private litigation that seeks, among other things, relief for consumers, Class Action certifications, class wide damages and recalls of products. We could become a target of such private Class Action litigation. Any actions against us by governmental authorities or private litigants could have a material and adverse effect on our business, financial condition, operating results, liquidity, cash flow and operational performance.
The license we have to use and commercialize the ‘Desirick Procedure’ is only exclusive in four states, and even in those states, is subject to licenses which were existing as of February 9, 2021.
On February 9, 2021, EM3 provided us a royalty-free, perpetual license (unless terminated by the Company) to use the Desirick Procedure or any derivation thereof and its application and use, including, but not limited to, related consumables (cans, valves, and actuators), filling equipment for pMDIs, and/or plastic testing vials and training, support or maintenance thereon of any combination thereof, and all intellectual property of EM3 relating to the foregoing, on an exclusive basis in the states of Texas, California, Florida and Nevada (subject to pre-existing licensing rights which have been provided by EM3 in such jurisdictions), and on a non-exclusive basis throughout the rest of the world, in consideration for $10. As such, while our license is exclusive in the four states described above, such license is subject to pre-existing license rights which existed as of February 9, 2021, and is non-exclusive in every other state and throughout the world. Consequently, competitors could compete against us in other states, and throughout the rest of the world using the licensed intellectual property, or may already have license rights to the intellectual property in those four states, which remain valid under the terms of the February 9, 2021 license. As a result, we may face competition for our products and future products using the licensed intellectual property and may have no remedy to prevent such competition pursuant to the terms of the license.
We are dependent upon our current management, who may have conflicts of interest.
We are dependent upon the efforts of our current management. The majority of our officers and directors have duties and affiliations with other companies, including in some cases with competitors involved in cannabinoid distribution. Such involvement of our officers and directors in other businesses may therefore present a conflict of interest regarding decisions they make for Rapid or with respect to the amount of time available for Rapid. The loss
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of any of our officers or directors and, in particular, Mr. Donal R. Schmidt, Jr., our Chief Executive Officer, or Mr. D. Hughes Watler, Jr., our Chief Financial Officer, could have a materially adverse effect upon our business and future prospects. We do not have key man life insurance upon the life of any of our officers or directors.
We will continue to incur increased costs as a result of being a reporting company, and given our limited capital resources, such additional costs may have an adverse impact on our profitability.
We are an SEC reporting company. The rules and regulations under the Exchange Act require reporting companies to provide periodic reports with interactive data files, which require that we engage legal, accounting and auditing professionals, and eXtensible Business Reporting Language (XBRL) and EDGAR (Electronic Data Gathering, Analysis, and Retrieval) service providers. The engagement of such services can be costly, and we may continue to incur additional losses, which may adversely affect our ability to continue as a going concern. In addition, the Sarbanes Oxley Act of 2002, as well as a variety of related rules implemented by the SEC, have required changes in corporate governance practices and generally increased the disclosure requirements of public companies. For example, as a result of being a reporting company, we are required to file periodic and current reports and other information with the SEC and we have adopted policies regarding disclosure controls and procedures and regularly evaluate those controls and procedures.
The additional costs we continue to incur in connection with becoming a reporting company (expected to be approximately a hundred thousand dollars per year) will continue to further stretch our limited capital resources. Due to our limited resources, we have to allocate resources away from other productive uses in order to continue to comply with our obligations as an SEC reporting company. Further, there is no guarantee that we will have sufficient resources to continue to meet our reporting and filing obligations with the SEC as they come due.
The FDA has not approved any of the Company’s products.
While the Company’s MDIs are made using FDA listed cans, valves, actuators, propellant and excipients, the Company’s products have not been approved by the FDA-provided that no approval for such products has been sought. To date the Company is only aware of one hemp or CBD product which is FDA approved. Instead, the Company, and to the Company’s knowledge, the entire CBD marketplace, sells products under the no enforcement position the FDA, which has not codified (as discussed in greater detail below under “Item 1. Business-Description of Business-Regulation”). The lack of FDA approval may prevent market acceptance of our products, result in liability from consumers, or potential result in liability from the FDA in the future, any one of which could have a material adverse effect on our results of operations.
Risks Relating to Our Securities
Your ownership may be diluted if additional capital stock is issued to raise capital, to finance acquisitions or in connection with strategic transactions.
We will need to raise additional funds to expand our operations or finance acquisitions by issuing equity or convertible debt securities, which would reduce the percentage ownership of our existing stockholders. Our board of directors has the authority, without action or vote of the stockholders, to issue all or any part of our authorized but unissued shares of common stock. Our amended articles of incorporation authorize us to issue up to 750,000,000 shares of common stock and up to 100,000,000 shares of “blank check” preferred stock, of which 16,500,000 shares are designated as Series A Convertible Preferred Stock. Future issuances of common stock or of certain types of preferred stock could reduce your influence over matters on which stockholders vote and could be dilutive to earnings per share.
Shares issuable upon the conversion of convertible notes may substantially increase the number of shares available for sale in the public market and depress the price of our common stock.
In conjunction with the execution of the Agreement with TMDI in November 2019, the Company entered into the following transactions involving convertible notes payable: (i) The Company entered into new promissory notes with two accredited investors under which the Company borrowed a total of $300,000, with such notes maturing in five years, accruing interest at 5% per annum, and being convertible into common stock at a conversion price of $0.05 per share; and (ii) The Company entered into an amendment with the holders of existing non-convertible notes in the total principal amount of $732,835 whereby such notes will remain outstanding and continue to accrue interest with deferral of the maturity dates being extended for one year or until the Company has raised an
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additional $500,000 of new equity securities, at which time, the principal and accrued interest shall be converted into common stock at a conversion price of $0.05 per share. During the nine-month transition period ended December 31, 2020, the Company reached the necessary milestone to trigger the conversion of certain notes payable issued to the holders, in the total principal amount of $732,835 into shares of the Company’s common stock, subject to a 4.99% ownership limitation for each beneficial owner of such notes. In conjunction with this conversion, holders of notes in the principal amount of $404,601, plus an additional accrued interest amount of $96,536, converted their notes into 10,022,749 shares of common stock effective as of August 31, 2020. As of December 31, 2020, notes in the amount of $328,234, plus accrued interest in the amount of $92,575, remain outstanding and are available to be subsequently converted into 8,416,180 shares of common stock, subject to the ownership limitations set forth therein. Besides these two recent transactions, the Company has outstanding convertible notes payable, at a conversion ratio of $0.13 per share, remaining from an earlier issuance in the principal balance of $165,240.
To the extent that the holders of any of the foregoing notes elect to convert them into shares of common stock, there will be dilution to existing stockholders.
In addition, the common stock issuable upon conversion of the convertible notes may represent overhang that may also adversely affect the market price of our common stock. Overhang occurs when there is a greater supply of a company’s stock in the market than there is demand for that stock. When this happens the price of the company’s stock will decrease, and any additional shares which shareholders attempt to sell in the market will only further decrease the share price. In the event of such overhang, the note holders will have an incentive to sell their common stock as quickly as possible. If the share volume of our common stock cannot absorb the discounted shares, then the value of our common stock will likely decrease.
The concentration of our common stock ownership by our current management will limit your ability to influence corporate matters.
Our directors and executive officers beneficially own and are able to vote in the aggregate 27.6% of our outstanding common stock. As such, our directors and executive officers, as stockholders, will continue to have the ability to exert significant influence over all corporate activities, including the election or removal of directors and the outcome of tender offers, mergers, proxy contests or other purchases of common stock that could give our stockholders the opportunity to realize a premium over the then-prevailing market price for their shares of common stock. This concentrated control will limit your ability to influence corporate matters and, as a result, we may take actions that our stockholders do not view as beneficial. In addition, such concentrated control could discourage others from initiating changes of control. In such cases, the perception of our prospects in the market may be adversely affected and the market price of our common stock may decline.
We have no intention of declaring dividends in the foreseeable future.
The decision to pay cash dividends on our common stock rests with our board of directors and will depend on our earnings, unencumbered cash, capital requirements and financial condition. We do not anticipate declaring any dividends in the foreseeable future, as we intend to use any excess cash to fund our operations. Investors in our common stock should not expect to receive dividend income on their investment, and investors will be dependent on the appreciation of our common stock to earn a return on their investment.
We could issue “blank check” preferred stock without stockholder approval with the effect of diluting then current stockholder interests and impairing their voting rights, and provisions in our charter documents and under Nevada corporate law could discourage a takeover that stockholders may consider favorable.
Our Articles of Incorporation authorize the issuance of up to 100,000,000 shares of “blank check” preferred stock with designations, rights and preferences as may be determined from time to time by our board of directors. Our board of directors is empowered, without stockholder approval, to issue a series of preferred stock with dividend, liquidation, conversion, voting or other rights which could dilute the interest of, or impair the voting power of our common stockholders. The issuance of a series of preferred stock could be used as a method of discouraging, delaying or preventing a change in control.
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Series A Preferred Stock issued to the prior owners of Razor Jacket, LLC, upon conversion thereof, will cause significant dilution to existing stockholders.
On October 23, 2020, the Company entered into an Asset Purchase and Sales Agreement with Razor Jacket, LLC (“Razor Jacket”), an Oregon based supplier of isolate and related products, to acquire all of Razor Jacket’s equipment and know-how relating to the manufacture of cannabinoid isolates and related products (the “Assets”). The purchase price for the Assets is (a) $300,000 in cash, payable at closing; (b) 625,000 shares of restricted common stock, payable at closing; and (c) the right for the sellers to earn up to 16.5 million shares Series A Preferred Stock, which are convertible into common stock on a one-for-one basis (subject to equitable adjustments for stock splits and dividends), subject to certain conditions. The Series A Preferred Stock are issuable pursuant to certain earn-out milestones. In the event earned and converted into common stock, such conversions will create significant dilution to existing stockholders.
In addition, the common stock issuable upon conversion of the Series A Preferred Stock may represent overhang that may also adversely affect the market price of our common stock. Overhang occurs when there is a greater supply of a company’s stock in the market than there is demand for that stock. When this happens the price of the company’s stock will decrease, and any additional shares which stockholders attempt to sell in the market will only further decrease the share price. In the event of such overhang, the Series A Preferred Stock will have an incentive to sell their common stock as quickly as possible. If the share volume of our common stock cannot absorb the discounted shares, then the value of our common stock will likely decrease.
Stockholders may be diluted significantly through our efforts to obtain financing and satisfy obligations through the issuance of additional shares of our common stock.
Wherever possible, our Board of Directors will attempt to use non-cash consideration to satisfy obligations. In many instances, we believe that the non-cash consideration will consist of restricted shares of our common stock or where shares are to be issued to our officers, directors and applicable consultants. Our Board of Directors has authority, without action or vote of the stockholders, to issue all or part of the authorized but unissued shares of common stock. In addition, we may attempt to raise capital by selling shares of our common stock, possibly at a discount to market. These actions will result in dilution of the ownership interests of existing stockholders, which may further dilute common stock book value, and that dilution may be material. Such issuances may also serve to enhance existing management’s ability to maintain control of the Company because the shares may be issued to parties or entities committed to supporting existing management.
There is no material public market for our common stock.
Our securities are currently quoted on the OTC Pink Market maintained by OTC Markets; provided that there is currently no information available about the Company. We currently have a volatile, sporadic and illiquid market for our common stock, which is subject to wide fluctuations in response to several factors, including, but not limited to:
·actual or anticipated variations in our results of operations;
·our ability or inability to generate revenues;
·the number of shares in our public float;
·increased competition; and
·conditions and trends in the market for our services and products.
Our stock price may be impacted by factors that are unrelated or disproportionate to our operating performance. These market fluctuations, as well as general economic, political and market conditions, such as recessions, interest rates or international currency fluctuations may adversely affect the market price of our common stock. Shareholders and potential investors in our common stock should exercise caution before making an investment in us, and should not rely solely on the publicly quoted or traded stock prices in determining our common stock value, but should instead determine the value of our common stock based on the information contained in our public disclosures, industry information, and those business valuation methods commonly used to value private companies.
Additionally, the market price of our common stock historically has fluctuated significantly based on, but not limited to, such factors as general stock market trends, announcements of developments related to our business, actual or anticipated variations in our operating results, our ability or inability to generate revenues, and conditions and trends in the industries in which our customers are engaged.
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In recent years, the stock market in general has experienced extreme price fluctuations that have oftentimes been unrelated to the operating performance of the affected companies. Similarly, the market price of our common stock may fluctuate significantly based upon factors unrelated or disproportionate to our operating performance. These market fluctuations, as well as general economic, political and market conditions, such as recessions, interest rates or international currency fluctuations may adversely affect the market price of our common stock.
There may not be sufficient liquidity in the market for our securities in order for investors to sell their shares. The market price of our comment stock may be volatile.
The market price of our common stock will likely be highly volatile, as is the stock market in general. Some of the factors that may materially affect the market price of our common stock are beyond our control, such as conditions or trends in the industry in which we operate or sales of our common stock. This situation is attributable to a number of factors, including the fact that we are a small company which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable.
As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non existent, as compared to a mature issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. It is possible that a broader or more active public trading market for our common stock will not develop or be sustained, or that trading levels will not continue. These factors may materially adversely affect the market price of our common stock, regardless of our performance. In addition, the public stock markets have experienced extreme price and trading volume volatility. This volatility has significantly affected the market prices of securities of many companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of our common stock.
Trading on the OTC Markets is volatile and sporadic, which could depress the market price of our common stock and make it difficult for our security holders to resell their common stock.
Our common stock is quoted on the OTC Pink Market tier of the OTC Markets. In the future we may apply to list our common stock on The NASDAQ Capital Market or NYSE American. Such listing is not guaranteed, however. If such listing is not approved, our common stock will continue to be quoted on the OTC Pink Market. Trading in securities quoted on the OTC Markets is often thin and characterized by wide fluctuations in trading prices, due to many factors, some of which may have little to do with our operations or business prospects. This volatility could depress the market price of our common stock for reasons unrelated to operating performance. Moreover, the OTC Markets is not a stock exchange, and trading of securities on the OTC Markets is often more sporadic than the trading of securities listed on a quotation system like NASDAQ or a stock exchange like the New York Stock Exchange. These factors may result in investors having difficulty reselling any shares of our common stock.
There is a limited public market for our common stock.
Our securities are currently quoted on the OTC Pink Market maintained by OTC Markets. We currently have a volatile, sporadic and illiquid market for our common stock, which is subject to wide fluctuations in response to several factors, including, but not limited to:
·actual or anticipated variations in our results of operations;
·our ability or inability to generate revenues;
·the number of shares in our public float;
·increased competition; and
·conditions and trends in the market for our services and products.
Our stock price may be impacted by factors that are unrelated or disproportionate to our operating performance. These market fluctuations, as well as general economic, political and market conditions, such as recessions, interest rates or international currency fluctuations may adversely affect the market price of our common stock. Stockholders and potential investors in our common stock should exercise caution before making an
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investment in us, and should not rely solely on the publicly quoted or traded stock prices in determining our common stock value, but should instead determine the value of our common stock based on the information contained in our public disclosures, industry information, and those business valuation methods commonly used to value private companies.
Additionally, the market price of our common stock historically has fluctuated significantly based on, but not limited to, such factors as general stock market trends, announcements of developments related to our business, actual or anticipated variations in our operating results, our ability or inability to generate revenues, and conditions and trends in the industries in which our customers are engaged.
In recent years, the stock market in general has experienced extreme price fluctuations that have oftentimes been unrelated to the operating performance of the affected companies. Similarly, the market price of our common stock may fluctuate significantly based upon factors unrelated or disproportionate to our operating performance. These market fluctuations, as well as general economic, political and market conditions, such as recessions, interest rates or international currency fluctuations may adversely affect the market price of our common stock.
General Risk Factors
We may not be able to compete successfully against present or future competitors.
We do not have the resources to compete with larger providers of similar services at this time. With the limited resources we have available, we may experience great difficulties in expanding our operations. Competition from existing and future competitors could result in our inability to secure funding to expand our business. This competition from other entities with greater resources and experience may result in our failure to maintain or expand our business, as we may never be able to successfully execute our business plan.
Our ability to grow and compete in the future will be adversely affected if adequate capital is not available.
The ability of our business to grow and compete depends on the availability of adequate capital, which in turn depends in large part on our cash flow from operations and the availability of equity and debt financing. Our cash flow from operations may not be sufficient or we may not be able to obtain equity or debt financing on acceptable terms or at all to implement our growth strategy. As a result, adequate capital may not be available to finance our current growth plans, take advantage of business opportunities or respond to competitive pressures, any of which could harm our business.
We may be subject to claims that we violated intellectual property rights of others, which are extremely costly to defend and could require us to pay significant damages and limit our ability to operate.
There may be intellectual property rights held by others, including issued or pending patents and trademarks, that cover significant aspects of our technologies, products, branding or business methods. Any intellectual property claims against us, regardless of merit, could be time-consuming and expensive to settle or litigate and could divert our management’s attention and other resources. These claims also could subject us to significant liability for damages and could result in our having to stop using technology, products, branding or business methods found to be in violation of another party’s rights. We might be required or may opt to seek a license for rights to intellectual property held by others, which may not be available on commercially reasonable terms, or at all. If we cannot license or develop technology, products, branding or business methods for any allegedly infringing aspect of our business, we may be unable to compete effectively. Even if a license is available, we could be required to pay significant royalties, which could increase our operating expenses. We may also be required to develop alternative non-infringing technology, content, branding or business methods, which could require significant effort and expense and be inferior. Any of these results could harm our operating results.
If we do not successfully implement any acquisition strategies, our operating results and prospects could be harmed.
We face competition within our industry for acquisitions of businesses, technologies and assets, and, in the future, such competition may become more intense. As such, even if we are able to identify an acquisition that we would like to consummate, we may not be able to complete the acquisition on commercially reasonable terms or at all because of such competition. Furthermore, if we enter into negotiations that are not ultimately consummated, those negotiations could result in diversion of management time and significant out-of-pocket costs. Even if we are
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able to complete such acquisitions, we may additionally expend significant amounts of cash or incur substantial debt to finance them, which indebtedness could result in restrictions on our business and use of available cash. In addition, we may finance or otherwise complete acquisitions by issuing equity or convertible debt securities, which could result in dilution of our existing stockholders. If we fail to evaluate and execute acquisitions successfully, we may not be able to realize their benefits. If we are unable to successfully address any of these risks, our business, financial condition or operating results could be harmed.
Failure to adequately manage our planned aggressive growth strategy may harm our business or increase our risk of failure.
For the foreseeable future, we intend to pursue an aggressive growth strategy for the expansion of our operations through increased product development and marketing. Our ability to rapidly expand our operations will depend upon many factors, including our ability to work in a regulated environment, establish and maintain strategic relationships with suppliers, and obtain adequate capital resources on acceptable terms. Any restrictions on our ability to expand may have a materially adverse effect on our business, results of operations, and financial condition. Accordingly, we may be unable to achieve our targets for sales growth, and our operations may not be successful or achieve anticipated operating results.
Additionally, our growth may place a significant strain on our managerial, administrative, operational, and financial resources and our infrastructure. Our future success will depend, in part, upon the ability of our senior management to manage growth effectively. This will require us to, among other things:
·implement additional management information systems;
·further develop our operating, administrative, legal, financial, and accounting systems and controls;
·hire additional personnel;
·develop additional levels of management within our company;
·locate additional office space; and
·maintain close coordination among our operations, legal, finance, sales and marketing, and client service and support personnel.
As a result, we may lack the resources to deploy our services on a timely and cost-effective basis. Failure to accomplish any of these requirements could impair our ability to deliver services in a timely fashion or attract and retain new customers.
If we make any acquisitions, they may disrupt or have a negative impact on our business.
If we make acquisitions in the future, funding permitting, which may not be available on favorable terms, if at all, we could have difficulty integrating the acquired company’s assets, personnel and operations with our own. We do not anticipate that any acquisitions or mergers we may enter into in the future would result in a change of control of the Company. In addition, the key personnel of the acquired business may not be willing to work for us. We cannot predict the effect expansion may have on our core business. Regardless of whether we are successful in making an acquisition, the negotiations could disrupt our ongoing business, distract our management and employees and increase our expenses. In addition to the risks described above, acquisitions are accompanied by a number of inherent risks, including, without limitation, the following:
·the difficulty of integrating acquired products, services or operations;
·the potential disruption of the ongoing businesses and distraction of our management and the management of acquired companies;
·difficulties in maintaining uniform standards, controls, procedures and policies;
·the potential impairment of relationships with employees and customers as a result of any integration of new management personnel;
·the potential inability or failure to achieve additional sales and enhance our customer base through cross-marketing of the products to new and existing customers;
·the effect of any government regulations which relate to the business acquired;
·potential unknown liabilities associated with acquired businesses or product lines, or the need to spend significant amounts to retool, reposition or modify the marketing and sales of acquired products or operations, or the defense of any litigation, whether or not successful, resulting from actions of the acquired company prior to our acquisition; and
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·potential expenses under the labor, environmental and other laws of various jurisdictions.
Our business could be severely impaired if and to the extent that we are unable to succeed in addressing any of these risks or other problems encountered in connection with an acquisition, many of which cannot be presently identified. These risks and problems could disrupt our ongoing business, distract our management and employees, increase our expenses and adversely affect our results of operations.
Our Amended and Restated Articles of Incorporation provide for indemnification of officers and directors at our expense and limits their liability, which may result in a major cost to us and hurt the interests of our stockholders because corporate resources may be expended for the benefit of officers or directors.
Our Amended and Restated Articles of Incorporation require us to indemnify to the fullest extent under Nevada law, any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) by reason of the fact that he is or was a director or officer of the Company, or, while a director or officer of the Company, is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, association or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with which action, suit or proceeding, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal action or proceeding, that he had reasonable cause to believe that his conduct was unlawful. Our Amended and Restated Articles of Incorporation also provide that no director shall be personally liable to the Company, any of its stockholders or its creditors for money damages for breach of fiduciary duty as a director, except to the extent such exemption from liability or limitation thereof is not permitted under the Nevada Revised Statutes.
We have been advised that, in the opinion of the SEC, indemnification for liabilities arising under federal securities laws is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification for liabilities arising under federal securities laws, other than the payment by us of expenses incurred or paid by a director, officer or controlling person in the successful defense of any action, suit or proceeding, is asserted by a director, officer or controlling person in connection with our activities, we will (unless in the opinion of our counsel, the matter has been settled by controlling precedent) submit to a court of appropriate jurisdiction, the question whether indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The legal process relating to this matter if it were to occur is likely to be very costly and may result in us receiving negative publicity, either of which factors is likely to materially reduce the market and price for our shares, if such a market ever develops.
Stockholders may face significant restrictions on the resale of our common stock due to federal regulations of penny stocks.
Our common stock will be subject to the requirements of Rule 15g-9, promulgated under the Exchange Act, as long as the price of our common stock is below $5.00 per share. Under such rule, broker-dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements, including a requirement that they make an individualized written suitability determination for the purchaser and receive the purchaser’s consent prior to the transaction. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990, also requires additional disclosure in connection with any trades involving a stock defined as a penny stock. Generally, the Commission defines a penny stock as any equity security not traded on an exchange or quoted on NASDAQ that has a market price of less than $5.00 per share. The required penny stock disclosures include the delivery, prior to any transaction, of a disclosure schedule explaining the penny stock market and the risks associated with it. Such requirements could severely limit the market liquidity of the securities and the ability of Company stockholders to sell their securities in the secondary market.
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