UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the Quarterly Period Ended September 30, 2019

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

For the transition period from __________ to _________ 

Commission File Number: 000-29381

 

MEDTAINER, INC.

(Exact name of registrant as specified in its charter)

 

Florida		65-0207200
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
1620 Commerce St., Corona, California		92880
(Address of principal executive offices)		(Zip code)

 

(844) 226-5649

(Registrant’s telephone number, including area code)

 

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

 

Securities registered pursuant to Section 12 (b) of the Act: None.

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller and emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	☐		Accelerated filer	☐
Non-accelerated filer	☐		Smaller reporting company	☒
			Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial statement standards provided pursuant to Section 13(a) of the Exchange Act ☐

 

Indicate by check mark whether the issuer is a shell company (as defined in rule 12b-2 of the Exchange Act) Yes ☐ No ☒

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

 

PROCEEDINGS DURING THE PRECEDING FIVE YEARS

 

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

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

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

 

As of March 5, 2020, there were 56,700,979 shares of the Registrant’s Common Stock outstanding.

 

 

MEDTAINER, INC.

 

QUARTERLY REPORT ON FORM 10-Q

 

for the Quarterly Period Ended September 30, 2019

 

TABLE OF CONTENTS

 

		Page
PART I - FINANCIAL INFORMATION		1
Item 1.	Financial Statements	1
Item 2.	Managements Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19
Item 4.	Controls and Procedures	19
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	20
Item 1A.	Risk Factors	20
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	20
Item 3.	Defaults upon Senior Securities.	20
Item 4.	Mine Safety Disclosures	20
Item 5.	Other Information	20
Item 6.	Exhibits	20
SIGNATURES		21

 

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

 

 

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.

 

MEDTAINER, INC.

(formerly named Acology, Inc.)

 

CONSOLIDATED BALANCE SHEETS

 

		September 30, 2019				December 31, 2018
		(Unaudited)				(Audited)
ASSETS
CURRENT ASSETS:
Cash		$	15,043			$	17,374
Accounts receivable			80,546				67,874
Inventories			170,674				172,884
Prepaid expenses			5,750				—
TOTAL CURRENT ASSETS			272,013				258,132
Property and equipment, net of accumulated depreciation of $112,272 and $90,140, respectively			41,471				62,434
Intangible assets, net of accumulated amortization of $106,122 and $45,514, respectively			1,425,878				1,486,486
Goodwill			1,020,314				1,020,314
Security deposits			7,699				7,699
TOTAL ASSETS		$	2,767,375			$	2,835,065

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued expenses		$	290,001			$	189,217
Accrued interest payable			143,143				124,633
Payroll liabilities payable			127,371				111,128
Customer deposits payable			84,253				51,496
Convertible notes payable			81,172				81,172
Notes payable			373,959				373,959
Loans payable - stockholder			564,368				385,660
Capital lease payable			—				9,522
TOTAL CURRENT LIABILITIES			1,664,267				1,326,787
STOCKHOLDERS’ EQUITY (DEFICIT)
Preferred stock, without par value, issuable in series, 10,000,000 shares authorized: none issued			—				—
Common stock, $0.00001 par value, 100,000,000 shares authorized: 56,700,979 issued and outstanding at September 30, 2019, and 55,499,106 issued and outstanding at December 31, 2018			567				555
Additional paid-in capital			5,754,980				5,034,636
Accumulated deficit			(4,652,439	)			(3,526,913	)
TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)			1,103,108				1,508,278
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)		$	2,767,375			$	2,835,065

 

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

 

 

MEDTAINER, INC.

(formerly named Acology, Inc.)

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited) 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2019				2018				2019				2018
Revenues		$	526,143			$	602,302			$	1,562,206			$	1,798,800
Cost of goods sold			271,444				246,555				742,928				748,593
Gross profit			254,699				355,747				819,278				1,050,207
Operating expenses:
Advertising and marketing expense			23,654				9,046				51,289				44,349
Depreciation and amortization expense			27,087				43,030				82,734				65,706
Professional fees			6,730				21,244				72,213				48,720
Share-based compensation			150,676				—				720,356				—
Payroll expenses			281,523				291,798				880,532				895,068
General and administrative expenses			31,857				38,888				108,692				119,973
Total operating expenses			521,527				404,006				1,915,816				1,173,816
Operating loss			(266,828	)			(48,259	)			(1,096,538	)			(123,609	)
Non-operating income (expense)
Interest expense			(9,503	)			(8,909	)			(28,988	)			(28,852	)
(Loss) gain on derivative liability			—				(1,100	)			—				1,031
Non-operating income (expense), net			(9,503	)			(10,009	)			(28,988	)			(27,821	)
Loss before income taxes			(276,331	)			(58,268	)			(1,125,526	)			(151,430	)
Income tax provision			—				—				—				—
Net loss		$	(276,331	)		$	(58,268	)		$	(1,125,526	)		$	(151,430	)
Basic loss per common share		$	(0.00	)		$	(0.00	)		$	(0.02	)		$	(0.00	)
Diluted loss per common share		$	(0.00	)		$	(0.00	)		$	(0.02	)		$	(0.00	)
Basic weighted average common shares outstanding			56,503,176				52,242,212				56,453,724				53,697,623
Diluted weighted average common shares outstanding			57,000,978				52,242,212				57,000,978				53,697,623

 

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

  

 

MEDTAINER, INC.

(formerly named Acology, Inc.)

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Nine Months Ended September 30,
		2019				2018
OPERATING ACTIVITIES:
Net loss		$	(1,125,526	)		$	(151,430	)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation expense			22,128				15,000
Share-based compensation			720,356				—
Amortization expense			60,606				50,706
Gain on change in fair value of derivative			—				(1,031	)
Decrease (increase) in operating assets:
Accounts receivable			(12,672	)			(51,375	)
Inventories			2,210				12,209
Prepaid expenses			(5,750	)			—
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses			100,786				12,374
Accrued interest payable			18,510				24,000
Payroll liabilities payable			16,243				8,534
Customer deposits payable			32,757				—
NET CASH USED IN OPERATING ACTIVITIES			(170,352	)			(81,013	)
INVESTING ACTIVITIES:
Payment of security deposits			—				(1,071	)
Acquisition of property and equipment			(1,165	)			(12,420	)
NET CASH USED IN INVESTING ACTIVITIES			(1,165	)			(13,491	)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock			—				120,000
Repayment of notes payable			—				(100,000	)
Principal payments on capital lease obligations			(9,522	)			(25,149	)
Proceeds from stockholder loan			516,327				190,756
Repayment of stockholder loan			(337,619	)			(56,000	)
NET CASH PROVIDED BY FINANCING ACTIVITIES			169,186				129,607
(DECREASE) INCREASE IN CASH			(2,331	)			35,103
CASH - BEGINNING OF PERIOD			17,374				22,656
CASH - END OF PERIOD		$	15,043			$	57,759
Supplemental disclosures of cash flow information:
Non-cash financing activities
Common stock issued for the acquisition of intangible assets		$	—			$	2,552,314
Conversion of convertible debt into common stock		$	—			$	100,000

 

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

 

 

MEDTAINER, INC.

(formerly named Acology, Inc.)

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(Unaudited)

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018 (UNAUDITED):

 

		Common Stock								Paid in				Accumulated
		Shares				Amount				Capital				Deficit				Total
Balances – December 31, 2017			52,495,113			$	525			$	1,536,002			$	(2,252,653	)		$	(716,126	)
Issuance of common stock in private placement			120,000				1				119,999				—				120,000
Common Stock issued upon acquisition of Intangible Assets			2,631,252				26				2,552,288				—				2,552,314
Net loss			—				—				—				(93,162	)			(93,162	)
Balances – June 30, 2018			55,246,365				552				4,208,289				(2,345,815	)			1,863,026
Net loss			—				—				—				(58,268	)			(58,268	)
Balances – September 30, 2018			55,246,365			$	552			$	4,208,289			$	(2,404,083	)		$	1,804,758

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 (UNAUDITED):

 

		Common Stock								Paid in				Accumulated
		Shares				Amount				Capital				Deficit				Total
Balances – December 31, 2018			55,499,106			$	555			$	5,034,636			$	(3,526,913	)		$	1,508,278
Common stock issued in reverse split			1,873				—				—				—				—
Share-based compensation			1,200,000				12				569,668				—				569,680
Net loss			—				—				—				(849,195	)			(849,195	)
Balances – June 30, 2019			56,700,979				567				5,604,304				(4,376,108	)			1,228,763
Share-based compensation			—				—				150,676				—				150,676
Net loss			—				—				—				(276,331	)			(276,331	)
Balances – September 31, 2019			56,700,979			$	567			$	5,754,980			$	(4,652,439	)		$	1,103,108

 

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

 

 

MEDTAINER, INC. 

(formerly named Acology, Inc.)

 

Notes to Consolidated Financial Statements 

September 30, 2019 

(Unaudited)

 

Note 1: BUSINESS

 

Medtainer, Inc. (the “Company”) is in the business of designing, manufacturing, branding and selling proprietary plastic medical grade containers that can store pharmaceuticals, herbs, teas and other solids or liquids and can grind solids and shred herbs. The Company is also in the business of selling other products such as humidity control inserts, smell-proof bags, lighters, and plastic lighter holders, as well as providing private labeling and branding for purchasers of the Company’s containers and the other products. Prior to January 1, 2019, the Company conducted its various businesses through wholly owned subsidiaries. Since January 1, 2019, the Company has conducted all of its sales, production and distribution under the parent entity. The Company changed its corporate name from Acology, Inc. to Medtainer, Inc. on August 28, 2018.

 

Note 2: SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation and Principles of Consolidation

 

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the United States Securities and Exchange Commission (the “SEC”). Accordingly, they do not contain all information and footnotes required by GAAP for annual financial statements. In the opinion of the Company’s management, the accompanying unaudited financial statements contain all the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of September 30, 2019, and the results of operations and cash flows for the periods presented. The results of operations for the nine months ended September 30, 2019, are not necessarily indicative of the operating results for the full fiscal year or any future period. These unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on December 20, 2019.

 

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. (See Note 1.) All intercompany balances and transactions have been eliminated.

 

Use of Estimates

 

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

 

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

 

Financial Statement Reclassification

 

Certain account balances from prior periods have been reclassified in these unaudited consolidated financial statements so as to conform to current period classifications. For the three-month and nine-month periods ending September 30, 2018, the Company reclassified $35,676 and $112,861, respectively, of operating expenses to cost of goods sold. These reclassifications were made to reflect the absorption calculations used in the current periods more accurately.

 

 

Cash

 

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

 

Accounts Receivable

 

Included in “Accounts receivable” on the consolidated balance sheets are amounts primarily related to customers. The Company estimates losses on receivables based on known troubled accounts and historical experience of losses incurred. Receivables are considered impaired and written off when it is probable that all contractual payments due will not be collected in accordance with the terms of the related agreement. Based on experience and the judgment of management, the allowance for doubtful accounts was $0 as of September 30, 2019, and December 31, 2018.

 

Inventories

 

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

 

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

 

Property and Equipment

 

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

 

Goodwill and Intangible Assets

 

Goodwill and intangible assets that have indefinite useful lives are not amortized but are evaluated for impairment annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company records intangible assets at fair value, estimated using a discounted cash flow approach. The Company amortizes its intangible assets that have finite lives using either the straight-line method or base on estimated future cash flows to approximate the pattern in which the economic benefit of the assets will be utilized. Amortization is recorded over estimated useful lives ranging from 14 to 20 years. The Company reviews intangible assets subject to amortization quarterly to determine if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment or a change in the remaining useful life. Conditions that would indicate impairment and trigger a more frequent impairment assessment include, but are not limited to, a significant adverse change in legal factors or business climate that could affect the value of an asset, or an adverse action or assessment by a regulator. If the carrying value of an intangible asset exceeds its undiscounted cash flows, the Company will write down the carrying value to its fair value in the period identified. The Company generally calculates fair value as the present value of estimated future cash flows to be generated by the asset using a risk-adjusted discount rate. If the estimate of an intangible asset’s remaining useful life is changed, the Company will amortize the remaining carrying value of the intangible asset prospectively over the revised remaining useful life. The Company conducted its first annual impairment test of goodwill during the fourth quarter of the year ended December 31, 2018. The Company operates as a single operating segment with one reporting unit and consequently evaluates goodwill for impairment base on an evaluation of the fair value of the Company as a whole. The estimation of fair value requires significant judgement.

 

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

 

In January 2017, FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment (“ASU No. 2017-04”), which simplifies accounting for goodwill impairment. This ASU requires a hypothetical purchase price allocation, which is mandatory for fiscal years beginning after December 14, 2019. As permitted, the Company adopted No. ASU 2017-04 for fiscal periods beginning January 1, 2018.

 

The Company evaluates intangible assets and long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. These changes include but are not limited to significant adverse changes in business climate, market conditions, or other events that indicate an asset’s carrying amount may not be recoverable. Recoverability of these assets is measured by comparison of the carrying amount of each asset to the future undiscounted cash flows the asset is expected to generate. If the undiscounted cash flows used in the test of recoverability are less than the carrying amount of these assets, the carrying amount of such assets is reduced to fair value. The Company evaluates and tests the recoverability of its goodwill for impairment at least annually during the fourth quarter of each fiscal year or more often if circumstances indicate that goodwill may not be recoverable. There was no impairment of intangible assets, long-lived assets or goodwill during the three and nine months ended September 30, 2019.

 

 

Convertible Instruments

 

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

 

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

 

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

 

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

 

Revenue Recognition

 

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

 

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

 

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

 

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

 

The following table summarizes revenue from contracts with customers for the three months and the nine months ended September 30, 2019, and September 30, 2018:

 

			Three Months Ended September 30,								Nine Months Ended September 30,
			2019				2018				2019				2018
Product			$	501,156			$	569,322			$	1,502,240			$	1,714,386
Service				24,987				32,980				59,966				84,414
Total			$	526,143			$	602,302			$	1,562,206			$	1,798,800

 

 

Share-Based Payments

 

In June 2018, FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which aligns accounting for share-based payments issued to nonemployees to that of employees under the existing guidance of Topic 718, with certain exceptions. This update supersedes previous guidance for equity-based payments to nonemployees under Subtopic 505-50, Equity—Equity-Based Payments to Non-Employees. This guidance became effective for the Company as of January 1, 2019. Based on the completed analysis, the Company has determined the adoption of this guidance will not have a material impact on its financial statements. The Company is treating share-based payments to both employees and non-employees in accordance with GAAP.

 

Fair Value Measurements

 

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

 

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

 

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

 

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

 

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

 

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

 

During the year ended December 31, 2018, the Company accounted for a derivative liability in connection with the conversion feature of convertible debt, classified as a Level 3 liability, as the only financial liability measured at fair value on a recurring basis. As of December 31, 2018, and during the three and nine months ended September 30, 2019, the Company had no derivative liability.

 

Advertising

 

Advertising and marketing expenses are charged to operations as incurred.

 

Income Taxes

 

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

 

ASC Topic 740-10-30 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740-10-40 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company has no material uncertain tax positions.

 

Concentration of Credit Risk

 

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

 

Recent Accounting Pronouncements

 

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

 

The Company does not believe there are any other recently issued, but not yet effective, accounting standards that would have a significant impact on the Company’s financial position or results of operations.

 

Note 3: GOING CONCERN

 

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. At September 30, 2019, the Company had a working capital deficit of $1,392,254. In addition, the Company has generated operating losses since its inception and has notes payable that are currently in default. These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the successful execution of its operating plan which includes increasing sales of existing products while introducing additional products and services, controlling operating expenses, negotiating extensions of existing loans and raising either debt or equity financing. There is no assurance that the Company will be able to increase sales or to obtain or extend financing on acceptable terms, or at all, or successfully execute any of the other measures set forth in the previous sentence.

 

Note 4: INTANGIBLE ASSETS

 

Intangible assets that are subject to amortization are reviewed for potential impairment whenever events or circumstances indicate that carrying amounts may not be recoverable. Assets not subject to amortization are tested for impairment at least annually. The Company has intangible assets subject to amortization as described in the next paragraph. These costs were included in intangible assets on the balance sheet and amortized as indicated in the next paragraph. The Company will periodically review these and other intangible assets for impairment that it may acquire whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company will recognize an impairment loss when the sum of expected undiscounted future cash flows is less that the carrying amount of the asset, to be measured as the difference between the asset’s estimated fair value and its book value.

 

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

 

Intangible Assets consisted of the following as of December 31, 2018: 

Description		Weighted Average Estimated Useful Life			Gross Carrying Value				Accumulated Amortization				Net Amount
U.S. patents		15 years			$	435,000			$	(16,060	)		$	418,940
U.S. patents		15 years				435,000				(15,455	)			419,545
Canadian patents		20 years				260,000				(7,286	)			252,714
European patents		14 years				30,000				(1,175	)			28,825
Molds		15 years				150,000				(5,538	)			144,462
Trademark		Indefinite life				220,000				—				220,000
Domain name		Indefinite life				2,000				—				2,000
Intangible asset totals					$	1,532,000			$	(45,514	)		$	1,486,486
Goodwill					$	1,020,314			$	—			$	1,020,314

 

Intangible Assets consisted of the following as of September 30, 2019:  

Description		Weighted Average Estimated Useful Life			Gross Carrying Value				Accumulated Amortization				Net Amount
U.S. patents		15 years			$	435,000			$	(37,445	)		$	397,555
U.S. patents		15 years				435,000				(36,035	)			398,965
Canadian patents		20 years				260,000				(16,989	)			243,011
European patents		14 years				30,000				(2,741	)			27,259
Molds		15 years				150,000				(12,912	)			137,088
Trademark		Indefinite life				220,000				—				220,000
Domain name		Indefinite life				2,000				—				2,000
Intangible asset totals					$	1,532,000			$	(106,122	)		$	1,425,878
Goodwill					$	1,020,314			$	—			$	1,020,314

 

 

Note 5: CONVERTIBLE NOTES PAYABLE AND PROMISSORY NOTES PAYABLE

 

As of September 30, 2019, and December 31, 2018, the Company had the following convertible notes and promissory notes outstanding: 

 

		September 30, 2019								December 31, 2018
		Principal				Accrued Interest				Principal				Accrued Interest
Convertible Notes Payable (a)
July 2014 $75,000 Note convertible into common stock at $5.00 per share, 10% interest, currently in default		$	66,172			$	22,058			$	66,172			$	17,095
July 2014 $15,000 Note convertible into common stock at $5.00 per share, 10% interest, currently in default			15,000				8,750				15,000				7,625
Total Convertible Notes Payable		$	81,172							$	81,172
Promissory Notes Payable
November 2014 $300,000 Note, 10% interest, due
February 2019, currently in default (b)		$	298,959				37,335			$	298,959				24,913
August 2015 $75,000 Note, with a one-time interest charge of $75,000, currently in default (c)			75,000				75,000				75,000				75,000
Total Promissory Notes Payable		$	373,959							$	373,959
Total Accrued Interest Payable						$	143,143							$	124,633

 

 

a.

The Company entered into promissory note conversion agreements in the aggregate amount of $90,000. Payments of $8,828 have been made on these notes as of September 30, 2019. These notes are convertible into shares of the Company’s common stock at a conversion price of $5.00 per share. The loans under these agreements are non-interest-bearing and have no stated maturity date; however, the Company is accruing interest at a 10% annual rate.

 

b.

On November 3, 2014, the Company made a promissory note in the principal amount of $300,000 in favor of an unrelated person (the “Old Note”). On February 22, 2018, the Company repaid $100,000 on the principal of the Old Note and made a new promissory note, dated February 22, 2018, in the principal amount of $298,959 in favor of said party (the “New Note”) in satisfaction of the Old Note, which principal amount comprised the unpaid principal amount of $200,000 due on the Old Note after the repayment, and $98,958.90 of accrued interest on the Old Note. At September 30, 2019, accrued interest on this note was $37,335. The outstanding balance of this note was $298,959 at September 30, 2019, and December 31, 2018. The New Note was due on February 22, 2019. The Company is negotiating an extension.

 

c.

On August 15, 2015, the Company made a promissory note in the amount of $150,000 in favor of an unrelated party. The note bears interest at 0.48% per annum, provided that the note is paid on or before maturity date, or 2 percentage points over the Wall Street Journal Prime Rate, if it is not repaid on or before the maturity date. This note matured on August 11, 2016. Upon an event of default, as defined in the note, interest shall be compounded daily. The Company is currently negotiating an extension of the maturity date for the balance. During the year ended December 13, 2017, the holder of this note agreed to exchange $75,000 of principal and $663 of interest accrued on this note for 500,000 shares of common stock. This exchange was accounted for as an extinguishment of debt resulting in a loss of $683,337. In connection with this exchange, the Company agreed to pay the holder a fee of $75,000 in consideration of his waiving the default under the promissory note, as additional consideration for his agreeing to the exchange and as compensation for his foregoing the interest that would have accrued on the promissory note at the default rate but for the waiver. At September 30, 2019, and December 31, 2018, the note had a balance of $75,000 in addition to the $75,000 fee included in accrued interest.

 

Note 6: STOCKHOLDERS’ EQUITY

 

On February 12, 2018, the Company issued 120,000 shares of common stock to an unrelated third party in consideration of $120,000.

 

On June 8, 2018, the Company issued 2,631,252 shares of common stock, valued at $2,552,314, for the purchase of a patent, patent applications, a trademark and an internet domain. For information regarding the valuation of these assets, see Note 4.

 

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

 

During the nine months ended September 30, 2019, the Company recognized the issuance of 1,200,000 shares of common stock to consultants, valued at $569,680 for financial reporting purposes under GAAP, as allowed by the Company’s 2018 Incentive Award Plan. These shares are fully vested for financial reporting purposes under GAAP. (See Note 7.)

 

 

Note 7: SHARE-BASED COMPENSATION

 

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

 

On December 1, 2018, 1,350,000 shares of common stock were awarded to employees in the form of restricted shares and 335,000 shares of common stock were awarded to consultants as compensation. The fair value of these shares on the grant date was $0.01 per share. As of December 31, 2018, 185,000 shares awarded to consultants were vested and none of the shares awarded to employees were vested. During the nine months ended September 30, 2019, 150,000 shares awarded to consultants vested and 1,050,000 shares awarded to employees were vested. As of September 30, 2019, all shares awarded to consultants and 1,050,000 of the 1,350,000 shares awarded to employees were vested for financial reporting purposes under GAAP.

 

The Company made no awards in any other form during the nine months ending September 30, 2019, and September 30, 2018. The Company expensed $720,356 and $0 for share-based compensation in the nine months ended September 30, 2019, and September 30, 2018, respectively, for its employees and nonemployees in the accompanying consolidated statements of operations.

 

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

 

Vesting Dates:		Employees				Consultants
December 31, 2018			—				185,000
January 1, 2019			750,000				—
March 31, 2019			—				150,000
June 30, 2019			300,000				—
Total shares vested at September 30, 2019			1,050,000				335,000

 

Note 8: INCOME TAXES

 

The Company has approximately $2,651,000 net operating loss carryforwards (“NOLs”) that are available to reduce future taxable income as of December 31, 2018, which will begin to expire in 2034. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based on the assessment, management has established a full valuation allowance against all the deferred tax assets for every period because it is more likely than not that all of the deferred tax assets will not be realized.

 

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) was signed into law, making significant changes to the Internal Revenue Code. Changes include a federal corporate tax rate decrease from 35% to 21% for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system and a one-time transition tax on the mandatory deemed repatriation of foreign earnings. The Company has estimated its provision for income taxes in accordance with the 2017 Tax Act and the guidance available and has kept the full valuation allowance. As a result, the Company recorded no income tax expense during the nine months ended September 30, 2019.

 

Note 9: CAPITAL LEASES

 

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

 

Note 10: RELATED-PARTY TRANSACTIONS

 

Loans

 

The Company has received loans from its officers and directors from time to time since 2014. During the nine months ended September 30, 2019, the Company received loans of $516,327 from its officers and directors. During the nine months ended September 30, 2019, the Company repaid $337,619 of these loans. The balance of these loans at September 30, 2019, and December 31, 2018, was $564,368 and $385,660, respectively. All of these loans are non-interest-bearing and have no set maturity date. The Company expects to repay these loans when cash flows become available.

 

 

Contracts

 

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

 

Payments made to the related party for the three months and the nine months ended September 30, 2019, and September 30, 2018, were as follows:

 

		Three Months Ended								Nine Months Ended
		September 30, 2019				September 30, 2018				September 30, 2019				September 30, 2018
Capital lease payments		$	—			$	6,000			$	10,000			$	30,000
Building lease payments			26,574				8,640				78,417				8,640
Purchase of products for resale			16,530				15,000				68,559				46,337
Total paid to related party		$	43,104			$	29,640			$	156,976			$	84,977

 

Note 11: CONCENTRATIONS

 

For the nine months ended September 30, 2019, and September 30, 2018, one of the Company’s customers accounted for approximately 11% of total sales. For the three months ended September 30, 2019, and September 30, 2018, one of the Company’s customers accounted for approximately 10% and 11%, respectively, of total sales.

 

For the nine months ended September 30, 2018, the Company purchased approximately 41% and 34% of its products for cost of goods sold from two distributors. For the three months ended September 30, 2018, the Company purchased approximately 44% and 36% of its products for cost of goods sold from two distributors.

 

For the nine months ended September 30, 2019, the Company purchased approximately 43% and 33% of its products for cost of goods sold from two distributors. For the three months ended September 30, 2019, the Company purchased approximately 42% and 41% of its products for cost of goods sold from two distributors.

 

As of September 30, 2019, one of the Company’s customers accounted for 49% of its accounts receivable, and another accounted for 13% of its accounts receivable. As of December 31, 2018, one of the Company’s customers accounted for 35% of its accounts receivable, another accounted for 23% of its accounts receivable, and another accounted for 20% of its accounts receivable.

 

Note 12: COMMITMENTS

 

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

 

In conjunction with the Asset Purchase Agreement described in Note 4, the Company agreed to purchase a minimum of 30,000 units of product per month. The minimum purchase quantity will increase by 1% every anniversary of its effective date. The purchase price for units is subject to periodic adjustment for changes in the consumer price index. The agreement expires on April 30, 2031; however, it can be terminated with a one-time $400,000 payment.  

 

Note 13: SUBSEQUENT EVENTS

 

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

 

 

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

 

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

 

Introduction

 

The financial data discussed below are derived from the unaudited consolidated financial statements of the Company as of September 30, 2019, which were prepared and presented in accordance with United States generally accepted accounting principles for interim financial statements. These financial data are only a summary and should be read in conjunction with the financial statements and related notes contained herein, which more fully present the Company’s financial condition and operations as at that date, and with its audited financial statements and notes thereto contained in its Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC. Further, the Company urges caution regarding the forward-looking statements which are contained in this report because they involve risks, uncertainties and other factors affecting its operations, market growth, service, products and licenses that may cause the Company’s actual results and achievements, whether expressed or implied, to differ materially from the expectations the Company describes in its forward-looking statements. The occurrence of any of the events described as risk factors could have a material adverse effect on the Company’s business, results of operations and financial position.

 

General Statement of Business

 

The Company was incorporated under the laws of the state of Florida on September 5, 1997, under the name Synthetic Flowers of America, Inc. and changed its name to Acology, Inc. on January 9, 2014. On August 28, 2018, the Company changed its name from Acology, Inc. to Medtainer, Inc. The Company has authorized capital of 100,000,000 shares of common stock, $0.00001 par value per share, and 10,000,000 shares of preferred stock, without par value.  

 

The Company’s principal place of business is 1620 Commerce St., Corona, CA 92880. The Company’s telephone number is (844) 226-5649. The Company’s corporate website address is http://www.medtainer.com. The Company’s common stock is quoted on the OTC Pink tier of the OTC Marketplace under the symbol “MDTR.”

 

Overview

 

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

 

The Company is in the business of selling and distributing proprietary containers, called Medtainers^®, which are made from medical-grade polypropylene resin. Medtainer^® can store pharmaceuticals, herbs, teas and other solids or liquids and can grind solids and shred herbs. The Company sells its original 20-dram size, which has received child safety certification, and a 40-dram size. Both sizes are air- and water-tight and have grinding capability. The Company is focusing its marketing efforts for this product on drug stores and drug store chains, veterinarians and veterinary distributors and other distributors and end users.

 

The Company also sells and distributes humidity control inserts, lighters, smell-proof bags and other durable goods and is actively developing markets for them. The Company is also in the business of private labeling and branding for purchasers of containers and other products.

 

The Company markets its products directly to businesses through its phone room and to the retail public through internet sales. The Company also markets directly to wholesalers and other businesses that resell them to other businesses and end users.

 

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

 

●

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

 

 

●

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

 

Based on the Company’s financial history since inception, its auditor has expressed substantial doubt as to the Company’s ability to continue as a going concern. The Company has limited revenue, nominal cash, and has accumulated deficits since inception. If the Company cannot obtain sufficient additional capital, the Company will be required to delay the implementation of its business strategy and may not be able to continue operations.

 

Results of Operations

 

Comparison of the Three Months Ended September 30, 2019, and September 30, 2018

 

The following table sets forth information from the statements of operations for the three months ended September 30, 2019, and September 30, 2018.

 

		Three Months Ended September 30,				Three Months Ended September 30,
		2019				2018
Revenues		$	526,143			$	602,302
Cost of goods sold			271,444				246,555
Gross profit			254,699				355,747
Operating expenses			521,527				404,006
Loss from operations			(266,828	)			(48,259	)
Non-operating expense:
Loss on change in fair value of derivative			—				(1,100	)
Interest expense			(9,503	)			(8,909	)
Net loss		$	(276,331	)		$	(58,268	)

 

 

Revenue

 

Revenue was $526,143 and $602,302 for the three months ended September 30, 2019, and September 30, 2018, respectively. This decrease in revenues was primarily due to a $60,779 decrease in revenues from containers, a $6,700 decrease in revenues from humidity control inserts, a $8,992 decrease in revenues from printing, a $7,574 decrease in revenues from plastic lighter holders, and a $5,693 decrease in revenues from shipping income.  This decrease in revenues was partially offset by a $7,796 increase in revenues from lighters.

 

Cost of Goods Sold

 

Cost of goods sold for the three months ended September 30, 2019, and September 30, 2018 were $271,444 and $246,555, respectively. This increase in cost of goods sold was primarily due to a $10,042 increase in cost of printing, a $9,445 increase in the cost of lighters, a $3,386 increase in the cost of humidity control inserts, a $2,618 increase in the cost of payment processing fees, and a $1,322 increase in the cost of containers. This increase in cost of goods sold was partially offset by a $3,418 decrease in cost of plastic container holders, and a $1,148 decrease in cost of shipping.

 

Operating Expenses

 

Operating expenses for the three months ended September 30, 2019, and September 30, 2018, consisted of the following:

 

		Three Months				Three Months
		Ended				Ended
		September 30, 2019				September 30, 2018
Advertising and marketing expense		$	23,654			$	9,046
Depreciation and amortization expense			27,087				43,030
Professional fees			6,730				21,244
Share-based compensation			150,676				—
Payroll expenses			281,523				291,798
General and administrative expenses			31,857				38,888
Total operating expenses		$	521,527			$	404,006

 

Operating expenses for the three months ended September 30, 2019, and September 30, 2018, were $521,527 and $404,006, respectively. The increase in operating expenses is attributable to a $14,608 increase in advertising and marketing expense, and a $150,676 increase in share-based compensation. This increase in operating expense was partially offset by a $15,943 decrease in depreciation and amortization expense, a $14,514 decrease in professional fees, a $10,275 decrease in payroll expenses, and a $7,031 decrease in general and administrative expense. The decrease in general and administrative expense was primarily due to a $1,940 decrease in automobile expense ($1,124 for the three months ended September 30, 2019, versus $3,064 for the three months ended September 30, 2018), a $3,415 decrease in office and miscellaneous expense ($9,911 for the three months ended September 30, 2019, versus $13,326 for the three months ended September 30, 2018), a $3,282 decrease in stock related expense ($3,478 for the three months ended September 30, 2019, versus $6,760 for the three months ended September 30, 2018), and a $3,068 decrease in bank service charges ($587 for the three months ended September 30, 2019, versus $3,655 for the three months ended September 30, 2018). The decrease in general and administrative expense was partially offset by a $2,150 increase in rent expense, and a $2,249 increase in travel expense.

 

Loss from Operations

 

Loss from operations increased from a loss of $48,259 for the three months ended September 30, 2018, to a loss of $266,828 for the three months ended September 30, 2019. The increase in loss from operations was primarily due to the decrease in sales and increase in cost of goods sold, resulting in a decrease in gross profit, and an increase in operating expense. The increase in operating expense was principally due to an increase in advertising and marketing expense, and an increase in share-based compensation. This increase in operating expense was partially offset by a decrease in depreciation and amortization expense, a decrease in professional fees, a decrease in payroll expense, and a decrease in general and administrative expense.

 

Interest Expense

 

For the three months ended September 30, 2019, and September 30, 2018, interest expense was $9,503 and $8,909, respectively.

 

Gain on Change of Fair Value of Derivative

 

For the three months ended September 30, 2018, a loss on change in fair value of derivative of $1,100 was recorded as the result of a change in the fair value of the derivative liability, which is adjusted to fair value each reporting period, substantially due to a decrease in the underlying stock price. This derivative liability no longer existed as of December 31, 2018, and therefore, the Company recorded no gain or loss from derivative liability during the three months ended September 30, 2019.

 

 

Net Loss

 

The net loss for the three months ended September 30, 2019, was $276,331, versus a net loss of $58,268 for the three months ended September 30, 2018. As more fully described above, the principal reason for this difference was the decrease in sales and increase in cost of goods sold, resulting in a decrease in gross profit, and an increase in operating expense.

 

Comparison of the Nine Months Ended September 30, 2019, and September 30, 2018

 

The following table sets forth information from the statements of operations for the nine months ended September 30, 2019, and September 30, 2018.

 

		Nine Months Ended September 30, 2019				Nine Months Ended September 30, 2018
Revenues		$	1,562,206			$	1,798,800
Cost of goods sold			742,928				748,593
Gross profit			819,278				1,050,207
Operating expenses			1,915,816				1,173,816
Loss from operations			(1,096,538	)			(123,609	)
Non-operating income (expense):
Gain on change in fair value of derivative			—				1,031
Interest expense			(28,988	)			(28,852	)
Net loss		$	(1,125,526	)		$	(151,430	)

 

Revenue

 

Revenue was $1,562,206 and $1,798,800 for the nine months ended September 30, 2019, and September 30, 2018, respectively. This decrease in revenues was primarily due to a $146,953 decrease in revenues from containers, a $57,357 decrease in revenues from humidity control inserts, a $24,973 decrease in revenues from printing revenue, a $17,753 decrease in revenues from plastic lighter holders, and a $17,543 decrease in revenues from shipping revenue. This decrease in revenues was partially offset by a $9,997 increase in revenues from lighters.  

 

Cost of Goods Sold

 

Cost of goods sold for the nine months ended September 30, 2019, and September 30, 2018, were $742,928 and $748,593, respectively. This decrease in cost of sales was primarily due to a $49,168 decrease in the cost of humidity control inserts, and a $8,286 decrease in the cost of plastic lighter holders. This decrease in cost of sales was partially offset by a $18,879 increase in the printing costs, a $12,606 increase in the cost of payment processing fees, a $9,311 increase in the cost of containers, and a $4,847 increase in the cost of shipping.

 

Operating Expenses

 

Operating expenses for the nine months ended September 30, 2019, and September 30, 2018, consisted of the following:

 

		Nine Months				Nine Months
		Ended				Ended
		September 30, 2019				September 30, 2018
Advertising and marketing expense		$	51,289			$	44,349
Depreciation and amortization expense			82,734				65,706
Professional fees			72,213				48,720
Share-based compensation			720,356				—
Payroll expenses			880,532				895,068
General and administrative expenses			108,692				119,973
Total operating expenses		$	1,915,816			$	1,173,816

 

 

Operating expenses for the nine months ended September 30, 2019, and September 30, 2018, were $1,915,816 and $1,173,816, respectively. The increase in operating expenses can be attributed to a $6,940 increase in advertising and marketing expense, a $17,028 increase in depreciation and amortization expense, a $23,493 increase in professional fees, and a $720,356 increase in share-based compensation. This increase was partially offset by a $14,536 decrease in payroll expenses, and a $11,281 decrease in general and administrative expense. The decrease in general and administrative expense was primarily due to a $7,275 decrease in automobile expense ($3,429 for the nine months ended September 30, 2019, versus $10,705 for the nine months ended September 30, 2018), a $11,477 decrease in insurance expense ($12,344 for the nine months ended September 30, 2019, versus $23,820 for the nine months ended September 30, 2018), and a $10,620 decrease in office and miscellaneous expense ($61,190 for the nine months ended September 30, 2019, versus $71,810 for the nine months ended September 30, 2018). The decrease in general and administrative expense was partially offset by a $3,054 increase in stock related expenses ($22,862 for the nine months ended September 30, 2019, versus $19,808 for the nine months ended September 30, 2018), and a $6,641 increase in rent expense ($78,418 for the nine months ended September 30, 2019, versus $71,777 for the nine months ended September 30, 2018).

 

Loss from Operations

 

Loss from operations increased from a loss of $123,609 for the nine months ended September 30, 2018, to a loss of $1,096,538 for the nine months ended September 30, 2019. The increase in loss from operations was primarily due to the decrease in sales, offset partially by a decrease in cost of goods sold, but still resulting in a decrease in gross profit. Additionally, the increase in loss from operations resulted from an increase in operating expenses, principally due to the increase in the non-cash expenses of share-based compensation, depreciation and amortization expense, and professional fees. The increase in operating expense was offset partially offset by a decrease in payroll expense, and general and administrative expense.

 

Interest Expense

 

For the nine months ended September 30, 2019, and September 30, 2018, interest expense was $28,988 and $28,852, respectively.

 

Gain on Change of Fair Value of Derivative

 

For the nine months ended September 30, 2018, a gain on change in fair value of derivative of $1,031 was recorded as the result of a change in the fair value of the derivative liability, which is adjusted to fair value each reporting period, substantially due to a decrease in the underlying stock price. This derivative liability no longer existed as of December 31, 2018 and therefore, the Company recorded no gain or loss from derivative liability during the nine months ended September 30, 2019.

 

Net Loss

 

The net loss for the nine months ended September 30, 2019, was $1,125,526 ($720,356 of which was non-cash expense for share-based compensation), versus a net loss of $151,430 for the nine months ended September 30, 2018. As more fully described above, the principal reason for this difference was the $230,929 decrease in gross profit, and the $742,000 increase in operating expenses, including a $720,356 increase in share-based compensation.

 

Liquidity and Capital Resources

 

As of September 30, 2019, the Company had $15,043 in cash and accounts receivable of $80,546. At September 30, 2019, and December 31, 2018, the Company had negative working capital of $1,392,254 and $1,068,655, respectively. As of September 30, 2019, the Company had no commitments for capital expenditures. As of September 30, 2019, the Company had inventory of approximately 142,000 units of Medtainer^® products and approximately 126,000 units of other products.

 

During the nine months ended September 30, 2019, the Company experienced negative cash flow from operations of $170,352 and used $1,165 for investing activities while adding $169,186 of cash flows from financing activities. Cash used in operating activities increased from $81,013 for the nine-month period ending September 30, 2018 to $170,352 for the nine-month period ending September 30, 2019. Cash used in operating activities was primarily a result of the Company’s net loss, partially offset by the non-cash items share-based compensation, depreciation, and amortization, the decrease in operating assets and an increase in operating liabilities. The Company used $1,165 and $13,491 in cash from investing activities for the nine-month period ending September 30, 2019, and September 30, 2018, respectively. Cash provided from financing activities increased from $129,607 for the nine-month period ending September 30, 2018, to $169,186 for the nine-month period ending September 30, 2019. The increase in cash provided from financing activities was primarily a result of increase in proceeds from stockholder loans.

 

 

The Company has generated material operating losses since inception. The Company believes that it will require approximately $1,000,000 in additional funding for the next 12 months, including approximately $600,000 to repay its overdue loans, including accrued interest, assuming the Company’s operating loss remains at the same level. The Company plans to seek extensions of these loans, in which case the amount of such funding will be reduced; however, the Company can give no assurance as to the extent that it will be successful.

 

The Company is seeking to raise additional capital within the next 12 months for working capital as well as business expansion through loans from banks and other financial institutions and the sale of debt or equity securities to private investors from investors. The Company can give no assurance that it will be successful in so doing or that such funding, if available, can be obtained on acceptable terms, if at all. Although the Company has engaged in numerous discussions with financial institutions and investors, the Company has not received firm commitments for any funding. If the Company is unable to raise sufficient funds, when required or on acceptable terms, it may have to significantly reduce or discontinue, operations or take measures to reduce its costs. In the event that the Company raises additional funds by issuing equity securities or securities that are convertible into equity securities, its stockholders may experience significant dilution.

 

Off-Balance Sheet Arrangements

 

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

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

The Company’s financial condition and results of operations could be adversely affected by the recent coronavirus outbreak.

 

In December 2019, a new strain of coronavirus surfaced in Wuhan, China, and has spread to many countries, including the United States of America. Several cases of this coronavirus have been reported in the State of California, where the Company’s headquarters, all of its employees and the manufacturer of its Medtainer^® products are located. The federal and state governments, including the government of the State of California, are taking measures to prevent the spread of this virus, but it is presently unknown to what extent they will be successful. If coronavirus is not contained, among other things, the ability of the Company’s suppliers to manufacture and deliver the products that it sells, the ability of the Company to deliver its products, its ability to display its products at trade shows and similar events, its ability to conduct meetings with its customers and prospective customers, and, if its employees were to contract coronavirus, the Company’s ability to conduct its day-to-day operations could be adversely impacted. The financial impact of coronavirus on the Company will depend on future developments and cannot be reasonably predicted or estimated at this time, but could materially and adversely affect its results for an unknown but possibly extended period.

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

The Company’s management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of September 30, 2019. Based on this evaluation, the principal executive officer and the principal accounting officer concluded that these disclosure controls and procedures were not effective as of such date, at a reasonable level of assurance, in ensuring that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is: (i) accumulated and communicated to management (including its principal executive officer and principal accounting officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in internal control over financial reporting during the three months ended September 30, 2019, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

None.

 

ITEM 1A. Risk Factors.

  

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

 

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

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

EXHIBIT
NUMBER		DESCRIPTION
31		Rule 13a-14(a)/15d-14(a) Certification
32		Section 1350 Certification

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	MEDTAINER, INC.
	By:	/s/ Curtis Fairbrother
Date: March 11, 2020		Curtis Fairbrother
		Principal Executive Officer and Principal Accounting Officer