BAKHU HOLDINGS, CORP.
Notes to Consolidated Financial Statements
October 31, 2023
(Unaudited)
NOTE 1 - ORGANIZATION AND BUSINESS OPERATIONS; BASIS OF PRESENTATION
Bakhu Holdings, Corp. (formerly Planet Resources, Corp.) (the “Company”) was incorporated under the laws of the State of Nevada, U.S. on April 24, 2008. In May 2009, the Company began to look for other types of business to pursue that would benefit the stockholders. To pursue businesses outside the mining industry the name of the Company was changed with the approval of the directors and stockholders to Bakhu Holdings, Corp. on May 4, 2009.
The Company has not generated any revenue to date, and consequently, its operations are subject to all risks inherent in establishing a new business enterprise. For the period from inception, April 24, 2008, through October 31, 2023, the Company accumulated losses of $48,610,966.
On December 20, 2018, the Company acquired a license from Cell Science Holding Ltd. (“Cell Science”) in exchange for 210,000,000 shares of Company common stock. The license provides for the Company’s exclusive right in North America and Central America to use certain patents and intellectual property for the production of cannabinoids for medical, food additive, and recreational uses.
On August 9, 2019, the Company formed Cell Science CBD International, Inc., a California corporation as a wholly owned subsidiary to commercialize use of the licensed technology to produce and manufacture cannabis and their byproducts that have measurable tetrahydrocannabinol (THC) concentration potency less than 3% on a dry weight basis. This subsidiary had no active operations as of October 31, 2023. When used herein, the “Company” includes this consolidated subsidiary.
In the opinion of management, the Company’s financial statements reflect all adjustments that are of a normal recurring nature necessary for presentation of financial statements for interim periods in accordance with U.S. generally accepted accounting principles (GAAP) and with the instructions to Form 10-Q in Article 10 of SEC Regulation S-X. As used in this report, the term the “Company” means Bakhu Holdings, Corp. and its subsidiary, unless the context indicates otherwise.
The Company condensed or omitted certain information and footnote disclosures normally included in our annual audited financial statements, which the Company prepared in accordance with GAAP. Our interim financial statements should be read in conjunction with our annual report on Form 10-K for the year ended July 31, 2023.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America and are presented in US dollars.
Going Concern
The financial statements have been prepared on a going concern basis which assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. The Company has incurred losses since inception resulting in an accumulated deficit of $48,610,966 as of October 31, 2023 and further losses are anticipated in the development of its business raising substantial doubt about the Company’s ability to continue as a going concern.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with a maturity of three months or less at the time of issuance to be cash equivalents.
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BAKHU HOLDINGS, CORP.
Notes to Consolidated Financial Statements
October 31, 2023
(Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Use of Estimates and Assumptions
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Foreign Currency Translation
The Company’s functional currency and its reporting currency is the United States dollar.
Financial Instruments
The carrying value of the Company’s financial instruments approximates their fair value because of the short maturity of these instruments.
Stock-based Compensation
In September 2020, the Company adopted a stock-based compensation plan, the 2020 Long-Term Incentive Plan (“2020 Plan”), which is more fully described in Note 5. We expense the fair value of stock options and warrants granted for services as they vest.
On September 22, 2020, the Company granted to each of its directors, Thomas K. Emmitt, Peter Whitton, Aristotle Popolizio and Evripides Drakos, a non-qualified stock option to purchase 300,000 shares of common stock, for a total of 1,200,000 shares, at an exercise price of $5.10 per share, representing the current price at which the Company was offering and selling its restricted shares for cash in its capital raising efforts. Such Options shall be exercisable for a period of seven years. Twenty percent (20%) (i.e. 60,000) of the options shall vest and be exercisable immediately with the remaining 240,000 options vesting at the rate of 1/12 (i.e. 20,000 shares) per month so that all options shall be fully vested and exercisable on the first anniversary of the Grant Date. The fair value of each option grant issued under the 2020 Plan was estimated using the Black-Scholes option pricing model.
On June 7, 2021, we entered a consulting agreement with Fourth and G Holdings, LLC, through which Christopher Ganan provided consulting services. We granted the consultant one warrant to purchase 1,500,000 shares, vesting over two years, and another warrant to purchase 28,500,000 shares, vesting in increments based on specified technology commercialization accomplishments. The exercise price of these warrants is $3.00 per share, which was approximately equivalent to the market price of our common stock as of the date of grant. The fair value of each warrant grant was estimated using the Black-Scholes option pricing model.
On September 11, 2021, the Company and Fourth and G Holdings, LLC, amended their June 2021 agreement, to reflect that the total warrants were reduced from 30,000,000 to 15,000,000, of which warrants to purchase 300,000 shares were vested on signing the initial agreement. Effective June 7, 2023, with the consultant not having fulfilled any of the specified technology commercialization accomplishments, the remaining 14,250,000 warrants were cancelled.
On July 27, 2021 the Company entered into Consulting Agreements with two consultants to assist the Science team and granted each Consultant a seven-year stock option to purchase 100,000 shares of Common Stock at an exercise price of $4.20 per share, which was approximately equal to the closing price for our common stock on the date of grant. The fair value of each option grant issued under the 2020 Plan was estimated using the Black-Scholes option pricing model.
On September 16, 2021, the Company granted to its then Chief Executive Officer, Teddy Scott, a non-qualified stock option to purchase 5,000,000 shares of common stock at an exercise price of $4.50 per share, representing the current market price on the date of the issuance of the option. Such Options shall be exercisable for a period of ten
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BAKHU HOLDINGS, CORP.
Notes to Consolidated Financial Statements
October 31, 2023
(Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
years. Six hundred twenty-five thousand (625,000) of the options shall vest and be exercisable immediately with the remaining options vesting at the rate of ninety-three thousand eighty-five (93,085) shares per month over a period of forty-seven (47) months. The fair value of each option grant issued under the 2020 Plan was estimated using the Black-Scholes option pricing model.
Dr. Scott resigned as a director and chief executive officer on November 10, 2021. As of the date of his resignation, 718,085 options were vested and are exercisable through the expiration of such options on September 16, 2031, except in the event of his death, in which case such options will terminate if not exercised within six months. The remaining 4,281,915 options terminated upon Dr. Scott’s resignation as a director.
On December 3, 2021, the Company appointed an additional director and granted him a seven-year stock option to purchase 300,000 shares of common stock at $3.00 per share, which was approximately equal to the closing price for our common stock on the date of grant. The fair value of each option grant issued under the 2020 Plan was estimated using the Black-Scholes option pricing model.
On December 6, 2021, the Company appointed a new Chief Financial and Accounting Officer and director of the Company at an annual base salary of $60,000 and granted him a seven-year stock option to purchase 300,000 shares of common stock at $3.40 per share, which was approximately equal to the closing price for our common stock on the date of grant. The fair value of each option grant issued under the 2020 Plan was estimated using the Black-Scholes option pricing model.
On December 7, 2021, the Company entered into Consulting Agreements with two consultants to assist the Science team. Pursuant to the Consulting Agreements, the Company granted each Consultant a seven-year stock option to purchase 200,000 shares of Common Stock at an exercise price of $3.40 per share, which was approximately equal to the closing price for our common stock on the date of grant. The fair value of each option grant issued under the 2020 Plan was estimated using the Black-Scholes option pricing model.
On January 5, 2022, in consideration of the services of our Chief Executive Officer and our Vice President and Secretary of the Company, we granted them each a seven-year stock option to purchase 700,000 shares of common stock at $2.60 per share which was approximately equal to the closing price for our common stock on the date of grant. The fair value of each option grant issued under the 2020 Plan was estimated using the Black-Scholes option pricing model.
On February 11, 2022, the Company appointed a new Deputy Chief Executive Officer and granted him a seven-year stock option to purchase 2,000,000 shares of common stock at an exercise price of $3.00 per share which was approximately equal to the closing price for our common stock on the date of grant. The fair value of each option grant issued under the 2020 Plan was estimated using the Black-Scholes option pricing model.
On February 11, 2022, the Company entered into a Consulting Agreement with an advisor to the board and granted him a seven-year stock option to purchase 3,500,000 shares of common stock at an exercise price of $3.00 per share which was approximately equal to the closing price for our common stock on the date of grant. The fair value of each option grant issued under the 2020 Plan was estimated using the Black-Scholes option pricing model.
On April 18, 2022, in consideration of the services of our Chief Executive Officer and our Vice President and Secretary of the Company, we granted them each a seven-year stock option to purchase 1,300,000 shares of common stock at $3.30 per share which was approximately equal to the closing price for our common stock on the date of grant. The fair value of each option grant issued under the 2020 Plan was estimated using the Black-Scholes option pricing model.
On July 29, 2022, in consideration of the services of two of our Directors, we granted them each a seven-year stock option to purchase 300,000 shares of common stock at $1.50 per share which was approximately equal to the closing price for our common stock on the date of grant. The fair value of each option grant issued under the 2020 Plan was estimated using the Black-Scholes option pricing model.
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BAKHU HOLDINGS, CORP.
Notes to Consolidated Financial Statements
October 31, 2023
(Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
On July 29, 2022, in consideration of the services of a Senior Board Advisor and our Chief Financial Officer of the Company, we granted them each a seven-year stock option to purchase 160,000 shares of common stock at $1.50 per share which was approximately equal to the closing price for our common stock on the date of grant. The fair value of each option grant issued under the 2020 Plan was estimated using the Black-Scholes option pricing model.
Based on the above assumptions for all stock options and warrants, the Company recognized stock-based compensation of $626,975 and $3,070,970 (which is included in consulting fees on the Statement of Operations) for the three months ended October 31, 2023 and 2022, respectively. As of October 31, 2023 there was $5,642,775 of total unrecognized stock-based compensation that is expected to be recognized over the remaining vesting period of the options (which ends on February 11, 2026).
Income Taxes
Income taxes are accounted for under the assets and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.
Basic and Diluted Net Loss per Share
The Company computes net loss per share in accordance with ASC 105, “Earnings per Share.” ASC 105 requires presentation of both basic and diluted earnings per share (EPS) on the face of the income statement.
Basic EPS is computed by dividing net loss available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all potentially dilutive common shares outstanding (such as stock options, warrants, and convertible notes payable) during the period. Diluted EPS excludes all potentially dilutive shares if their effect is anti-dilutive.
Professional fees
Substantially all professional fees presented in the financial statements represent accounting fees, audit fees and legal fees associated with the filing of reports with the Securities and Exchange Commission. Also included in professional fees are fees paid to the stock transfer agent. The fees are expensed as incurred.
Fiscal Periods
The Company’s fiscal year end is July 31.
Recently Issued Accounting Pronouncements
The Company has reviewed accounting pronouncements issued during the past two years and have adopted any that are applicable to the Company. We have determined that none had a material impact on our financial position, results of operations, or cash flows for the periods presented in this report.
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BAKHU HOLDINGS, CORP.
Notes to Consolidated Financial Statements
October 31, 2023
(Unaudited)
NOTE 3 – FIXED ASSETS
On January 31, 2022, the Company and Cell Science entered into the Third Amendment to the December 20, 2018 Patent and Technology License Agreement (see Note 7). As part of this transaction, the Company acquired all related equipment, improvements, supplies, and related tangible and intangible assets. The Company determined that the lab equipment acquired had a cost basis of $765,160. These costs are depreciated using the straight-line method over their estimated economic lives which is estimated to be 5 years.
Fixed Assets consisted of the following:
| October 31, 2023
|
| July 31, 2023
|
Laboratory equipment and components – at cost
| $ 668,358
|
| $ 668,357
|
Accumulated depreciation
| (233,925)
|
| (200,507)
|
Fixed assets – net
| $ 434,433
|
| $ 467,850
|
NOTE 4 - NOTES PAYABLE – RELATED PARTIES
Notes payable – related parties consist of:
| | October 31, 2023
|
| July 31, 2023
|
| Note payable to Cell Science Holding Ltd. dated January 31, 2022, interest at 0.44%, due June 30, 2023
| $ 3,500,000
|
| $ 3,500,000
|
| Convertible note payable to The OZ Corporation dated August 1, 2019, interest at 6%, due June 30, 2023
| 3,103,972
|
| 3,094,672
|
| Note payable to The OZ Corporation dated June 23, 2022, interest at 7%, due December 15, 2024
| 150,000
|
| 150,000
|
| Total – current amount due
| 6,753,972
|
| 6,744,672
|
|
|
|
|
|
| Notes payable to OZ Company, interest at 13%, due in four years from closing of promissory note agreements
| 500,000
|
| -
|
| Total – non-current amount due
| 500,000
|
| -
|
|
|
|
|
|
| Total notes payable – related parties
| $ 7,253,972
|
| $ 6,744,672
|
On August 1, 2019, the Company executed a promissory note in favor of The OZ Corporation to evidence monies loaned to the Company from December 26, 2018 through July 31, 2019 in the amount of $147,513, and to evidence any additional amounts that may be loaned to the Company thereafter. Pursuant to the terms of the promissory note, the principal and unpaid accrued simple interest at the rate of 6.0% per annum was due and payable on or before December 31, 2019 (which by successive amendments the due date was extended to December 31, 2027). The principal amount of the promissory note has been increased by the amount of any additional advances of funds made by The OZ Corporation to the Company, from time to time, from the date of such advance. Under the terms of the promissory note, The OZ Corporation, at its option may, at any time, convert all or any portion of the then unpaid principal balance and any unpaid accrued interest into shares of the Company’s common stock. The number of shares of common stock to be issued upon such conversion shall be equal to the quotient obtained by dividing (i) the then unpaid principal balance and any unpaid accrued interest of the promissory note being converted by (ii) 80% of the average closing price of the common stock of the Company, for the ninety (90) trading days before the conversion date, rounded up to the nearest whole share. The principal balance and accrued interest due on the note were $3,103,972 and $422,488, respectively, as of October 31, 2023.
The Company has not assigned any value to the conversion feature of the Note because the common stock is only thinly traded, the Company had a negative book value as of October 31, 2023, and the Company has not generated any revenue to date.
On January 31, 2022, the Company and Cell Science entered into the Third Amendment to the December 20, 2018 Patent and Technology License Agreement (see Note 7). As part of this transaction, the Company issued a $3,500,000 promissory note, bearing interest at the applicable federal short-term rate of 0.44% under IRC Section
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BAKHU HOLDINGS, CORP.
Notes to Consolidated Financial Statements
October 31, 2023
(Unaudited)
NOTE 4 - NOTES PAYABLE – RELATED PARTIES (continued)
1274(d), originally due in January 2023 which by successive amendments has been extended to December 31, 2027. The principal balance and accrued interest due on the note were $3,500,000 and $26,918, respectively, as of October 31, 2023.
On June 23, 2022, the Company executed a promissory note in favor of The OZ Corporation, in the amount of $150,000. Pursuant to the terms of the promissory note, the principal and unpaid accrued simple interest at the rate of 7.0% per annum shall be due and payable on or before December 15, 2024. The principal balance and accrued interest due on the note were $150,000 and $14,240, respectively, as of October 31, 2023.
NOTE 5 - PREFERRED AND COMMON STOCK
Preferred Stock
In connection with the December 20, 2018 Patent and Technology Agreement, the Company issued 4 shares of its Series A Preferred Stock to Cell Science. Each share of Series A Preferred Stock had voting rights equal to four (4) times the aggregate votes of the total number of shares of common stock issued and outstanding plus the total number of votes of all other classes of preferred stock issued and outstanding, divided by the number of shares of Series A Preferred Stock issued and outstanding. On September 18, 2023, Cell Science agreed to cancel the four outstanding shares of Series A Preferred Stock owned by it. As a result of this preferred stock cancellation, Cell Science no longer has the voting power to control all stockholder votes, and we are amending our certificates of designation so that the Series A Preferred Stock and Series B Preferred Stock are no longer authorized for future issuance. We now have outstanding only common stock, which is entitled to one vote per share on all matters.
Stock Option Plan
On September 22, 2020, the board of directors adopted the 2020 Long-Term Incentive Plan (“2020 Plan”), under which 20,000,000 shares of our common stock were reserved for issuance by us to attract and retain employees and directors and to provide such persons with incentives and awards for superior performance and providing services to us. The 2020 Plan is administered by a committee comprised of our board of directors or appointed by the board of directors, which has broad flexibility in designing stock-based incentives. The board of directors determines the number of shares granted and the option exercise price pursuant to the 2020 Plan.
The following table summarizes the stock option award activity under the 2020 Plan during the three months ended October 31, 2023:
|
| Number of options
|
Outstanding at July 31, 2023
|
| 10,943,075
|
Granted
|
| -
|
Exercised
|
| -
|
Expired
|
| -
|
Outstanding at October 31, 2023
|
| 10,943,075
|
The following table summarizes the warrants activity during the three months ended October 31, 2023:
|
| Number of Warrants
|
Outstanding at July 31, 2023
|
| 750,000
|
Granted
|
| -
|
Exercised
|
| -
|
Expired
|
| -
|
Outstanding at October 31, 2023
|
| 750,000
|
See Stock-based Compensation under Note 2 for description of options and warrants granted.
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BAKHU HOLDINGS, CORP.
Notes to Consolidated Financial Statements
October 31, 2023
(Unaudited)
NOTE 6 - INCOME TAXES
As of October 31, 2023, the Company had net operating loss carry forwards that may be available to reduce future years’ taxable income. Future tax benefits which may arise as a result of these losses have not been recognized in these financial statements, as their realization is determined not likely to occur and accordingly, the Company has recorded a valuation allowance for the deferred tax asset relating to these tax loss carry-forwards.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Office Cost Sharing Agreement
On September 22, 2020, the Company executed an Office Cost Sharing Agreement with The OZ Corporation. The agreement provides for the Company’s payments to The OZ Corporation of $34,000 per month for the shared use of office space located in Long Beach California for so long as The OZ Corporation provides the Company with shared use of the premises. For the three months ended October 31, 2023 and 2022, the space sharing fees were $102,000 and $102,000, respectively. As of October 31, 2023, accounts payable and accrued liabilities included $1,103,000 due to The OZ Corporation.
Patent and Technology license agreements
Under the April 2020 strategic alliance agreement and related sublicense between the Company’s subsidiary, CBD Biotech, Inc., and Integrity Cannabis Solutions, Inc. (“ICS”), the Company is obligated to issue to ICS that number of shares of Bakhu common stock equal to 0.5% of the number of shares outstanding as of the date that the production facility of ICS is completed and commences production. Further, if the sublicense is terminated, CBD Biotech will be obligated to repay to ICS its initial $250,000 license fee and reimburse ICS for the cost of the laboratory operational equipment used in its production facility, which thereafter will be owned and managed jointly by ICS and CBD Biotech.
As a result of successfully completing the efficacy demonstration of our licensed technology in July 2021, we became obligated to issue to Cell Science, the licensor, a one-year note for an agreed one-time payment of $3.5 million, less certain credits. The amount of the credits to the note were determined and on January 31, 2022, the Company and Cell Science entered into the Third Amendment to the December 20, 2018 Patent and Technology License Agreement, as subsequently amended, in which the Company and Cell Science agreed as follows:
·There would be no reduction or offset against the $3.5 million One-time Payment for costs paid by the Company or on its behalf. Therefore, the Company issued a $3.5 million promissory note, bearing interest at the applicable federal short-term rate of 0.44% under IRC Section 1274(d), originally payable on January 31, 2023, as extended by successive amendments to December 31, 2027.
·In lieu of any offset or reduction against the One-Time Payment Note, Cell Science agreed to convey to the Company the lease on the California laboratory in which the efficacy demonstration was conducted, including all related equipment, improvements, supplies, and related tangible and intangible assets.
·Cell Science and The OZ Corporation would execute and deliver to the Company a similar conveyance of all rights to the California laboratory.
·The Integrated License Agreement was clarified to provide that all improvements to the licensed technology made by the Company would be owned by Cell Science and included in the license.
The lease on the California laboratory space located in Sherman Oaks, California, as amended March 12, 2020 and assumed by the Company on January 31, 2022, provides for a monthly space sharing fee of $10,000 and has a term of thirty six (36) months from March 12, 2020 to March 12, 2023 with an option to extend for an additional period not to exceed three (3) months. In addition, the agreement provides for a monthly cannabis activities fee equal to the greater of (i) $11,640 or (ii) ten percent (10%) of the gross sales of the products, if any, manufactured through
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BAKHU HOLDINGS, CORP.
Notes to Consolidated Financial Statements
October 31, 2023
(Unaudited)
NOTE 7 - COMMITMENTS AND CONTINGENCIES (continued)
lessee’s operations. From March 12, 2023 through August 2023, the agreement continued on a month-to-month basis. For the three months ended October 31, 2023 and 2022, the space sharing fees were $10,000 and $30,000, respectively, and the cannabis activities fees were $11,640 and $34,920, respectively.
NOTE 8 – FINANCING EFFORTS
From August 1, 2023 to December 31, 2023, the Company, as part of its financing efforts, sold an aggregate of $830,000 principal amount of 13% Convertible Secured Notes, $500,000 of which were sold to OZ Company, and $330,000 to third party investors. The 13% Convertible Secured Notes bear interest at 13% payable in cash or in kind. The notes are payable at maturity in 2027. The obligations under the notes are secured by a lien on our assets. The 13% Convertible Secured Notes are convertible to our common stock at $0.50 per share.
Upon conversion of the notes, the Company will issue one warrant for each dollar amount converted, with an exercise price of $0.50 per share for warrants issued on conversion of the first $1.5 million of 13% Convertible Secured Notes issued, an exercise price of $0.75 per share for warrants issued on conversion of the second $3.5 million tranche of 13% Convertible Secured Notes issued and an exercise price of $1.00 per share for warrants issued on conversion of 13% Convertible Secured Notes issued after the first $5.0 million in notes issued.
The total note proceeds of $830,000 were deposited in a third-party escrow account. A total of $607,500 has been disbursed from escrow to pay accounts payable and current operating expenses. The balance in the escrow account at December 31, 2023 is $222,500.
NOTE 9 – RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
The Company has restated the consolidated Financial Statements for the three months ended October 31, 2022 (which were included in the Company’s Form 10-Q filed with the SEC on December 20, 2022) in order to correct the consulting fees expense related to warrants issued. The Company had previously expensed warrants that had not yet vested and therefore had overstated consulting fees expense.
The effect of the restatement adjustment on the Consolidated Statement of Operations for the three months ended October 31, 2022 follows:
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BAKHU HOLDINGS, CORP.
Notes to Consolidated Financial Statements
October 31, 2023
(Unaudited)
NOTE 10 – SUBSEQUENT EVENTS
Extension of Notes Payable
On December 27, 2023, the maturity date of the $3.5 million One-time Payment Note to Cell Science, originally due on January 2023, as previously extended by successive amendments to December 31, 2023, was further extended to December 31, 2027.
On December 27, 2023, the maturity date of the Working Capital Note payable to OZ Company, originally due on December 31, 2020, as previously extended by successive amendments to December 31, 2023, was further extended to December 31, 2027.
VO Leasing Agreement
On December 7, 2023, we reached an agreement with VO Leasing Corp., our landlord and holder of necessary cannabis cultivation and manufacturing licenses in CA, in settlement of the $623,078 owed VO Leasing as of October 31, 2023. Per the agreement, it was agreed that we would pay VO Leasing the total amount of $300,000 with interest thereon at the rate of 10% per annum as full satisfaction of the amounts owed. Under the agreement, we paid $40,000. The balance of $260,000 plus all accrued and unpaid interest is payable within 180 days (the “Due Date”). With the payment of the initial $40,000 we were permitted to retrieve the Bioreactors from the premises. Additionally, per the agreement, upon our payment, anytime before the Due Date, of an additional $50,000 applied against the balance due, we can retrieve all of our remaining equipment, except the Filtration System, which shall be Collateral for our full performance under the agreement, and which shall be released upon full payment prior to the Due Date.
Page 15
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act relating to future events or our future performance. The following discussion should be read in conjunction with our consolidated financial statements and notes to our financial statements included elsewhere in this report. This discussion contains forward-looking statements that relate to future events or our future performance. Although management believes that the assumptions made and expectations reflected in the forward-looking statements are reasonable, we cannot assure that the underlying assumptions will, in fact, prove to be correct or that actual results will not be different from expectations expressed in this report.
Business Overview
Since December 2018, we have focused on testing and commercializing cannabis plant cell-extraction and replication technologies under a technology license granted by Cell Science. This licensed technology uses plant cell-extraction and replication technology and related proprietary equipment, processes, and medium formulations in a commercially-sized bioreactor laboratory to produce, manufacture, and sell plant-based cannabis products —sometimes referred in the industry as cannabinoids—exclusively in North and Central America and the Caribbean for medical, food additive, and recreational uses.
During our fiscal quarter ended January 31, 2022, we undertook additional work to determine the limits of the technology, maximize production efficiency, and reduce production costs, which we believe will enhance our commercialization efforts. Subject to successfully completing our ongoing work, we intend to seek to commercialize the licensed technology through joint ventures, strategic partners, sublicenses, and other arrangements that may enable us to take advantage of the technical experience, regulatory relationships, and financial resources of experienced cannabinoid production firms. We intend to authorize these third parties to incorporate the technology into production facilities they fund, build, and operate to produce medical, food additive, and recreational cannabis-related products in compliance with applicable state and federal law. We will need additional financing from external sources to begin these commercialization efforts.
During the last three fiscal years and the recently completed quarter, we have not generated revenue and have devoted our limited management, technical, and financial resources to pay general and administrative expenses to position us to be able to commercially exploit the licensed technology. In July 2021, we completed efficacy testing of our licensed technology required to demonstrate its commercial viability. As we seek to implement our commercialization plan, we are seeking substantial amounts of required additional capital.
Results of Operations
Following is management’s discussion of the relevant items affecting results of operations for the three months ended October 31, 2023 and 2022.
Revenues. We generated no net revenues during the three months ended October 31, 2023 and 2022. We do not expect to generate revenues until we launch our proposed commercialization program. We cannot predict whether or when that may occur.
Consulting Fees. Consulting fees were $692,606 and $3,166,087 for the three months ended October 31, 2023, and 2022, respectively. We recognized stock-based compensation of $626,975 and $3,070,969 for the three months ended October 31, 2023 and 2022, respectively, attributable to the issuance of options and warrants. See Stock-based Compensation under Note 2 in the Notes to Financial Statements for description of options and warrants granted.
Professional Fees. Professional fees were $192,326 and $170,223 for the three months ended October 31, 2023 and 2022, respectively. Professional fees consist of legal and accounting fees associated with our reporting obligations under federal securities laws and the filing of a registration statement on behalf of stockholders for the resale of outstanding securities.
Other Operating Expenses. Other operating expenses were $149,017 and $290,514 for the three months ended October 31, 2023, and 2022, respectively. SG&A expenses include laboratory expenses, including office facility charges, insurance, equipment, staff and other related laboratory costs, which we expect will continue.
Page 16
Other Income (Expenses). We had net other expenses of $64,111 and $112,411 for the three months ended October 31, 2023, and 2022, respectively. Included in other expenses for the three months ended October 31, 2023, was the loss on sale of equipment in the amount of $65,748. Also included in other expenses were interest expenses related to our notes payable to related parties in the amount of $64,111 and $46,663 for the three months ended October 31, 2023 and 2022, respectively. The increase in interest expenses is a result of the increase in loans and notes payable due to related parties. These borrowed funds were used for operating expenses.
Net Loss. We had a net loss of $1,131,478 and $3,772,653 for the three months ended October 31, 2023, and 2022, respectively. Other than the decrease in stock based compensation, we did not expect a major change in our net loss as our operations remain relatively the same as the prior year.
Liquidity and Capital Resources
As of October 31, 2023, our primary source of liquidity consisted of $153,263 in cash and cash equivalents. Since inception, we have financed our operations through a combination of short and long-term loans from related parties and through the private placement of our common stock.
For the three months ended October 31, 2023, cash increased $150,162 from $3,101 at July 31, 2023, to $153,263 at October 31, 2023.
Net cash used in operating activities was $389,138 during the three months ended October 31, 2023, with a net loss of $1,131,478, stock-based compensation of $626,975, depreciation expense of $33,417, an increase in accounts payable of $17,837, and an increase in accrued liabilities of $64,111.
Net cash provided by investing activities was $-0- during the three months ended October 31, 2023.
During the three months ended October 31, 2023, financing activities provided $539,300 in net cash which consisted of proceeds from notes payable of $30,000, and proceeds from notes payable – related parties in the amount of $509,300.
Future Capital Requirements
Our ability to continue as a going concern is contingent upon our ability to obtain capital through the sale of equity or issuance of debt, and ultimately attaining profitable operations. We expect that any financing we receive will be similar to what we have heretofore received over the previous two years to enable us to operate, which financing consists of short-term loans from related parties at negotiated rates of interest. We cannot assure you that we will be able to successfully complete any of these activities.
We estimate that we will require a minimum of approximately $8.5 million in external capital to continue and to fund our activities during the next 12 months. Any additional funds available would be used for planned laboratory work to improve and customize our licensed processes and commercialize our technology. The actual amount of work completed will depend on the amount of capital available for those expenditures. Reductions in available capital would correspondingly delay and disrupt laboratory plans and, in turn, the commencement of our commercialization program that we anticipate will lead to recurring revenue. Less available capital will require us to implement cost-cutting measures and may delay planned activities.
We are currently seeking between $10.0 and $20.0 million through the sale of convertible secured notes to reduce our liabilities and to fund our proposed activities. As we continue our efforts to reach a minimum of $10 million in offering proceeds, we will allocate a portion of the incoming funds to repay current liabilities, and operating expenses. Such liabilities amount to approximately $2 million, including $1.3 million due officers, directors, and other affiliates for compensation, office sharing expenses, and advances.
The balance of about $8.0 million will be available to advance our proposed technology customization and refinement and our licensing effort and general and administrative expenses, including salaries and consulting fees, including compensation to officers and directors. If we obtain up to $20.0 million in gross proceeds from the sale of convertible debt, we will devote the additional funds to expanding and accelerating our implantation of our licensing plan and to payment of the $3.5 million One-time Payment Note to Cell Science, and approximate the $3.0 million Working Capital Note payable to OZ Company, both affiliates. Alternatively, in order to maximize cash proceeds
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from the offering we may seek to accept cancellation of this approximate $3.0 million working capital note with OZ Company as payment for the purchase of convertible debt in the offering.
We have no commitments or agreements to complete the above offering.
We expect to generate revenue pursuant to our commercialization and licensing efforts, dependent on obtaining additional capital to fund activities. We cannot assure you, however, that any such financings will be available or will otherwise be made on terms acceptable to us or that our present shareholders might suffer substantial dilution as a result. In addition, we may receive advance payments from joint venture partners, parties to strategic relationships, or sublicensees.
We may also seek additional debt and equity financing to fund payment of additional trade and other obligations incurred and costs of implementing our commercialization and licensing efforts. Our ability to attract debt financing will be substantially impaired by our current lack of both revenues and a robust, viable trading market for our common stock. Accordingly, any debt financing will likely be convertible to common stock, at the lender’s option, at prices discounted to our stock trading price at the time of conversion, which could dilute the interests of existing stockholders. We cannot assure that any such financings will be available, or can be completed on terms acceptable, to us. Any transaction involving the issuance of preferred or common stock, or securities convertible into common stock, would result in dilution, possibly substantial, to our current security holders.
Critical Accounting Pronouncements
Our financial statements and related public financial information are based on the application of generally accepted accounting principles in the United States (“GAAP”). GAAP requires the use of estimates, assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risks, and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.
Our significant accounting policies are summarized in Note 2 of our financial statements included in our July 31, 2022, Form 10-K. While these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates. Our management believes that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause a material effect on our results of operations, financial position or liquidity for the periods presented in this report.
Recent Accounting Pronouncements
See Note 2 in the Notes to the Financial Statements. We have reviewed accounting pronouncements issued during the past two years and have adopted any that are applicable to the Company. We have determined that none had a material impact on our financial position, results of operations, or cash flows for the periods presented in this report.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities” (“SPE”s).
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
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ITEM 4.CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by our Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Our management carried out an evaluation under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”). Based on that evaluation, management concluded that, during the period covered by this report, such internal controls and procedures were not effective due to the following material weakness identified:
·lack of appropriate segregation of duties
·lack of control procedures that include multiple levels of supervision and review
·lack of full-time executive personnel to oversee financial reporting and controls
To mitigate these issues, we have an external accountant review all transactions and accounting records and make the appropriate adjustments to the financial statements prior to the review by our external auditor.
Changes in Internal Controls
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended January 31, 2023, that have materially affected, or are 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
Notwithstanding that we are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this Item 1A, in light of the current COVID-19 pandemic, the Company is including the following Risk Factor in its Quarterly Report.
Risks Related to Ukrainian Crises
Russia’s recent military intervention in Ukraine and Hamas’ strikes in Gaza and the international community’s responses have created substantial political and economic disruption, uncertainty, and risk.
Russia’s military intervention in Ukraine in late February 2022, Ukraine’s widespread resistance, and the NATO led and United States coordinated economic, financial, communications, and other sanctions imposed by other countries have created significant political and economic world uncertainty and contributed to worldwide inflation. There is significant risk of expanded military confrontation between Russia and other countries, possibly including the United States. Current and likely additional international sanctions against Russia may contribute to higher costs, particularly for petroleum-based products.
In early October, Hamas melodeonists launched assaults against Israeli citizens in Gaza. Israel has responded aggressively with operations inside Gaza against Hamas. The foregoing events have caused substantial regional instability and world-wide concern and potential involvement. In addition to deadly fighting, the conflict has created large numbers of refugees who are fleeing Gaza.
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The Ukraine and Gaza military activities and related actions, responses, and consequences that cannot now be predicted or controlled may contribute to worldwide economic reversals and inflation. In these circumstances, our efforts to commercialize our technology may be delayed or otherwise negatively impacted.
ITEM 2.UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3.DEFAULTS UPON SENIOR SECURITIES
None
ITEM 5.OTHER INFORMATION
Cancellation of Series A Preferred Stock.
On September 18, 2023, pursuant to the consent and agreement of Inter-M Traders FZ, LLE (the “Principal Shareholder”), Cell Science Holding Ltd. (“Cell Science”), the OZ Company (the “Lead Investor”) and Bakhu, and in furtherance of the financing efforts led by the Lead Investor, the four (4) shares of Series A Preferred Stock held by the Cell Science, and which carried super-voting rights, were canceled and terminated. Each share of Series A Preferred Stock had voting rights equal to four (4) times the aggregate votes of the total number of shares of common stock issued and outstanding plus the total number of votes of all other classes of preferred stock issued and outstanding, divided by the number of shares of Series A Preferred Stock issued and outstanding, which have an equivalent of 1,204,731,932 votes. As a result of the preferred stock cancellation, Cell Science no longer has the voting power to control all stockholder votes.
As a result of the cancellation of said Series A Preferred Stock, no shares Preferred Stock are issued or outstanding, and the only class of shares that are outstanding are the shares of Common Stock which have one vote per share.
Financing Efforts
From August 1, 2023 to December 31, 2023, the Company, as part of its financing efforts, sold an aggregate of $830,000 principal amount 13% Convertible Secured Notes, $500,000 of which were sold to the OZ Company, and $330,000 to third party investors. The 13% Convertible Secured Notes, bear interest at 13%, payable in cash or in kind. The notes are payable at maturity in 2027. The obligations under the notes are secured by a lien on our assets. The 13% Convertible Secured Notes are convertible to our common stock at $0.50 per share.
Upon conversion of the notes, the Company will issue one warrant for each dollar amount converted, with an exercise price of $0.50 per share for warrants issued on conversion of the first $1.5 million of 13% Convertible Secured Notes issued, an exercise price of $0.75 per share for warrants issued on conversion of the second $3.5 million tranche of 13% Convertible Secured Notes issue, and an exercise price of $1.00 per share for warrants issued on conversion of 13% Convertible Secured Notes issued after the first $5.0 million in notes issued.
The total note proceeds of $830,000 were deposited in a third-party escrow account. A total of $607.500 has been disbursed from escrow to pay accounts payable and current operating expenses. The balance in the escrow account at December 31, 2023, is $222,500.
The referenced financing effort is continuing. Subject to meeting offering benchmarks, the Principal Shareholder and the Lead Investor have agreed to restructure our board of directors and management to use available net proceeds from the financing to renew our efforts to commercialize our licensed technology.
Subsequent Events
Extension of Notes Payable
On December 27, 2023, the maturity date of the $3.5 million One-time Payment Note to Cell Science, originally due on January 2023, as previously extended by successive amendments to December 31, 2023 was further extended to December 31, 2027.
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On December 27, 2023, the maturity date of the Working Capital Note payable to OZ Company, originally due on December 31, 2020, as previously extended by successive amendments to December 31, 2023 was further extended to December 31, 2027.
VO Leasing Agreement
On December 7, 2023, we reached an agreement with VO Leasing Corp., our landlord and holder of necessary cannabis cultivation and manufacturing licenses in CA, for payment of $589,732 we owe VO Leasing. Per the agreement, it was agreed that we would pay VO Leasing the total amount of $300,000 with interest thereon at the rate of 10% per annum as full satisfaction of the amounts owed. Under the agreement, we paid $40,000. The balance of $260,000 plus all accrued and unpaid interest is payable within 180 days (the “Due Date”). With the payment of the initial $40,000 we were permitted to retrieve the Bioreactors from the premises. Additionally, per the agreement, upon our payment, anytime before the Due Date, of an additional $50,000 applied against the balance due, we can retrieve all of our remaining equipment, except the Filtration System, which shall be Collateral for our full performance under the agreement, and which shall be released upon full payment prior to the Due Date.
ITEM 6.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits. The following exhibits are either filed as a part hereof or are incorporated by reference. Exhibit numbers correspond to the numbering system in Item 601 of Regulation S-K.
Exhibit
Number*
|
|
Description of Exhibit
|
3(i)
|
| Amended and Restated Articles of Incorporation of Bakhu Holdings, Corp. (1)
|
3(ii)
|
| Amended and Restated By-Laws of Bakhu Holdings, Corp. (1)
|
4(i)
|
| Certificate of Designation of Series A Preferred Stock (1)
|
4(ii)
|
| Certificate of Designation of Series B Preferred Stock (1)
|
10.1
|
| Patent and Technology License Agreement dated December 20, 2018 (2)
|
10.2
|
| Amended and Restated Patent and Technology License Agreement dated December 31, 2019 (3)
|
10.3
|
| Strategic Alliance Agreement between CBD Biotech Inc and ICS dated April 17, 2020
|
10.4
|
| Sublicense Agreement between CBD Biotech and ICS dated April 22, 2020
|
10.6
|
| Efficacy Demonstration Laboratory Agreement dated June 10, 2020 (5)
|
10.7
|
| Amendment to Amended and Restated License Agreement dated September 22, 2020 (6)
|
10.8
|
| Agreement, Assignment Waiver and Estoppel dated September 22, 2020 (6)
|
10.9
|
| Form of Indemnification Agreement entered into between the Company and directors Thomas Emmitt, Peter Whitton, Aristotle Popolizio and Euripides Drakes on September 22, 2022, and with Teddy Scott on September 16, 2021(6)
|
10.10
|
| Assignment and Assumption Agreement dated September 22, 2020 (6)
|
10.11
|
| Office Cost Sharing Agreement dated September 22, 2020 (6)
|
10.12
|
| Bakhu 2020 Long-Term Incentive Plan (6)
|
10.13
|
| Audit Committee Charter (6)
|
10.14
|
| Consulting Agreement with Fourth and G Holdings, LLC dated June 7, 2021(7)
|
10.15
|
| Tranche 1 Warrant issued to Fourth and G Holdings, LLC dated June 7, 2021(7)
|
10.16
|
| Tranche 2 Warrant issued to Fourth and G Holdings, LLC dated June 7, 2021(7)
|
10.17
|
| First Amendment to Amended and Restated License Agreement dated February 12, 2021(12)
|
10.18
|
| Second Amendment to Amended and Restated License Agreement dated July 12, 2021(8)
|
10.19
|
| Consulting Agreement with Damian Solomon dated July 28, 2021(9)
|
10.20
|
| Consulting Agreement with Sean Akhavan dated July 28, 2021(9)
|
10.21
|
| First Amendment to Consulting Agreement and Warrants dated September 12, 2021(10)
|
10.22
|
| Executive Employment Agreement with Teddy Scott dated September 16, 2021(11)
|
10.23
|
| Third Amendment to Integrated License Agreement dated January 31, 2022(13)
|
10.24
|
| Employment Agreement dated February 11, 2022(14)
|
10.25
|
| Consulting Agreement dated February 11, 2022(14)
|
10.26
|
| Second Amendment to BDC Consulting Agreement dated July 14, 2022(15)
|
10.27
|
| Promissory Note dated June 23, 2022(15)
|
10.28
|
| Form of Director Agreement(16)
|
10.29
|
| Form of Confidentiality and Nondisclosure Agreement(16)
|
10.30
|
| Form of Indemnification Agreement(16)
|
14.01
|
| Code of Ethics (6)
|
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(1)Previously filed on Form 8-K on August 22, 2018
(2)Previously filed on Form 8-K on December 27, 2018
(3)Previously filed on Form 8-K on January 14, 2020
(4)Previously filed on Form 8-K on April 27, 2020
(5)Previously filed on Form 8-K on June 12, 2020
(6)Previously filed on Form 8-K on October 1, 2020
(7)Previously filed on Form 8-K on June 16, 2021
(8)Previously filed on Form 8-K on July 12, 2021
(9)Previously filed on Form 8-K on August 2, 2021
(10)Previously filed on Form 8-K on September 14, 2021
(11)Previously filed on Form 8-K on September 21, 2021
(12)Previously filed on Form 10-Q on January 11, 2022
(13)Previously filed on Form 8-K on February 3, 2022
(14)Previously filed on Form 8-K on February 17, 2022
(15)Previously filed on Form 8-K on July 22, 2022
(16)Previously filed on Form 8-K on August 4, 2022
(17) Filed herewith
*
| All exhibits are numbered with the number preceding the decimal indicating the applicable SEC reference number in Item 601 and the number following the decimal indicating the sequence of the particular document.
|
(b)Financial Statement Schedules. The following financial statements are filed as part of this report:
Unaudited Consolidated Balance Sheets as of October 31, 2023 and
the audited balance sheet as of July 31, 2023;
| 3
|
Unaudited Consolidated Statements of Operations for the three-month periods ended
October 30, 2023 and 2022
| 4
|
Unaudited Consolidated Statements of Cash Flows for the three-month periods ended
October 30, 2023 and 2022
| 5
|
Unaudited Consolidated Statement of Stockholders’ Equity (Deficit) for the three-month periods
ended October 30, 2023 and 2022
| 6
|
Notes to the Consolidated Financial Statements
| 7
|
All financial statement schedules are omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or the notes thereto.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| BAKHU HOLDINGS, CORP.
|
|
|
|
|
Dated: January 22, 2024
| /s/ Aristotle Popolizio
|
| By: Aristotle Popolizio
|
| Its: Vice President
Principal Executive Officer
|
|
|
|
|
|
|
Dated: January 22, 2024
| /s/ Juan Carlos Garcia La Sienra Garcia
|
| By: Juan Carlos Garcia La Sienra Garcia
|
| Its: Chief Financial Officer
Principal Financial Officer
|
|
|
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