Advanced Container (ACTX) 10-Q2022 Q2 Quarterly report

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended June 30, 2022

☐ 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

ADVANCED CONTAINER TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (951) 381-2555

Securities registered pursuant to Section 12(b) of the Exchange 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.

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 August 22, 2022, there were 51,901,525 shares of the registrant’s Common Stock outstanding.

ADVANCED CONTAINER TECHNOLOGIES, INC.

QUARTERLY REPORT ON FORM 10-Q

for the Quarterly Period Ended June 30, 2022

TABLE OF CONTENTS 

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements that involve a number of risks and uncertainties. The use of words such as “anticipates,” “expect,” “intend,” “strive,” “goals,” “plans,” “opportunity,” “future,” “achieve,” “grow,” “committed,” “believes,” “seeks,” “targets,” “estimated,” “continues,” “likely,” “possible,” “may,” “might,” “potentially,” “will,” “would,” “should,” “could,” “on track,” and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to uncertain events or assumptions – such as future responses to and effects of COVID-19; projections of our future financial performance; future business, social, and environmental performance, goals, and measures; our anticipated growth and trends in our business and operations; projected growth and trends in markets relevant to our businesses and especially, the market for GrowPods and cannabis and related products; business and investment plans; future products and technology; laws and regulation, and especially those relating to cannabis; projected cost and yield trends; availability, uses, sufficiency, and cost of capital of capital resources; valuations; the future purchase, use, and availability of products, components, and services supplied by third parties – are based on management’s expectations as of the date of this report, unless an earlier date is specified, and involve many risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include those described throughout this report and particularly, in Part II, Item 1A, Risk Factors. Given these risks and uncertainties, you are cautioned not to place undue reliance on forward-looking statements. You are urged to review and consider carefully the various disclosures made in this report and in other reports and documents that we file from time to time with the U.S. Securities and Exchange Commission (the “SEC”).

NOTE REGARDING THIRD-PARTY INFORMATION

This report may include information and estimates that are based on reports and other publications sources from industry analysts, market research firms and other independent sources that were generally available to the public and not commissioned by us, in addition to management’s good faith estimates and analyses. We believe that such reports and publications, if included, are reliable, but have not independently verified them or their underlying data sources, methodologies or assumptions. They contain information and estimates that are based on estimates, forecasts, projections, market research, or similar methodologies, and are inherently subject to uncertainties. Actual events or circumstances may differ materially from events and circumstances reflected in these reports.

NOTE REGARDING DESCRIPTIONS OF CONTRACTS

This report may contain descriptions of contracts and instruments to which the Company or its officers and directors are parties or by which it is affected. Where such contracts or instruments are exhibits to this report, either because they are filed herewith or incorporated herein by reference, you are referred thereto and the descriptions herein are qualified by such reference. These contracts and instruments are identified in Item 6.

NOTE REGARD TRADEMARK 

“Medtainer” is a registered trademark owned by the Company. Its use in this report without the symbol “®” should not be considered to be a disclaimer of such ownership or permission to any person to use “Medtainer” without such symbol.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

ADVANCED CONTAINER TECHNOLOGIES, INC.

(formerly named Medtainer, Inc.)

CONSOLIDATED BALANCE SHEETS

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

ADVANCED CONTAINER TECHNOLOGIES, INC.

(formerly named Medtainer, Inc.)

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

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

ADVANCED CONTAINER TECHNOLOGIES, INC.

(formerly named Medtainer, Inc.)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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

ADVANCED CONTAINER TECHNOLOGIES, INC.

(formerly named Medtainer, Inc.)

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 (Unaudited):

CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021 (Unaudited):

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

ADVANCED CONTAINER TECHNOLOGIES, INC.

(formerly named Medtainer, Inc.)

Notes to Unaudited Consolidated Financial Statements

June 30, 2022

Note 1 – Description of Business and Organization

Advanced Container Technologies, Inc. (the “Company”) markets and sells two principal products: (i) beginning in the first quarter of 2021, GrowPods, which are specially modified insulated shipping containers manufactured by GP Solutions, Inc. (“GP”), in which plants, herbs and spices may be grown hydroponically in a controlled environment (“GrowPods”) and (ii) the Medtainer, which may be used to store pharmaceuticals, herbs, teas and other solids or liquids and can grind solids and shred herbs. The Company also markets and sells products related to GrowPods and the Medtainer. The Company also provides private labeling and branding for purchasers of Medtainers, lighters and other products. Management believes they have one reportable segment given the financial information that is available for review by the chief decision-maker.

The Company was incorporated under the laws of the state of Florida on September 5, 1997. It changed its corporate name to Acology, Inc. on January 9, 2014; to Medtainer, Inc. on August 28, 2018; and to its present name on October 3, 2020.

On October 9, 2020, the Company acquired all of the outstanding shares of Advanced Container Technologies, Inc., a California corporation (“ACT”), from its shareholders pursuant to an Exchange Agreement, dated August 14, 2020, and amended on September 9, 2020 (the “Exchange Agreement”), in exchange for 50,000,000 shares of the Company’s common stock (“Common Stock”). This exchange resulted in ACT’s becoming the wholly owned subsidiary of the Company. In connection with this exchange, the Company acquired a Distributorship Agreement, dated August 6, 2020, by and between ACT and GP (the “Distributorship Agreement”), under which ACT has the exclusive right to purchase GrowPods and related products from GP at prices to be agreed to from time to time and to sell and distribute them within the United States and its territories for an initial term that will expire on December 31, 2025. ACT may renew the Distributorship Agreement indefinitely as long as it purchases in the last calendar year of any term the lesser of (i) 100 GrowPods or (ii) GP’s total output of GrowPods.

On August 27, 2020, the Company incorporated Med X Technologies Inc. (“Med X”) in the State of California, and acquired all of its shares, such that it is the Company’s wholly owned subsidiary. The Company intends to transfer the assets used in its Medtainer and printing businesses to Med X, after which it will conduct all of its operations through Med X and ACT.

Note 2 – Summary of Significant Accounting Policies

Accounting Principles

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the U.S. 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 consolidated financial statements contain all the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of June 30, 2022, and the results of operations and cash flows for the periods presented. The results of operations for the three and six months ended June 30, 2022, are not necessarily indicative of the operating results for the full fiscal year or any future period. These unaudited consolidated financial statements should be read in conjunction with the financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the U.S. Securities and Exchange Commission (the “SEC”) on April 18, 2022.

Principles of Consolidation

The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. 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 these estimates could be affected by external conditions, including those unique to the Company’s industries, and general economic conditions. These external conditions could affect the Company’s estimates so as to 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. 

Cash and Cash Equivalents

The Company considers all short-term highly liquid investments with an original maturity at the date of purchase of 3 months or less to be cash equivalents. The Company had 0 cash equivalents at June 30, 2022, or December 31, 2021.

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 upon experience and the judgment of management, the provision for doubtful accounts was $5,750 for the six months ended June 30, 2022.

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. As of June 30, 2022, no inventory reserves were considered necessary.

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. Furniture and fixtures are depreciated over the useful life of 7 years. Machinery, equipment, and computers are depreciated over the useful life of 3 to 7 years. Leasehold improvements are depreciated over 2 years and were fully depreciated as of June 30, 2022. Expenditures for additions and improvements are capitalized and 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 their carrying value may not be recoverable. The Company records intangible assets at fair value when they are acquired and they are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test consists of a comparison of the fair value of the indefinite-lived intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss will be recorded in the consolidated statements of operations in an amount equal to that excess. The Company amortizes its intangible assets that have finite lives using either the straight-line method or based upon 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 5 to 20 years. The Company records intangible assets at fair value, estimated using a discounted-cash-flow approach.

The Company reviews intangible assets subject to amortization at least annually to determine whether 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 than quarterly 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 its remaining carrying value prospectively over its revised remaining useful life. The Company has conducted its annual impairment test of goodwill during the fourth quarter of each year. The estimation of fair value requires significant judgment. There was 0 impairment of intangible assets, long-lived assets or goodwill during the six-month periods ended June 30, 2022, or June 30, 2021.

Any loss resulting from an impairment test will be reflected in operating income in the Company’s consolidated statements of operations. 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.

Revenue Recognition

The Company follows the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), as amended. 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 them.

Under ASC 606, Company recognizes revenue when a customer obtains control of promised goods or services or when they are shipped to a customer, in an amount that reflects the consideration that it expects to receive in exchange for them. The Company recognizes revenues following the five-step model prescribed under ASC 606: (a) it identifies a contract with a customer; (b) it identifies the performance obligations in the contract; (c) it determines the transaction price; (d) it allocates the transaction price to the performance obligations in the contract; and (e) it recognizes revenues when (or as) it satisfies its performance obligation.

Revenues from product sales are recognized when a customer obtains control of the Company’s product, which occurs at a point in time, typically upon shipment 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 been recognized is 1 year or less or the amount is immaterial.

Revenue from sales of items sold by the Company for the three months ended June 30, 2022, and June 30, 2021, and the percentage of sales allocable to each item to the Company’s total revenues were as follows:

Revenue from sales of items sold by the Company for the six months ended June 30, 2022, and June 30, 2021, and the percentage of sales allocable to each item to the Company’s total revenues were as follows:

The table below presents the customer deposits payable balance and the significant activity affecting customer deposits during the period ended June 30, 2022:

Share-Based Payments

ASC 718, Compensation – Stock Compensation, prescribes accounting and reporting standards for all share-based payment transactions. The Company follows FASB guidance related to equity-based payments, for both employees and non-employees, which requires that equity-based compensation be accounted for using a fair value method and recognized as expense in the accompanying consolidated statements of operations. Equity-based compensation expense is recognized as compensation expense over the applicable service or vesting period (see Note 7).

Fair Value Measurements

The Company has adopted 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 on a historical cost basis, which approximates their fair values because of the short-term nature of these instruments. The carrying amounts of the Company’s short- and long-term credit obligations approximate fair value because the effective yields on these obligations, which include contractual interest rates taken together with other features, such as concurrent issuances of warrants and/or embedded conversion options, are comparable to rates of returns for instruments of similar credit risk.

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

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

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

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

Advertising

Advertising and marketing expenses are charged to operations as incurred. These expenses totaled $77,991 and $32,431 for the six months ended June 30, 2022, and June 30, 2021, respectively.

Income Taxes

The Company uses the asset and liability method of accounting for income taxes in accordance with ASC Topic 740, Income Taxes. Under this method, income tax expense is recognized for (a) taxes payable or refundable for the current year and (b) 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 of a change in tax rates on deferred tax assets and liabilities is recognized in the consolidated statements 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 that some portion or all the deferred tax assets will not be realized. 

ASC Topic 740-10-30 clarifies accounting for uncertainty in income taxes recognized in an entity’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 financial institutions, which at times may exceed the federal deposit insurance coverage of $250,000. The Company has not experienced losses on these accounts and believes that it is not exposed to significant risks on such accounts. The Company has not experienced losses on accounts receivable and the Company believes that it is not exposed to significant risks with respect to them.

Loss per Share

The basic loss per share is calculated by dividing the Company’s net loss attributable to common stockholders by the weighted average number of common shares outstanding during the year. The diluted loss per share is calculated by dividing the Company’s net loss attributable to common stockholders by the diluted weighted average number of shares outstanding during the year. The potentially dilutive stock options on the Company’s common stock were not considered in the computation of diluted net loss per share as they would be anti-dilutive. NaN dilutive effective as calculated for the three and six months ended June 30, 2022, and June 30, 2021, as the Company reported a net loss for each period.

Recent Accounting Pronouncements

The Company follows 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 asset 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. The Company and a related party entered into a building lease effective on September 1, 2018, which had a one-year term that expired on August 31, 2019, was renewed for a one-year term that expired on August 31, 2020, was renewed for a one-year term that expired on August 31, 2021, and has been renewed for a one-year term that expires August 31, 2022, at a monthly rent of $9,791. On March 23, 2021, the Company and an unrelated party entered into a lease of premises in Tulsa, Oklahoma, having a monthly rental of $5,500. The lease has a one-year term that expired on March 31, 2022, and was renewed for a one-year term at the same rent. The Company is obligated to pay all taxes, insurance, operating expenses, repairs and certain maintenance costs and utilities. Because each of these leases has a term of 12 months or less and there is no assurance the Company will remain in the building locations after the leases have expired, the Company has concluded that this ASU does not apply to these leases.

In August 2020, FASB issued ASU 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” For convertible instruments, FASB reduced the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting models results in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (2) those issued with substantial premiums for which the premiums are recorded as paid-in capital. FASB decided to amend the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. FASB observed that the application of the derivatives scope exception guidance results in accounting for some contracts as derivatives while accounting for economically similar contracts as equity. FASB also decided to improve and amend the related earnings per share guidance. The amendments in this update are effective for public business entities that meet the definition of an SEC filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Management is currently evaluating the potential impact of this new standard.

In December 2019, FASB issued ASU 2019-12, Income Taxes, which simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The guidance is effective for fiscal years beginning after December 31, 2021, and interim periods within that year. The adoption did not have any material impact on the Company’s consolidated financial statements.

In June 2016, FASB issued ASU 2016-13 regarding ASC Topic 326, “Measurement of Credit Losses on Financial Instruments.” This pronouncement changes the impairment model for most financial assets and will require the use of an “expected loss” model for instruments measured at amortized cost. Under this model, entities will be required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset. Subsequently, FASB issued an amendment to clarify the implementation dates and items that fall within the scope of this pronouncement. This standard is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Management is currently evaluating the effect on the Company’s financial statements.

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 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 June 30, 2022, the Company had a working capital deficit of $1,165,771 and an accumulated deficit of $6,800,851. 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 and services, introducing additional products and services, controlling operating expenses, negotiating extensions of overdue notes payable and raising either debt or equity financing. There is no assurance that the Company will be able to implement any of these measures.

Note 4 – Intangible Assets and Goodwill

Intangible assets, including patents and patent applications, a trademark and an internet domain related to Medtainer and distribution rights under a Distributorship Agreement dated August 6, 2020, are recorded at cost or estimated fair value at the date of acquisition. Goodwill relates to an Asset Purchase Agreement, amended as of June 8, 2018. The Company tested intellectual property and goodwill for impairment in preparing its financial statements for the year ended December 31, 2021, and determined that no adjustment was required. As of June 30, 2022, and December 31, 2021, there was no impairment of these assets, which are included in the tables below:  

Note 5 – Convertible Notes Payable and Promissory Notes Payable

As of June 30, 2022, and December 31, 2021, the Company had outstanding the following convertible notes payable and notes payable: 

Note 6 – Stockholders’ Equity

On October 8, 2020, the Company combined the outstanding shares of its common stock on the basis of 1 share of common stock for every 59 shares of common stock. The effects of this combination have been retroactively applied to all periods presented in the unaudited consolidated financial statements.

On July 30, 2020, the Company filed articles of amendment with the Secretary of State of the State of Florida, pursuant to which, a series of 1,000,000 of its 10,000,000 authorized shares of preferred stock was designated, which series is named Series A Convertible Preferred Stock (“Series A Preferred”). Each share of Series A Preferred is convertible into 0.3051 shares of Common Stock, has the dividend and distribution rights and redemption rights of the shares of Common Stock into which it is convertible, is not redeemable and has voting power equal to the combined voting power of all other of classes and series of the Company’s capital stock. On June 24, 2020, the Company issued all of the shares of this series to a related party in exchange for 305,085 shares of Common Stock.

On October 9, 2020, the Company issued 50,000,000 shares of Common Stock to the shareholders of ACT in exchange for their shares in ACT pursuant to the Exchange Agreement. See Note 1. As a result, ACT became the wholly owned subsidiary of the Company and the Company acquired the Distributorship Agreement, which has been valued as an intangible asset at $900,000 (see Note 4) and $86,293 in cash. Under the Distributorship Agreement, ACT has the exclusive right to purchase GrowPods and related products at prices to be agreed to from time to time and to sell and distribute them within the United States and its territories for an initial term that will expire on December 31, 2025. ACT may renew the Distributorship Agreement indefinitely as long as it purchases the lesser of (i) 100 GrowPods or (ii) GP’s total output of GrowPods in the last calendar year of any term. 

On January 1, 2021, the Company issued 120,000 shares of Common Stock to one of the Company’s directors as compensation pursuant to a Director Agreement between the Company and him, dated as of that date.

During the six months ended June 30, 2022, the Company issued 280,001 shares of Common Stock to four individuals. The aggregate purchase price of these shares was $210,000. During the year ended December 31, 2021, the Company issued 485,000 shares of Common Stock to eight individuals. The aggregate purchase price of these shares was $615,000.

Note 7 – Share-Based Compensation

The Company’s 2018 Incentive Award Plan (the “2018 Plan”) became effective on December 1, 2018, under which the Company may issue up to 33,898 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.

On December 1, 2018, 22,882 shares of common stock were awarded to employees in the form of restricted shares and 5,678 shares of common stock were awarded to consultants as compensation. The fair value of these shares on the grant date was $0.59 per share. As of December 31, 2020, all of these shares had vested. The following table shows vesting for financial reporting purposes under GAAP of the shares issued under the 2018 Plan: 

The Company made no awards in any other form during the six months ended June 30, 2022, and June 30, 2021.

The Company expensed $0 for share-based compensation under the 2018 Plan in the six months ended June 30, 2022, and June 30, 2021, respectively, for its employees and consultants in the accompanying consolidated statements of operations.

On January 1, 2021, the Company issued 120,000 shares of Common Stock to one of its directors, as compensation pursuant to a Director Agreement, dated as of that date and, in the six months ended June 30, 2021, the Company expensed $270,000 for share-based compensation in respect of these shares (see Note 6), based on their fair market value of $2.25 per share on their date of issuance.

Note 8 – Income Taxes

As of December 31, 2021, the Company had approximately $2,351,000 and $1,649,000 of net operating loss carryforwards (“NOLs”) available to reduce future Federal and California, respectively, taxable income, which will begin to expire in 2031. 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 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 enacted, 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, based thereon, has determined that the 2017 Tax Act does not change the determination that it is more likely than not that the deferred tax assets will not be realized. Accordingly, the Company has kept the full valuation allowance. As a result, the Company recorded $1,600 and $2,700, respectively, for minimum State franchise fees in general and administrative expenses during the six months ended June 30, 2022, and June 30, 2021.

Note 9 – Related-Party Transactions

Loans

The Company has received loans from its officers and directors from time to time since its inception. During the six months ended June 30, 2022, the Company received $163,351 in loans from one of its officers and directors and repaid $96,866 of these loans. During the six months ended June 30, 2021, the Company received $1,350 and repaid $93,474 of these loans. The balance of these loans at June 30, 2022, and December 31, 2021, was $386,896 and $320,411, 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 building lease payments and purchases products for resale from entities owned by a related party, who is also one of its executive officers.

Payments made to related parties for the six months ended June 30, 2022, and June 30, 2021, were as follows: 

Director Compensation

On January 1, 2021, the Company issued 120,000 shares of Common Stock to one of its directors as compensation pursuant to a Director Agreement, dated as of that date. (See Note 7.)

Note 10 – Concentrations

For the three months ended June 30, 2022, two of the Company’s customers accounted for approximately 22% and 19% of total revenues. For the three months ended June 30, 2021, two of the Company’s customers accounted for 24% and 10% of total revenues.

For the six months ended June 30, 2022, two of the Company’s customers accounted for approximately 17% and 14% of total revenues. For the six months ended June 30, 2021, two of the Company’s customers accounted for 41% and 17% of total revenues.

For the three months ended June 30, 2022, and June 30, 2021, the Company purchased approximately 45% and 51%, respectively, of its products for cost of goods sold from one distributor. For the six months ended June 30, 2022, and June 30, 2021, the Company purchased approximately 46% and 72%, respectively, of its products for cost of goods sold from one distributor.

As of June 30, 2022, two of the Company's customers accounted for 36% and 32%, respectively, of its accounts receivables. As of December 31, 2021, two of the Company’s customers accounted for 34% and 30%, respectively, of its accounts receivable.

Note 11 – Commitments

On September 1, 2018, the Company entered into an operating lease with an entity owned by a related party calling for monthly payments of $8,641, plus 100% of operating expenses, for a term expiring on August 31, 2019. On September 1, 2019, this lease was amended such that it expired on August 31, 2020, and the rent thereunder was increased to $8,967 per month. On September 1, 2020, this lease was amended such that its term will expire on August 31, 2021, and the rent thereunder was increased to $9,007 per month. On September 1, 2021, the lease was amended such that its term will expire on August 31, 2022, and the rent thereunder was increased to $9,791 per month. Management is currently negotiating a lease extension.

The Company leases premises of 6,000 square feet, which it uses as a showroom, in Tulsa, Oklahoma, at a monthly rental of $5,500 for a term that will expire on March 31, 2023.

Under an agreement with the supplier of Medtainers entered into in 2018, the Company agreed to purchase a minimum of 30,000 units of product per month. Under the terms of this agreement, the minimum purchase quantity increases by 1% on every anniversary of its effective date and is now 31,218 units per month. The purchase price for units is subject to periodic adjustment for changes in the consumer price index. This agreement will expire on April 30, 2031; however, it can be terminated upon payment of $400,000.

Note 12 – Subsequent Events

Management has evaluated all other subsequent events when the consolidated financial statements were issued and determined that none of them requires this 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 UNAUDITED CONSOLIDATED 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 June 30, 2022, 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 unaudited 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, 2021, filed with the SEC on April 18, 2021. 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 in Part II, Item 1A, Risk Factors, or other events, 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 corporate name Synthetic Flowers of America, Inc. It changed its corporate name to Acology, Inc. on January 9, 2014; on August 28, 2018, to Medtainer, Inc.; and on October 3, 2020, to its present name.

The Company is in the businesses of (i) selling and distributing hydroponic containers called “GrowPods” and related products and (ii) designing, 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, as well as selling other products such as humidity control inserts, smell-proof bags, lighters, and plastic lighter holders, and providing private labeling and branding for purchasers of the Company’s containers and the 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.

On October 9, 2020, the Company acquired all of the outstanding shares of Advanced Container Technologies, Inc., a California corporation (“Advanced”), from its shareholders pursuant to an Exchange Agreement, dated August 14, 2020, which was amended on September 9, 2020 (as so amended, the “Exchange Agreement”), in exchange for 50,000,000 shares of the Company’s Common Stock. This exchange resulted in Advanced’s becoming a wholly owned subsidiary of the Company.

The acquisition of ACT represented a material change in the business strategy of the Company and an expansion of its product base. Since the inception of the Company in 2014, its intended growth strategy was to concentrate on increasing sales of Medtainers, while introducing related products and services, such as humidity control inserts and printing. This approach resulted in relatively flat revenues, increasing expenses and a history of losses. Management believes that this acquisition offered the prospect of substantially increased revenues, without a comparable increase in expenses an opportunity to expand its profits significantly. The Company has announced that it is exploring with GP the acquisition of its assets and the assumption of some or all of its liabilities in exchange for shares of Common Stock (the “GP Acquisition”). Discussions are in their preliminary stages and none of the terms and conditions of the acquisition has been determined, including the number of shares of Common Stock to be issued to GP in exchange for its assets or the liabilities of GP that the Company would assume. The Company intends to structure any transaction such that its board of directors and executive officers would not be changed and that voting control of the Company would not be affected.

The Company’s authorized capital is 100,000,000 shares of Common Stock and 10,000,000 shares of preferred stock, par value $0.00001 per share. On October 3, 2020, the Company combined the outstanding shares of its Common Stock on the basis of one share for every 59 shares then outstanding; the number of authorized shares of Common Stock and preferred stock was unaffected. The effect of this combination has been applied to all periods covered by this report. The Company has also designated 1,000,000 shares of its preferred stock as Series A Convertible Preferred Stock (“Series A Preferred”) and, on July 31, 2020, issued them to its chief executive officer in exchange for 305,085 shares of his Common Stock; these shares, together with the shares of Common Stock owned by him, confer voting control of the Company on him. See Item 10, Employment Agreement.

The Company’s principal place of business is located at 1620 Commerce St., Corona, CA 92878. The Company’s telephone number is (951) 381-2555. The Company has two corporate websites: www.advancedcontainertechnologies.com for GrowPods and related items and www.medtainer.com for Medtainers and related products and services. Common Stock is quoted on the OTC Pink tier of OTC Link, a quotation system operated by OTC Markets Group Inc. (“OTC Link”), under the trading symbol ACTX.

Going Concern

As indicated in Note 3 of the Notes to Consolidated Financial Statements, there is substantial doubt as to the ability of the Company to continue as a going concern. The Company has generated material operating losses since inception and its ability to continue as a going concern depends on the successful execution of its operating plan, which includes increasing sales of existing products – and in particular GrowPods and related products – while introducing additional products and services, controlling cost of goods sold and operation expenses, negotiating extensions of existing loans, and raising either debt or equity financing.

Need for Capital

The Company needs a substantial amount of additional capital to fund its business, including expansion of its operations, and for repayment 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. If adequate capital cannot be obtained on a timely basis and on satisfactory terms, the Company’s operations could be materially negatively impacted it may need to take certain measures to remain a going concern, or it could be forced to terminate operating.

Impact of the Covid-19 Pandemic

For more information regarding the impact of the Covid-19 pandemic on the Company, see Part II – Item 1A – Risk Factors.

Critical Accounting Policies and Estimates

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 estimates could be affected by external conditions, including those unique to its industry, and general economic conditions, which could affect the Company s estimates so as to 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 the consolidated financial statements contained in this report 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 allowances.

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 on a historical cost basis, which approximates their fair value 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).

Goodwill and Intangible Asset Impairment

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 their carrying value may not be recoverable. The Company records intangible assets at fair value when they are acquired and they are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test consists of a comparison of the fair value of the indefinite lived intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss will be recorded in the consolidated statements of operation in an amount equal to that excess. The Company amortizes its intangible assets that have finite lives using either the straight-line method or based upon 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 5 to 20 years.

Significant judgment is required in evaluating whether an intangible asset has an indefinite useful life and in testing for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, and incorporating general economic and market conditions.

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 its 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 also 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 the business climate, market conditions, or other events, including the Covid-19 pandemic, that indicate an asset’s carrying amount may not be recoverable. The recoverability of these assets is measured by comparing the carrying amount of each asset with 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.

Pursuant to ASU No. 2017-04, Simplifying the Test for Goodwill Impairment (“ASU No. 2017-04”), 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. The Company has conducted annual impairment tests of goodwill during the fourth quarter of each year, commencing in the year ended December 31, 2018, in which year it first acquired intangible assets. 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. The Company operates as a single operating unit and consequently evaluates goodwill for impairment based upon an evaluation of the fair value of the Company as a whole. The estimation of fair value requires significant judgment. The goodwill recorded in the consolidated balance sheets at December 31, 2021, and December 31, 2020, was $1,020,314. Goodwill was due entirely to the Company s acquisition of intangible property relating to Medtainers in 2018. Various future events, including changes in demand for the Company s products and the Covid-19 pandemic, could result in an impairment of goodwill. Any adjustments resulting from an impairment test will be reflected in operating income in the Company s consolidated financial statements.

The fair value of acquired technology and patents, as well as acquired technology that the Company may develop, is determined at their acquisition date primarily using the income approach, which discounts expected future cash flows to present value. The discount rates used in the present value calculations are typically derived from a weighted-average cost-of-capital analysis and then adjusted to reflect risks inherent in the development life cycle as appropriate. 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.

There was no impairment of intangible assets, long-lived assets or goodwill during the years ended December 31, 2021, and December 31, 2020.

Revenue Recognition

Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), as amended by ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net); ASU No. 2016-10, 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, 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 them.

Under ASU No. 2014-09, as amended, the Company recognizes revenues when a customer obtains control of promised goods or services, or when they are shipped to a customer, in an amount that reflects the consideration that it expects to receive in exchange for them. The Company recognizes revenues following a five-step model: (a) it identifies contract(s) with a customer; (b) it identifies the performance obligations in the contract; (c) it determines the transaction price; (d) it allocates the transaction price to the performance obligations in the contract; and (e) it recognizes revenues when (or as) it satisfies its performance obligation.

Revenues from product sales are recognized when a customer obtains control of the Company s product, which occurs at a point in time, typically upon shipment 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 been recognized is one year or less or the amount is immaterial.

Taxes

The Company accounts for income taxes under FASB ASC Topic 740, Accounting for Income Taxes, under which the Company is required to recognize a current tax liability or asset for current taxes payable or refundable and a deferred tax liability or asset for the estimated future tax effects of temporary differences and carry forwards to the extent they are realizable.

Results of Operations

Comparison of the Three Months Ended June 30, 2022, and June 30, 2021

The following table sets forth information from the statements of operations for the three months ended June 30, 2022, and June 30, 2021.

Revenues

Revenues were $739,342 and $758,572 for the three months ended June 30, 2022, and June 30, 2021, respectively. The decrease was primarily due to a $85,306 decrease in revenues from sales of Medtainers and a $44,658 decrease in revenues from sales of other products, and was partially offset by a $57,500 increase in GrowPods and related products and a $44,686 increase in sales of lighters.

Cost of Goods Sold

Cost of goods sold for the three months ended June 30, 2022, and June 30, 2021, were $532,131 and $491,828, respectively. The difference was primarily due to a $57,500 increase in the cost of GrowPods and a $28,060 increase in the cost of lighters, and was partially offset by a $31,682 decrease in other product costs and a $13,708 decrease in cost of Medtainers.

Operating Expenses

The following table sets forth operating expenses for the three months ended June 30, 2022, and June 30, 2021:

Operating expenses were $469,989 and $556,370 for the three months ended June 30, 2022, and June 30, 2021, respectively. The decrease in operating expense was attributed to reduction of $123,492 in payroll expense, partially offset by a $11,918 increase in advertising and marketing and a $ 5,750 increase in bad debt expense.

Loss from Operations

Loss from operations decreased from a loss of $289,626 for the three months ended June 30, 2021, to a loss of $262,778 for the three months ended June 30, 2022, primarily due to a decrease $123,492 decrease in payroll expenses, which was partially offset by an increase of $40,303 in cost of goods sold, a $19,783 increase in general and administrative and a $11,918 increase in advertising and marketing.

Other Income (Expense)

For the three months ended June 30, 2022, and June 30, 2021, interest expense was $5,506 and $7,786, respectively.

Net Loss

The net loss for the three months ended June 30, 2022, was $268,284 ($69,516 of which was non-cash expense for depreciation and amortization), versus a net loss of $297,412 ($69,384 of which was non-cash expense for depreciation and amortization), for the three months ended June 30, 2021. As more fully described above, the principal reason for this difference was an $86,381 decrease in operating expenses.

Comparison of the Six Months Ended June 30, 2022, and June 30, 2021

The following table sets forth information from the statements of operations for the six months ended June 30, 2022, and June 30, 2021.

Revenues

Revenues were $1,665,490 and $2,631,530 for the six months ended June 30, 2022, and June 30, 2021, respectively. The difference was primarily due to a $1,070,350 decrease in revenues from sales of GrowPods, a $87,849 decrease in revenues from Medtainer sales and a $64,245 decrease in revenues from humidity pack sales, partially offset by a $232,488 increase in lighter sales and a $31,567 increase in printing sales.

Cost of Goods Sold

Cost of goods sold for the six months ended June 30, 2022, and June 30, 2021, were $1,140,100 and $2,041,869, respectively. This decrease was primarily due to a $1,085,380 decrease in the cost of GrowPods, a $27,159 decrease in cost of other products and a $8,181 decrease in cost of Medtainers. This decrease was partially offset by a $152,162 increase in cost of lighters.

Operating Expenses

Operating expenses for the six months ended June 30, 2022, and June 30, 2021, consisted of the following:

Operating expenses were $956,653 and $1,171,256 for the six months ended June 30, 2022, and June 30, 2021, respectively. The decrease in operating expenses was attributed to a $270,000 decrease in share-based compensation and a $54,758 decrease in payroll expenses. This decrease was partially offset by a $45,560 increase in advertising and marketing expense and a $35,352 increase in general and administrative expense, of which $13,352 was an increase of rental expense.

Loss from Operations

Loss from operations decreased from a loss of $581,595 for the six months ended June 30, 2021, to $431,263 for the six months ended June 30, 2022, primarily due to a $270,000 decrease in share-based compensation and a $54,758 decrease in payroll expenses, and was partially offset by a $45,560 in advertising and marketing expense.

Other Income (Expense)

For the six months ended June 30, 2022, and June 30, 2021, interest expense was $10,138 and $12,790, respectively.

Net Loss

Net loss for the six months ended June 30, 2021, was $594,385 ($270,000 of which was non-cash expense for share-based compensation and $139,824 of which was non-cash expense for depreciation), versus net loss of $441,401 ($138,539 of which was non-cash expense for depreciation) for the six months ended June 30, 2022. As more fully described above, the principal reason for this difference was a $64,271 decrease in gross profit and a $214,603 decrease in operating expenses.

Liquidity and Capital Resources

As of June 30, 2022, the Company had $101,155 in cash and accounts receivable of $221,341. As of June 30, 2022, and December 31, 2021, the Company had negative working capital of $1,165,771 and $1,073,722, respectively. As of June 30, 2022, the Company had no commitments for capital expenditures. As of that date, the Company had inventory of approximately 72,000 Medtainer products, approximately 115,000 units of other products and two GrowPod units.

During the six months ended June 30, 2022, the Company experienced negative cash flow from operations of $76,459 and added $118,247 of cash flows from financing activities. During the six months ended June 30, 2021, the Company experienced negative cash flow from operations of $446,263 and added $466,476 of cash flows from financing activities. Cash used in operating activities was primarily a result of the Company’s net loss, partially offset by the non-cash item of amortization and the decrease in operating assets and liabilities.

The decrease in cash provided from financing activities was primarily a result of a repayment of debt.

On May 4, 2020, the Company made a note in favor of Customers Bank in the principal amount of $137,690 pursuant to the terms of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) (the “PPP Loan”) and pursuant to all regulations and guidance promulgated or provided by the SBA and other Federal agencies that are now, or may become, applicable to the loan. On August 5, 2021, the Company was notified that the Paycheck Protection Note and the interest accrued thereon had been forgiven in full, subject to review by the SBA. The principal and interest forgiven will be recorded as non-operating income in the consolidated statement of operations for the quarter ending September 30, 2021.

In 2020, the Company received $137,690 from the PPP Loan and $210,000 from the sale of 348,983 shares of Common Stock to two private investors, and in 2021, the Company has received $615,000 from sales of 485,000 Common Stock to private investors. The proceeds from these transactions, which total $962,690, are insufficient to meet the Company’s capital needs, inasmuch as it believes that it will require approximately $1,000,000 in additional funding for the next 12 months, including approximately $600,000 to repay loans and interest that are past due, assuming that the Company’s operating loss remains at the same level and that it does not acquire the assets of GP, as it announced it may on February 28, 2022. If it does consummate this acquisition, the Company believes that it would require approximately $2,300,000 in additional funding for the next 12 months, owing to increased expenses associated with operating and integrating the acquired business. The Company is seeking extensions of its past-due loans, and if it is successful in doing so, the amount of such funding will be reduced, but assurance can be given as to the extent that it will be successful. The Company plans to fund its activities principally through the sale of debt or equity securities to private investors and, if attained, its profits. There is no assurance that such funding will be available on acceptable terms or available at all, or that the Company will attain profitability. If the Company is unable to raise sufficient funds when required or on acceptable terms, it may have to reduce significantly, or discontinue, its operations. To the extent that funds are raised by issuing equity securities or securities that are convertible into the Company’s equity securities, its stockholders may experience significant dilution.

The Company had no material commitments for capital expenditures as of June 30, 2022, or as of the date of this report.

The Company intends to devote its manpower and capital resources to increasing revenues, while working to reduce the cost of goods sold and operating expenses. Doing so depends on the successful execution of its operating plan, which includes increasing sales of existing products, introducing additional products and services, controlling cost of goods sold and operation expenses, negotiating extensions of existing loans and raising either debt or equity financing.

Off-Balance-Sheet Arrangements

The Company has no off-balance-sheet arrangements.

Recent Accounting Pronouncements

Refer to Note 2 of the accompanying financial statements. 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The Company’s management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of June 30, 2022. 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 June 30, 2022 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.

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

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

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

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

Due to the Company’s measures to reduce operating expenses, principally payroll costs, the COVID-19 pandemic did not have a material impact on its results of operations in 2020, 2021 and the second quarter of 2022. Nevertheless, the federal and local governmental restrictions that were implemented to control the spread of the virus, including quarantines, travel restrictions, business shutdowns and restrictions on the movement and gathering of people, affected the Company during these periods. During these periods, the cost-saving actions that the Company took to address and mitigate the effects of COVID-19 among other things reduced its ability to market its products at trade shows, led to disruptions in its business, reduced its ability to grow, resulted in the termination of many employees and increased the workload for the employees that were retained. These measures may have affected the ability of the Company to raise capital and may have created risks to the effectiveness of the Company’s internal controls. Almost all restrictions affecting the Company have been lifted. Accordingly, the Company has resumed normal operations and expects to operate normally as long as infections continue to remain at their current level. If, however, the pandemic were to intensify, the risks to which the Company is subject, including, but not limited to, those arising because of its inability to raise capital, the ability of its customers to pay the Company on a timely basis or at all and the execution of its strategy, could increase.

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

Cannabis is a Schedule I controlled substance under the Controlled Substances Act and accordingly, its cultivation, sale, or possession is unlawful under federal law, as is its advertisement for sale and the sale of paraphernalia designed or intended primarily for its use, unless such paraphernalia is authorized by federal, state, or local law. The Controlled Substances Act is enforced by the Drug Enforcement Administration (the “DEA”). The United States Supreme Court has ruled that the federal government has the right to regulate and criminalize cannabis, even for medical purposes. The illegality of cannabis under federal law preempts state laws that legalize its use and therefore, federal law and enforcement may adversely impact the implementation and effect of state laws permitting adult use of cannabis or its use for medical purposes.

Because cannabis is illegal under federal law, certain of our customers and suppliers involved in the cannabis business (collectively, “Cannabis Industry Participants) and we are subject to a number of risks. If any of the events described below in connection with these risks were to occur, our business, results of operations and financial condition could be materially and adversely affected. We do not believe that we are a Cannabis Industry Participant.

While we are not engaged in the cultivation or sale of cannabis, we sell our products to persons who may be Cannabis Industry Participants. Accordingly, laws and regulations governing the cultivation, sale and possession of cannabis and related products could affect our business. Such laws and regulations have been enacted on both the state and federal government levels and are subject to change. New laws and regulations and enforcement actions by state and federal authorities could indirectly reduce demand for our products and could materially and adversely affect our business, results of operations and financial condition.

State laws permitting the cultivation, possession, and of cannabis for adult and medical uses conflict with federal laws that prohibit such activities for any purpose. Many states have legalized or decriminalized the cultivation, use and possession of cannabis for adult use, while other states have enacted legislation specifically permitting the cultivation, use and possession of cannabis for medicinal purposes only If cannabis were to become legal under federal law, its cultivation, use and possession could be regulated by the FDA and the DEA (which now licenses cannabis research and drugs containing active ingredients derived from cannabis) or other federal agencies, either exclusively or in addition to state authorities.

Federal and state laws and regulations affecting the U.S. cannabis industry, which are broad in scope and subject to evolving interpretations, are continually changing, and these changes could adversely affect our growth, revenues, results of operations and success generally. As a result, users of our products and certain of our suppliers could incur substantial costs associated with compliance, which could in turn materially and adversely affect our business, results of operations and financial condition. In addition, violations of these laws by these users and suppliers, or allegations of such violations, could have a like effect. Demand for our products may be negatively impacted, depending on how laws, regulations, administrative practices, enforcement approaches, judicial interpretations and consumer perceptions develop. We cannot predict the nature of such developments or the effect, if any, that they could have on our business, results of operations and financial condition.

Other laws that could affect us directly, if, contrary to our belief, we were found to be a Cannabis Industry Participant, or indirectly through Cannabis Industry Participants with whom we do business, include:

We believe that most US. attorneys are not prioritizing the prosecution of cannabis-related offenses and medical cannabis is currently protected against enforcement by enacted legislation, which, if true, lowers, but does not eliminate, our cannabis-related risk. However, changes in the federal approach to enforcement could negatively affect the industry, potentially ending it entirely or causing significant direct or indirect financial damage to us. The legal uncertainty and possible future changes in law could negatively and substantially affect our business, results of operations and financial condition.

Violations of laws relating to cannabis could result in significant fines, penalties, administrative sanctions, convictions or settlements, including, but not limited to, disgorgement of profits, cessation of business activities or divestiture, arising from civil proceedings or criminal charges. This could have a material and materially adverse effect on our business, including our reputation and ability to conduct business, the listing or quotation of our securities on stock exchanges and quotation services, the settlement of trades of our securities, our ability to obtain banking services, our financial position, operating results, profitability or liquidity or the market price of our publicly traded shares. It is difficult for us to estimate the time, expenditures and resources that would be required in the event of such a proceeding. 

We have had and may continue to have difficulty in marketing and selling GrowPods and related products

The Company began selling GrowPods and related products in 2021 and has not yet acquired internal and external personnel in the quantity and with the skills and capacity necessary to market GrowPods, nor has it raised the capital necessary acquire such staff and to market and sell GrowPods. The extent of the Company’s difficulty in marketing and selling GrowPods is indicated by the fact that its revenues from sales of GrowPods diminished from $1,470,000 for the six-month period ended June 30, 2021, to $399,650 for the six-month period ended June 30, 2022. If funds are available, the Company intends to hire additional staff, but cannot assure that it will be able to manage and retain it. Further, if the GP Acquisition is completed, difficulties could arise in integrating GP’s operations with those of the Company that could adversely affect sales of GrowPods. If the Company is unable to market and sell GrowPods successfully, it may have to curtail its operations in this area, which could have a material and adverse impact on the Company, its financial results and its reputation.

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

During the six months ended June 30, 2022, the Company sold 280,001 shares of Common Stock to eight individuals for an aggregate purchase price of $210,000, without registration under the Securities Act, in reliance upon the exemptions from registration afforded by Section 4(a)(2) thereof and Rule 506(b) or (c) promulgated thereunder. During the six months ended June 30, 2021, the Company sold 485,000 shares of Common Stock to eight individuals for an aggregate purchase price of $615,000, without registration under the Securities Act, in reliance upon the exemptions from registration afforded by Section 4(a)(2) thereof and Rule 506(b) or (c) promulgated thereunder.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

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.