10-Q: TAURIGA SCIENCES, INC.
(EDGAR Online via COMTEX) — ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations describes the principal factors affecting the results of operations, liquidity and capital resources of the Company and critical accounting estimates. This discussion should be read in conjunction with the accompanying quarterly unaudited Condensed Consolidated Financial Statements contained in this Form 10-Q and our Annual Report on Form 10-K, for the year ended March 31, 2018 (“Annual Report”). Our Annual Report includes additional information about our significant accounting policies, practices and the transactions that underlie our financial results, as well as a detailed discussion of the most significant risks and uncertainties associated with our financial and operating results.
Tauriga Sciences, Inc. (the “Company,” “Tauriga” or “us”), prior to December 12, 2011, was involved in the business of exploiting new technologies for the production of clean energy. The Company was then moving in the direction of a diversified biotechnology company. The mission of the Company is to evaluate potential acquisition candidates operating in the life sciences technology space.
During the quarter ended December 31, 2017, the Company launched a lip balm product (branded as HerMan(R)) during December 2017. The Company is hopeful that this product can provide the Company with sustainable revenue at margins that will justify the initial expense and effort. The Company believes that the initial high cost per unit of this lip balm product was largely attributable to formulation issues that have since been addressed and resolved, packing issues, fulfillment issues and shipping costs. The packing issues are still in process of being resolved. Upon successful resolution of these issues, the Company anticipates ramping up marketing and sales efforts. The Company believes that future inventory costs, if there is sufficient demand will be substantially lower than the first batch on a per unit basis. The Company is exercising caution and performing due diligence to ensure that any potential opportunities in this area are appropriately evaluated. Moving forward, the Company remains interested in consummating an acquisition or other strategic transaction to bolster its operations such as with Malibu Health Technologies regarding the development of the Omega-3 product as well as the implementation of the electric vehicle car charging units that are anticipated to be deployed in our third fiscal quarter of 2019, if possible; however, we cannot express with any certainty that an acquisition or other strategic transaction will be sourced or consummated, or by when. If an acquisition or other strategic transaction is sourced, and approved by the board of directors, the Company will, in addition to conducting appropriate due diligence on such target, evaluate its options in terms of its cost and payment approach to any such transaction, including the utilization of available cash, equity or a mixture of both to consummate such transaction.
The Company’s activities are subject to significant risks and uncertainties, including failing to secure additional funding, success in developing and marketing its products and the level of competition. These risks and others are described in greater detail in the risk factors set forth in our annual report on 10-K for the year ended March 31, 2018, as supplemented by the risk factors set forth in Item 1A of Part II of this Form 10-Q.
2018 Reverse Stock Split
On March 12, 2018, the Company held a meeting of its board of directors. The matters voted on and approved at the meeting included an amendment to the Company’s Articles of Incorporation to decrease the number of authorized shares of the Company’s common stock, $0.00001 par value per share from 7,500,000,000 to 100,000,000 shares and to affect a reverse stock split of the Company’s Common Stock at a ratio of 1-for-75 (the “Reverse Stock Split”).
On June 8, 2018, the Company filed an Articles of Amendment to its Articles of Incorporation (the “Amendment”) with the Secretary of State of the State of Florida, for the aforementioned decrease in the number of authorized shares and to affect a 1-for-75 reverse stock split of the Company’s common stock. The Reverse Stock Split became effective at 12:01 a.m. on July 9, 2018.
As a result of the Reverse Stock Split, each seventy-five (75) shares of the Company’s issued and outstanding common stock has been automatically combined and converted into one (1) issued and outstanding share of common stock. The Reverse Stock Split has affected all issued and outstanding shares of common stock, as well as common stock underlying stock options, warrants and other convertible securities outstanding immediately prior to the effectiveness of the Reverse Stock Split. The Reverse Stock Split has reduced the number of outstanding shares of the common stock outstanding prior to the Reverse Stock Split from 4,078,179,672 shares to 54,380,230 shares following the Reverse Stock Split.
No fractional shares were issued as a result of the Reverse Stock Split, and any such stockholders whose number of post-split shares would have resulted in a fractional number had his/her/its shares rounded up to the next number of shares.
Pursuant to SAB Topic 14C of the Securities Exchange Act of 1934, as amended, the holders of common stock, par value $0.00001 per share, were notified via Current Report Form 8K (filed on July 9, 2018) that, in accordance with applicable Florida corporation law (the Company’s domestic jurisdiction), on March 12, 2018, the Company received a unanimous written consent in lieu of a meeting of the holders of the common stock that the common stock of the Company 1 for 75 reverse split was effective.
All references set forth in this quarterly report to number of shares or per share data have been presented retroactively on a post reverse stock-split basis, including any common stock equivalents, have been retroactively adjusted in these condensed consolidated financial statements for all periods presented to reflect the 1-for-75 Reverse Stock Split.
On July 30, 2018, the Company’s stock began trading on the OTC:QB.
Cupua�u Butter Lip Balm
On December 23, 2016, the Company entered into a non-exclusive, 12-month license agreement (the “License Agreement”) with Cleveland, Ohio based cosmetics products firm Ice + Jam LLC (“Ice + Jam”). Under terms of the License Agreement, the Company will market Ice + Jam’s proprietary cupua�u butter lip balm, sold under the trademark HerMan(R) and the two companies will evenly share on a 50/50 basis any profits generated through the Company’s marketing, sales and distribution efforts. The Company had agreed to pay the production, marketing and start-up costs for all product it sells to retail customers or distributors. As part of the License Agreement, the Company issued 66,667 common shares which had a value of $27,500, based on the closing price of the stock on the day the Company entered into the agreement ($0.38 per share). The cost of the shares will be prorated over the life of the license.
On November 27, 2017, the Company announced a 2-year extension to the existing non-exclusive License Agreement, extending the life of the License Agreement through December 23, 2019, at which time, if mutually agreed upon. the companies reserve the option to extend for an additional 2 years (if exercised at that time, this License Agreement would be extended through December 23, 2021). The two companies reserve the right to request amendment of the License Agreement at any point during the effective term of the agreement.
As noted above, during the quarter ended December 31, 2017, the Company launched this lip balm product (branded as HERMAN(R)).
During February of 2018, the Company’s strategy with respect to the HerMan(R) product was negatively impacted by a series of product defects relating to the twisting mechanism of the lip balm tube. The Company immediately made the decision to work with the manufacturer to permanently address and fix this defect issue (which the Company believes has affected approximately 30% of the initial product batch. This issue significantly increases the risk associated with this business opportunity and there can be no guarantee that this will be satisfactorily solved.
The Company had no sales of the HerMan(R) product during the three months ended June 30, 2018 and 2017. The Company has removed the product from the website and is working with the manufacturer to resolve product quality issues. As a result of the quality control issues regarding the packaging, the Company has written off the remaining inventory of $16,897 as of March 31, 2018 as they complete the re-design of the packaging of this product as they have determined that the units are not usable. The Company is still in the process of trying to resolve the packaging issue and cannot determine the impact that it will have on future revenue. The Company is still in the process of trying to resolve the packaging issue but cannot determine the impact that it will have on future revenue.
On March 10, 2014, the Company entered into a definitive agreement to acquire California-based Honeywood LLC (“Honeywood”), developer of a topical medicinal cannabis product, that, at the time, sold in numerous dispensaries across the state of California. This definitive agreement was valid for a period of 120 days and the Company advanced to Honeywood $217,000 to be applied towards the final closing requisite cash total and incurred $178,000 in legal fees as of March 31, 2014 in connection with the acquisition.
On September 24, 2014 (the “Unwinding Date”), the Company, Honeywood and each of Honeywood’s principals entered into a Termination Agreement (the “Termination Agreement”) to unwind the effects of the Merger (the “Unwinding Transaction”). In accordance with the Termination Agreement, Honeywood agreed to repay to the Company substantially all of the advances made by the Company to Honeywood prior to and after the Merger by delivering to the Company on the Unwinding Date a Secured Promissory Note in the principal amount of $170,000 (the “Note”). The Note bore interest at 6% per annum and was repayable in six quarterly installments on the last day of each calendar quarter starting on March 31, 2015 and ending on June 30, 2016. The Note was secured by a blanket security interest in Honeywood’s assets pursuant to a Security Agreement entered into on the Unwinding Date between Honeywood and the Company. Honeywood never made any payments under the Note prior to the Honeywood Conversion Agreement (as defined below). As a result, the Company had fully reserved this amount and it was not reflected as a receivable on its financial statements.
Effective August 1, 2017, the Company entered into a Debt Conversion Agreement, whereby the Company agreed to convert the entire principal and accrued but unpaid interest due into a 5% membership interest in Honeywood (the “Honeywood Conversion Agreement”).
The Company made an assessment for impairment of its investment in Honeywood at the entity level. During the relationship between the Company and Honeywood, Honeywood had a working capital deficiency and had a history of operating losses. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 320-10-35-28, “Investments-Debt and Equity Securities”, a Company may not record an impairment loss on the investment but shall continue to evaluate whether the investment is impaired (that is, shall estimate the fair value of the investment) in each subsequent reporting period until either of the following occurs: a) the investment experiences a recovery of fair value up to (or beyond) its cost; or b) the entity recognizes an other-than-temporary impairment loss. At the time of the Honeywood Conversion Agreement, the receivable balance under the Note of $199,119 had been fully written off by the Company in a prior period. As a result of the Honeywood Conversion Agreement, the Company deemed the investment to still have no current value. The Company recorded this investment at $0. Thus, no recovery of bad debt and no impairment will be recognized in this period.
On November 25, 2013, the Company executed a definitive merger agreement to acquire Pilus Energy, LLC (“Pilus”), an Ohio limited liability company and a developer of alternative cleantech energy platforms using proprietary microbial solutions that create electricity while consuming polluting molecules from wastewater. On January 28, 2014, the Company completed its acquisition of Pilus. As a condition of the acquisition, the shareholders of Pilus received a warrant to purchase 1,333,334 shares of common stock of the Company, which represented a fair market value of approximately $2,000,000, and, based upon whether the Warrants issued to Pilus represented at least 5% the then outstanding and fully diluted capitalization of the Company, Pilus had been granted an option to appoint a member to the Company’s board of directors. No board member had been appointed by Pilus to the Company’s board. In addition, the Company paid Open Therapeutics, LLC (f/k/a Bacterial Robotics, LLC and Microbial Robots, LLC) (“Open Therapeutics”), formerly the parent company of Pilus, $50,000 on signing the merger agreement and $50,000 at the time of closing. Pilus’ principal asset on its balance sheet at the time of the acquisition was its US patent relating to its clean water technology. The Company determined that the value of the acquisition on January 28, 2014 would be equal to the value of cash paid to Pilus plus the value of the 1,333,334 warrants the Company issued to acquire Pilus. Through March 31, 2014, the Company amortized the patent over its estimated useful life, then on March 31, 2014, the Company conducted its annual impairment test and determined that the entire unamortized balance should be impaired as the necessary funding to further develop the patent was not available at that time.
On December 22, 2016, the Company entered in a membership interest transfer agreement with Open Therapeutics whereby the Company sold 80% of its membership interest in Pilus back to Open Therapeutics. Open Therapeutics agreed to terminate and cancel 80% of the unexercised portion of the warrant to purchase 385,569 shares (or 308,455 warrants) of the Company’s common stock. Open Therapeutics agreed to pay to the Company 20% of the net profit generated Pilus Energy from its previous year’s earnings, if any. The first $75,000 of such payments would be retained by Pilus Energy as additional consideration for the sale, which is reflected as a contingent liability on the Company’s condensed consolidated balance sheet. The Company further agreed it would vote its 20% membership interest in Pilus Energy in the same manner that Open Therapeutics votes its membership interest on all matters for which a member vote is required. Through June 30, 2018, there has been no activity recorded by Open Therapeutics with respect to Pilus Energy, and thus the $75,000 remains contingently owed to them. No activity is expected to occur prior to the Company’s third fiscal quarter, and possibly later.
Tauriga Biz Dev Corp.
On January 4, 2018, the Company announced that its Board of Directors unanimously approved the formation a wholly-owned subsidiary focused on acquiring interest(s) in patents and other intellectual property. This subsidiary, incorporated in Delaware, was named Tauriga IP Acquisition Corp. On March 25, 2018, the Company changed the name to Tauriga Biz Dev Corp.
On March 29, 2018 the Company, through Tauriga Biz Dev Corp., entered into an independent sales representative agreement with Blink Charging Company (NASDAQ:
On June 29, 2018, the Company purchased four BLINK Level 2 – 40″ pedestal chargers for permanent placement in a retail location or locations whereby the Company will pay a variable annual fee based on 7% of total revenue per charging unit. The rest of the proceeds will be split 80/20 between the Company and the host location owner or its assignee. The host location owner to will pay for the cost of providing power to these unit as well as installation costs. The Company has not yet secured the location for installation of these units.
As of September 30, 2018, the Tauriga Biz Dev Corp. has not installed any of its own machines in any locations. No revenue has been generated through the BLINK contract.
RESULTS OF OPERATIONS
Three and six months ended September 30, 2018 compared to the three and six months ended September 30, 2017
During December 2017, the Company was developing its lip balm business product line and had recognized revenue on the sales of its HERMAN lip balm product, which was created through a joint venture with Ice + Jam (company); however, due to certain mechanical issues with the product tube (not formulation), the Company had not developed a material or consistent pattern of revenue generation subsequent to 2017. Therefore, due to the product issues related to the HerMan(R) inventory for the six months ended September 30, 2018 the Company did not generate any revenue. The Company had no revenue for the six months ended September 30, 2017 because this was prior to the launch of the HerMan(R) product.
The commercial grade inventory incorporates an enhanced formulation and packaging; the laboratory work was specifically aimed at improving the texture and viscosity of the underlying Cupua�u Butter lip treatment. From a composition analysis, HERMAN(R) is primarily composed of the compound Theobroma Grandiflorium (“Cupua�u Butter”) to leverage the potential benefits that have been well documented historically (see paragraph directly below). Cupua�u Butter, derived from the fruit of the Cupua�u Tree, a tropical rainforest tree related to Cacao (the base of chocolate production). Common throughout the Amazon basin (South America), it is widely cultivated in the jungles of Colombia, Bolivia and Peru and in the north of Brazil, with the largest production in the Brazilian states of Par�, followed by Amazonas, Rond�nia and Acre. Cupua�u Butter is a plant-based alternative to lanolin, offering the capacity to attract 240% more water which allows it to function much more effectively as a skin hydrator and moisturizer.
The Company has a two-channel sales model consisting of retail direct-to-consumer sales and distributor sales.
Distributor orders – The Company is currently building out its distributor network with a focus on developing specialty stores, supermarkets and other retail chain store establishments. The Company’s business-to-business sales strategy is market penetration competing with higher-end and specialty products. Our product placement strategy will be to place our product in retail store chains at check-out stands in branded displays built to hold 12, 24, 36, 48 or 60 units. Our minimum distributor order size is 200 units with a unit cost of $2.75 per unit.
Retail orders – The Company’s business to consumer sales channel is done through direct web sales by Ice + Jam via their website, www.iceandjam.com. Ice + Jam is handling the complete sales process from order fulfillment to cash receipt and shipping. The retail sales product was offered in two presentations stand-alone and a gift wrapped three pack. The gift wrapping will be offered from time to drive the purchase of multiple units. The selling price is $5.00 for the single units and $15.00 for the gift wrapped three pack. Each retail order is additionally charged $3.77 to cover shipping and handling cost.
The Company currently has no backlog of orders. The Company has no established track record of sales to definitively site seasonality, but the Company expects higher sales in the winter months. The Company has not recognized any allowance for return of product. The Company expects actual product returns to be minimal and will recognize returns when they occur. If product returns become more than very occasional the Company will establish a reasonable allowance and record as a contra-sales item to derive nets sales relative to when product is sold. At September 30, 2018, the Company had no refund liability.
On March 29, 2018 the Company, through Tauriga Biz Dev Corp., entered into an independent sales representative agreement with BLINK. Under this agreement the Company will be a non-exclusive independent sales representative. The Company will act on behalf of BLINK to solicit orders from potential customers for EV Stations placement. Tauriga Biz Dev Corp. will be compensated upon contracting and as long as the Company’s acquired prospect remains under contract. This arrangement has the potential to earn both short term as well as long term recurring revenue by helping BLINK expand its national electric vehicle charging infrastructure and network. This sales agreement is a three-tier model based on whether Tauriga Biz Dev Corp. contracts the new customer to purchase equipment outright from BLINK or enter into one of two revenue-sharing agreements. In the case Tauriga Biz Dev Corp. effectuates a sale of BLINK equipment it will receive a one-time sales commission based on the sales price of the equipment sale. In the case where Tauriga Biz Dev Corp. secures a revenue sharing agreement with a customer where BLINK remains the owner, Tauriga Biz Dev Corp. will be paid an on-going commission based off of gross charger revenue, subject to which party paid for the installation. Commission payments under the revenue sharing agreement are subject to minimum revenue generation hurdles.
Commissions earned under this contract with Tauriga Biz Dev Corp. will be recorded as revenue when earned. Based on a binding agreement in place between BLINK and the referral provided by the Company, revenue will be recorded based on equipment value purchased or placed in service as well as the length of the contract. The Company is currently working towards its goal of generating potential revenue deriving from this Reseller Agreement with BLINK.
On June 29, 2018, the Company purchased four BLINK Level 2 – 40″ pedestal chargers for permanent placement in a retail location or locations whereby the Company will pay a variable annual fee based on 7% of total revenue per charging unit. The rest of the proceeds will be split 80/20 between the Company and the host location owner or its assignee. The host location owner to will pay for the cost of providing power to these unit as well as installation costs. The Company has secured the location for installation of these units and is in the process of installing them.
The Company recognized no operating revenue during the six months ended September 30, 2018 and 2017.
Cost of Goods Sold.
The Company had realized a cost per item of $2.045 on its initial order of approximately 10,000 units. This cost was anticipated to continue to be constant until this batch of inventory is fully sold. Product defects that arose during the three months ended March 31, 2018 have forced the Company to fully impair the inventory value of $16,897. The Company believes that future order costs can be lowered through volume purchasing discounts, improved product routing and consistent proven product formulation. Also included in the cost of goods sold is the cost of postage and handling which the Company expects to remain constant in the short to mid-term future. Since shipping is on a per order basis as opposed to per unit and shipping has not been charged on the wholesale orders the sales mix can dramatically affect the cost of sales per unit cost.
The Company had no cost of goods sold for the three and six months ended September 30, 2018 and 2017, which resulted no gross profit for those periods.
Research and Development Expenses
For the three and six months ended September 30, 2018, the Company had no research and development expense compared to $2,000 and $4,000 for the same period in the prior year. The costs from the three and six months ended September 30, 2017 were related to graphics design for HerMan(R).
General and Administrative Expenses
For the three months ended September 30, 2018, general and administrative expenses were $296,273 compared to $627,270 for the same period in the prior fiscal year. This decrease of $333,997 was driven by the recognition of lower stock-based compensation expense issued for services in the amount of $259,885 offset by higher compensation expense during the three months ended September 30, 2018.
For the six months ended September 30, 2018, general and administrative expenses were $518,311 compared to $1,101,159 for the same period in the prior fiscal year. This decrease of $582,848 was driven by the recognition of lower stock-based compensation expense issued for services in the amount of $523,483 offset by higher compensation expense, accounting fees, travel expense and rent during the six months ended September 30, 2017.
Other Income (Expense)
For the three months ended September 30, 2018, other income was $30,980 compared to other expense of $24,976 for the same period in the prior fiscal year. The increase in net other income was due to an unrealized gain on the sale of trading securities in the amount of $143,215 offset by a realized loss on trading securities in the amount of $109,395 and interest expense that was lower by $25,756 expense for the three months ended September 30, 2017 due to decreased debt carrying cost and commitment fees to secure the debt.
For the six months ended September 30, 2018, other income was $420,065 compared to other expense of $127,442 for the same period in the prior fiscal year. The increase in net other income was due to a realized gain on the sale of trading securities in the amount of $230,625, an unrealized gain on trading securities in the amount of $221,385 and interest expense that was lower by $104,726 expense for the six months ended September 30, 2017 due to decreased debt and commitment fees to secure the debt.
For the three months ended September 30, 2018, the Company generated a net loss of $265,552 compared to a net loss of $654,471 for the same period in the prior fiscal year. The difference in the three months ended September 30, 2018 was primarily due to lower stock-based compensation, lower interest charges as well as unrealized and realized gains on the sale and holding of securities, commodities and digital currencies.
For the six months ended September 30, 2018, the Company generated a net loss of $98,764 compared to a loss of $1,232,961 for the same period in the prior fiscal year. The difference in the three months ended September 30, 2018 was primarily due to lower stock-based compensation, lower interest charges as well as unrealized and realized gains on the sale and holding of securities, commodities and digital currencies.
Liquidity and Capital Resources
During the year ended March 31, 2018, the Company had two substantial events occur dramatically affecting the Company’s liquidity. The Company launched its joint venture product as noted above, resulting in operations that the Company .