Silo Pharma, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. The company, formerly Uppercut Brands, Inc., reported as a small, non-accelerated filer. Its business was transitioning from NFID apparel toward pharmaceutical licensing and development; the new subsidiary had no operations during the nine-month period.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $16,285 | $268 | $18,795 | $268 |
| Gross profit (loss) | $(13,164) | $186 | $(12,071) | $186 |
| Operating expenses | $623,056 | $242,693 | $1,780,200 | $607,132 |
| Operating loss | $(636,220) | $(242,507) | $(1,792,271) | $(606,946) |
| Net loss | $(633,795) | $(265,481) | $(2,247,703) | $(631,215) |
| Net loss per share, basic and diluted | $(0.01) | $(0.01) | $(0.04) | $(0.03) |
Gross margins were negative in 2020; management cited an inventory write-down of $19,879, alongside product, production, storage and shipping costs. Nine-month operating expenses rose substantially, notably professional fees and compensation, including stock-based awards. Nine-month net loss also included $268,996 of interest expense, primarily non-cash debt-discount amortization, and a $198,000 loss on extinguishing convertible debt.
Cash, liquidity and capital
- At September 30, 2020, cash was $1,645,712, current assets $2,086,834, current liabilities $122,030, and working capital $1,964,804. Total assets were $2,204,181; total liabilities were $133,672; stockholders’ equity was $2,070,509.
- For the nine months, operating activities used $620,673; investing activities provided $20,000; and financing activities provided $2,134,633. Cash increased by $1,533,960 from year-end 2019.
- Financing included $2,115,733 net proceeds from common-stock sales. Shares outstanding rose from 23,604,207 at December 31, 2019 to 85,141,956 at September 30, 2020.
- The company had $18,900 outstanding under a Paycheck Protection Program loan, with $7,258 current and $11,642 long-term. The $330,000 convertible notes were exchanged for common shares in April 2020; no convertible notes remained at quarter-end.
- Notes receivable, net, fell to $90,000 from $200,000, after a $90,000 additional doubtful-account allowance and $20,000 of collections. Prepaid expenses and other current assets increased to $310,984 from $16,333.
Business developments, outlook and risks
- Management was exploring university- and researcher-related intellectual property for rare diseases, including potential psychedelic-related applications. In July, the subsidiary entered a six-month evaluation license and option agreement with the University of Maryland, Baltimore, relating to CNS-homing peptides and potential multiple sclerosis and neuroinflammatory applications. The company paid an initial $10,000 fee.
- NFID apparel sales remained minimal. Management described plans to pursue additional licensing or technology opportunities, but provided no quantified revenue, earnings, or cash-flow guidance.
- Management stated that available cash would not meet working-capital needs for at least 12 months from the report date and that additional debt or equity financing was needed. The filing identifies substantial doubt about the company’s ability to continue as a going concern; if funding cannot be obtained, operations may need to be curtailed.
- Management reported no material operational impact from COVID-19 to date but said the duration and economic effects were uncertain and could weaken demand or access to capital. Two suppliers provided substantially all raw materials and inventory.
- Disclosure controls and procedures were determined to be ineffective as of September 30, 2020, citing inadequate segregation of duties, insufficient review of complex reporting matters, and inadequate system and manual controls. No material changes to internal control were reported during the quarter.
- The filing reported no pending material legal proceedings and no material changes to previously disclosed risk factors other than the economic and COVID-19-related risks described.
Most important facts for investors to verify
- Whether subsequent financing was secured and whether cash resources proved sufficient, given the going-concern warning and management’s stated funding needs.
- Progress, costs, and follow-on licensing terms for the University of Maryland agreement, and whether the pharmaceutical strategy produced operating activity or revenue.
- Drivers and sustainability of expenses, especially professional fees, stock-based compensation, and the large increase in shares outstanding.
- Collectability and timing of the remaining notes receivable installments and the basis for the additional bad-debt allowance.
- Remediation of the disclosed material weaknesses in financial reporting controls.