Business context and reporting period
Uppercut Brands, Inc. (the issuer named in the filing; not Silo Pharma, Inc.) filed this unaudited Form 10-Q for the quarter ended September 30, 2019. The company was developing and launching NFID, a unisex apparel and footwear brand, after exiting its business development company status in September 2018. NFID began generating minimal sales in the third quarter.
Financial performance and position
- Revenue: $268 for both the three and nine months ended September 30, 2019, versus none in the comparable 2018 periods. Cost of sales was $82; gross profit was $186.
- Loss: Q3 net loss was $265,481 ($0.01 per share), versus $198,162 (reported as $0.00 per share) in Q3 2018. Nine-month net loss was $631,215 ($0.03 per share), versus $496,527 ($0.01 per share) in 2018.
- Expenses and margins: Nine-month operating expenses rose to $607,132 from $292,145; operating loss increased to $606,946 from $292,145. Revenue was minimal, so the filing provides little meaningful basis for assessing product-level margins.
- Cash flow: Nine-month operating cash use was $501,520, compared with cash provided of $431,524 in 2018. Investing activities provided $186,741; financing activities provided $2,656. Cash fell by $312,123 to $24,556.
- Liquidity: Current assets were $157,090 and current liabilities $87,831, leaving working capital of $69,259 at September 30, 2019, down from $578,002 at year-end 2018. Inventory rose to $99,580 from $26,973.
- Debt and other obligations: The company reported a $25,000 unsecured related-party note payable to its CEO, bearing 6% interest and due by November 15, 2019. It also had $400,000 of redeemable Series A convertible preferred stock, with a $100-per-share redemption value. Stockholders’ equity was a deficit of $101,301.
Material changes versus the prior comparable period
- Nine-month net loss increased $134,688, while operating expenses more than doubled, largely due to higher compensation, professional fees, product development, and marketing costs associated with NFID.
- Equity-investment results remained significant and volatile: nine-month realized gains were $138,032 and unrealized losses were $170,191. The company sold its remaining Ipsidy investment during the period; proceeds supported working capital.
- Cash from operations changed from positive $431,524 in the 2018 period to negative $501,520 in 2019. The 2018 operating cash result included proceeds from investment sales.
- Comparability is affected by the company’s September 2018 transition from investment-company to corporate accounting; the filing says certain 2018 amounts were reclassified, but prior periods were not restated.
Outlook, risks, contingencies, and unusual items
- Going concern: Management disclosed substantial doubt about the company’s ability to continue as a going concern for twelve months from the filing date. It said available cash would not meet working-capital needs for that period, and that inability to raise capital could require curtailing operations.
- Subsequent financing: In October 2019, the company issued $330,000 aggregate principal of convertible notes and warrants for up to 1,650,000 shares, receiving net proceeds of $295,000. Notes are due in October 2020, have a $0.20 conversion price, and bear no interest before default. The warrants have a $0.20 exercise price and five-year term. The instruments include a full-ratchet down-round provision, and default terms may accelerate amounts due.
- Receivable risk: A $200,000 net secured note receivable from the NFID asset seller remained outstanding. The seller had not paid interest, and the parties were negotiating a settlement. A separate $50,000 receivable remained fully reserved as doubtful.
- Controls: Management concluded disclosure controls and procedures were not effective, citing material weaknesses including limited segregation of duties and inadequate system and manual controls.
- The filing reports no pending material legal proceedings and no off-balance-sheet arrangements. Management provided no quantified sales or earnings guidance.
Important facts for investors to verify
- Confirm the issuer identity: this filing is for Uppercut Brands, Inc., despite the request metadata naming Silo Pharma, Inc.
- Review the October 2019 note and warrant terms, including conversion, dilution, default provisions, and the recorded discounts.
- Assess near-term liquidity and whether additional financing was obtained after the filing date; the company had only $24,556 of cash at September 30.
- Check collectability and settlement progress for the $200,000 seller note receivable and any potential impairment of inventory or other assets.
- Evaluate NFID sales traction, operating costs, and progress addressing the disclosed internal-control weaknesses.