Notes
to the Condensed Consolidated Financial Statements
June
30, 2019
(Unaudited)
1.
Organization and Description of Business
Immune
Therapeutics, Inc. (the “Company,” “we,” or “our”) was initially incorporated in Florida on
December 2, 1993 as Resort Clubs International, Inc. (“Resort Clubs”). It was formed to manage and market golf course
properties in resort markets throughout the United States. Galliano International Ltd. (“Galliano”) was incorporated
in Delaware on May 27, 1998 and began trading in November 1999 through the filing of a 15C-211. On November 10, 2004, Galliano
merged with Resort Clubs. Resort Clubs was the surviving corporation. On August 23, 2010, Resort Clubs changed its name to pH
Environmental Inc. (“pH Environmental”).
On
April 23, 2012, pH Environmental completed a name change to TNI BioTech, Inc., and on April 24, 2012, we executed a share exchange
agreement for the acquisition of all of the outstanding shares of TNI BioTech IP, Inc. On September 4, 2014, a majority of our
shareholders approved an amendment to our Amended and Restated Articles of Incorporation, as amended, to change our name to Immune
Therapeutics, Inc. We filed our name change amendment with the Secretary of State of Florida on October 27, 2014 changing our
name to Immune Therapeutics, Inc.
The
Company currently operates out of Orlando, Florida. In July 2012, the Company’s focus turned to acquiring patents that would
protect and advance the development of new uses of opioid-related immune- therapies, such as low dose naltrexone (“LDN”)
and Methionine [Met5]-enkephalin (“MENK”). The Company’s therapies are believed to stimulate and/or regulate
the immune system in such a way that they provide the potential to treat a variety of diseases. We believe our therapies may be
able to correct abnormalities or deficiencies in the immune system in diseases such as HIV infection, autoimmune disease, immune
disorders, or cancer; all of which can lead to disease progression and life-threatening situations when the immune system is not
functioning optimally.
In
October 2012, the Company formed TNI BioTech International, Ltd., a BVI company in Tortola, British Virgin Islands, which was
set up to allow the Company to market and sell LDN in those countries outside the U.S. in which we have been able to obtain approval
to sell the Company’s products.
In
August 2013, the Company formed its United Kingdom subsidiary, TNI BioTech, LTD (the “UK Subsidiary”). The UK Subsidiary
received approval to be considered a micro, small or medium-sized enterprise (“SME”) with the European Medicines Agency
(“EMA”) on August 21, 2013. The designation provides the UK Subsidiary with significant discounts when holding meetings
or submitting filings to the EMA. On September 19, 2013, the UK Subsidiary submitted a pre-submission package to the EMA regarding
Crohn’s Disease. The EMA granted the UK Subsidiary a meeting that took place on September 27, 2013. The UK Subsidiary is
eligible to benefit from the provisions for administrative and financial assistance for SMEs set out in Regulation (EC) No 2049/2005.
The Company will apply to obtain EMA benefits once funding becomes available.
In
December 2013, the Company formed a subsidiary, Cytocom Inc. (“Cytocom”), to focus on conducting LDN and MENK clinical
trials in the United States. In December 2014, the Company finalized the distribution of common stock of Cytocom to its shareholders.
As part of the transaction (“Original Agreement”), the Company transferred to Cytocom certain of its rights, title
and interest in or relating to intellectual property (i) patents, patent applications, and all divisional, continuations and continuations-in-part
thereof, together with all reissues, reexaminations, renewals and extensions thereof and all rights to obtain such divisionals,
continuations and continuations-in-part, reissues, reexaminations, renewals and extensions, and all utility models and statutory
invention registrations and any other such analogous rights, (ii) trademarks, service marks, Internet domain names, trade dress,
trade styles, logos, trade names, services names, brand names, corporate names, assumed business names and general intangibles
and other source identifiers of a like nature, together with the goodwill associated with any of the foregoing, and all registrations
and applications for registrations thereof, together with all renewals and extensions thereof and all rights to obtain such renewals
and extensions, (iii) copyrights, mask work rights, database and design rights, moral rights and rights in Internet websites,
whether registered or unregistered and whether published or unpublished, all registrations and recordings thereof and all applications
in connection therewith, together with all renewals, continuations, reversions and extensions thereof and all rights to obtain
such renewals, continuations, reversions and extensions, and (iv) confidential and proprietary information, including, trade secrets
and know-how.
The
Original Agreement also granted the Company rights to market Lodonal™ and Met-Enkephalin (“MENK”) in “Emerging
Markets,” which included all countries excluding Canada, Italy, Japan, France, Germany, United Kingdom, European Community
and the United States. Pursuant to the Original Agreement, the Company was required to pay Cytocom a 5% royalty on all sales all
ongoing drug development and fees due in connection with the underlying patents until such time as Cytocom was funded.
On
December 8, 2014, the number of Cytocom shares of common stock that were issued to our shareholders totaled 113,242,522 shares.
In connection with the Original Agreement, Cytocom issued an additional 140,100,000 shares of its common stock to the Company,
which gave the Company a 55.3% stake in Cytocom on that date. In April 2016, the Board of Directors and a majority of shareholders
of Cytocom approved a reverse stock split of Cytocom’s outstanding common stock with one new share of stock for each twenty
old shares of common stock. Cytocom effectuated and finalized the reverse split in June 2016.
On
May 1, 2018, the Company entered into an amended and restated licensing agreement (the “Restated Agreement”) with
Cytocom. The Restated Agreement restates the licensing arrangement between the Company and Cytocom as provided by the Original
Agreement. The Restated Agreement grants the Company distribution and marketing rights for Lodonal™ and MENK for humans
in Emerging Markets. In addition, the Company has been granted the rights to distribute and market Lodonal™ and MENK for
animal use in the United States. The royalty due to Cytocom has been reduced from 5% to 1% of sales and the Company no longer
has any ongoing obligations to pay for costs in connection with the assets of Cytocom.
On
June 4, 2018, the Company and Cytocom entered into a Stock Purchase Agreement (the “Stock Agreement. Pursuant to the Stock
Agreement, the Company cancelled approximately $4,000,000 of debt owed to it by Cytocom in exchange for ten percent (10%) of the
issued and outstanding common stock of Cytocom, as calculated on a fully diluted basis. The Restated Agreement was a condition
of the Stock Agreement.
At
June 30, 2019, the Company’s equity interest in Cytocom stood at 15.26% of Cytocom’s common stock issued and outstanding
on that date. The Company’s policies with respect to accounting for its equity interest in Cytocom is described in Note
2 to the “Notes to the Condensed Consolidated Financial Statements” below (“Summary of Significant Accounting
Policies: Non-Controlling Interest in Consolidated Subsidiaries”).
On
April 8, 2019, the Company signed a second amendment to its licensing agreement (the “Second Amendment” with Cytocom.
The Second Amendment confirmed that, as of its effective date (December 31, 2018) the Company owned 15.57% of the common shares
issued and outstanding on that date. The Company agreed to assume the obligation to repay all accounts payable obligations and
accrued liabilities owed by Cytocom as of the effective date, except those accounts’ payable obligations and accrued liabilities
as specified in the Second Amendment. The Company also assumed the obligation to repay all notes payable, together with any interest
or fees payable thereon, owed by Cytocom as of the effective date, except those notes’ payable obligations, together with
any interest or fees payable thereon, as specified by the Second Amendment. The parties further agreed that in the event of a
change of control of Cytocom, and at the option of Cytocom, the Company would have the right to purchase outright the Company’s
licensing rights to Emerging Markets for humans under the License Agreement at a price equal to value of those licensing rights
as determined by and independent valuator acceptable to the Company and Cytocom.
In
March 2014, the Company incorporated Airmed Biopharma Limited, an Irish corporation with an address in Dublin, Ireland, and Airmed
Holdings Limited, an Irish company domiciled in Bermuda. The Irish companies were set up to benefit from incentives granted by
the Irish government for the establishment of pharmaceutical companies (many of the world’s leading pharmaceutical companies
have located in Ireland), and so that the Company could take advantage of Ireland’s status as a member of the European Union
and the European Economic Area. An Irish limited liability company enjoys a low corporate income tax rate of 12.5%, one of the
lowest in the world. The Irish-domiciled company hopes to qualify for tax incentives for Irish holding/headquartered companies
and to benefit from the network of double tax treaties that reduce withholding taxes. TNI BioTech International, Ltd. will manage
our international distribution, using product that is manufactured in Ireland and elsewhere.
At
present, the Company is a late development-stage biopharmaceutical company focused on the licensing, development and commercialization
of innovative prescription medications for humans in Africa, Central and South America, the Caribbean and China (hereinafter referred
to as “Emerging Markets”) and worldwide for animals and companion pet therapeutics. The Company is not permitted to
market its licensed products in the United States.
Going
Concern
The
Company has incurred significant net losses since inception and has relied on its ability to fund its operations through private
equity financings. Management expects operating losses and negative cash flows to continue at more significant levels in the future.
As the Company continues to incur losses, transition to profitability is dependent upon the successful development, approval,
and commercialization of its product candidate and the achievement of a level of revenues adequate to support the Company’s
cost structure. The Company may never achieve profitability, and unless and until it does, the Company will continue to need to
raise additional cash. Management intends to fund future operations through additional private or public debt or equity offerings
and may seek additional capital through arrangements with strategic partners or from other sources. Based on the Company’s
operating plan, existing working capital at June 30, 2019 was not sufficient to meet the cash requirements to fund planned operations
through for the next 12 months without additional sources of cash. These conditions raise substantial doubt about the Company’s
ability to continue as a going concern. The accompanying financial statements have been prepared assuming that the Company will
continue as a going concern and do not include adjustments that might result from the outcome of this uncertainty. This basis
of accounting contemplates the recovery of the Company’s assets and the satisfaction of liabilities in the normal course
of business.
The
Company experienced a net loss attributable to common shareholders of $1,534,118 and added cash and cash equivalents for operations
in the amount of $15,538 during the 6 months ended June 30, 2019, resulting in stockholders’ deficit of $12,529,322 at that
date.
2.
Summary of Significant Accounting Policies
Basis
of Presentation
The
consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial
statements prepared in accordance with U.S. generally accepted accounting principles have been omitted. However, in the opinion
of management, all adjustments (which include only normal recurring adjustments, unless otherwise indicated) necessary to present
fairly the financial position and results of operations for the periods presented have been made. The results for interim periods
are not necessarily indicative of trends or of results to be expected for the full year. These financial statements should be
read in conjunction with the financial statements of the Company for the year ended December 31, 2018 (including the notes thereto)
set forth in Form 10- K.
We
have identified the policies below as critical to our business operations and the understanding of its results of operations.
The Company’s senior management has reviewed these critical accounting policies and related disclosures with the Company’s
Board of Directors. The impact and any associated risks related to these policies on our business operations are discussed throughout
this section where such policies affect our reported and expected financial results.
The
Company qualifies as an “emerging growth company” as defined in Section 101 of the Jumpstart our Business Startups
Act (“JOBS Act”) as we do not have more than $1,000,000,000 in annual gross revenue for the year ended December 31,
2018. We are electing to use the extended transition period for complying with new or revised accounting standards under Section
102(b)(1) of the JOBS Act.
Non-Controlling
Interest in Consolidated Subsidiaries
Prior
to May 1, 2018, the Company consolidated Cytocom. On May 1, 2018, the Company entered into an amended and restated licensing agreement
(the “Restated Agreement”) with Cytocom, Inc., in accordance with which the Company no longer has any ongoing obligations
to pay for costs in connection with the assets of Cytocom. On June 4, 2018, the Company and Cytocom entered into a Stock Purchase
Agreement (the “Stock Agreement”). Pursuant to the Stock Agreement, the Company cancelled approximately $4,000,000
of debt owed to it by Cytocom in exchange for ten percent (10%) of the issued and outstanding common stock of Cytocom, as calculated
on a fully diluted basis on June 4, 2018. At June 30, 2019, the Company’s equity interest in Cytocom stood at 15.26% of
Cytocom’s common stock issued and outstanding. Accordingly, the Company deconsolidated Cytocom as of May 1, 2018, and accounts
for its retained interest in Cytocom under the equity method of accounting, with the Company’s share of Cytocom’s
earnings recorded in “loss from equity method investment” in the consolidated statements of operations. As the balance
of the Company’s investment in Cytocom has been $0 since December 31, 2018, no losses have been recognized during the quarter
ended June 30, 2019.
Revenue
Recognition
We
recognize revenue on sales to customers and distributors upon satisfaction of our performance obligations when the goods are shipped.
For consignment sales, we recognize revenue when the goods are pulled from consignment inventory.
Sales
of LodonalTM pills or capsules product are included in revenue when production is sold to a customer in fulfillment of performance
obligations under the terms of agreed contracts. Performance obligations primarily comprise delivery of product at a delivery
point, as negotiated within each contract. Each quantity of product sold is separately identifiable and represents a distinct
performance obligation to which the transaction price is allocated. Performance obligations are satisfied at a point in time once
control of the product has been transferred to the customer. The Company considers a variety of facts and circumstances in assessing
the point of control transfer, including but not limited to: whether the purchaser can direct the use of the product, the transfer
of significant risks and rewards, the Company’s right to payment, and transfer of legal title. In each case, the time between
delivery and when payments are due is not significant.
Leases
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This standard requires all leases that have a term of over
12 months to be recognized on the balance sheet with the liability for lease payments and ‘the corresponding right-of-use
asset initially measured at the present value of amounts expected to be paid over the term. Recognition of the costs of these
leases on the income statement will be dependent upon their classification as either an operating or a financing lease. Costs
of an operating lease will continue to be recognized as a single operating expense on a straight-line basis over the lease term.
Costs for a financing lease will be disaggregated and recognized as both an operating expense (for the amortization of the right-of-use
asset) and interest expense (for interest on the lease liability). On January 1, 2019, the Company applied ASU 842 on a modified
retrospective basis to leases existing at, or entered into after, the beginning of the earliest comparative period presented in
the financial statements. At June 30, 2019, we had no leases that fall within the scope of this standard. Accordingly, the standard
has no impact on our consolidated financial position or our results of operations.
Use
of Estimates
The
preparation of the Company’s financial statements in conformity with U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from such estimates.
Cash,
Cash Equivalents, and Short-Term Investments
The
Company considers all highly liquid investments with original maturities at the date of purchase of three months or less to be
cash equivalents. Cash and cash equivalents include bank demand deposits, marketable securities with maturities of three months
or less at purchase, and money market funds that invest primarily in certificates of deposits, commercial paper and U.S. government
and U.S. government agency obligations. Cash equivalents are reported at fair value
.
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit risk are primarily cash and cash equivalents. The
Company is exposed to credit risk, subject to federal deposit insurance, in the event of a default by the financial institutions
holding its cash and cash equivalents to the extent of amounts recorded on the condensed consolidated balance sheets. The cash
accounts are insured by the Federal Deposit Insurance Corporation up to $250,000. At June 30, 2019, the Company has no cash balances
in excess of insured limits.
Segment
and Geographic Information
Operating
segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the
chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance.
The Company views its operations and manages its business in one operating segment and does not segment the business for internal
reporting or decision making.
Fair
Value of Financial Instruments
In
accordance with the reporting requirements of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC)
Topic 825, “Financial Instruments”, the Company calculates the fair value of its assets and liabilities which qualify
as financial instruments under this standard and includes this additional information in the notes to the financial statements
when the fair value is different than the carrying value of those financial instruments. Cash, cash equivalents and accounts payable
are accounted for at cost which approximates fair value due to the relatively short maturity of these instruments. The carrying
value of notes payable also approximate fair value since they bear market rates of interest and other terms. None of these instruments
are held for trading purposes.
Derivative
Financial Instruments
FASB
ASC 820,
Fair Value Measurements
requires bifurcation of certain embedded derivative instruments in certain debt or equity
instruments, and measurement at their fair value for accounting purposes. A holder redemption feature embedded in the Company’s
note payable requires bifurcation from its host instrument and is accounted for as a freestanding derivative.
Inventory
Inventories
comprise finished product, raw materials and materials used for packaging. Inventories are stated at the lower of cost or market
with cost based on the first-in, first-out (FIFO) method. Inventory that can be used in either the production of clinical or commercial
products is expensed as research and development costs when identified for use in a clinical trials or clinical manufacturing
campaigns. Inventory used in marketing activities is charged to selling, general and administrative expense.
Inventory
as of June 30, 2019 was valued at $0, a decrease of $158,648 or 100% from the inventory balance at the end of June 2018, as the
inventory was deemed obsolete and written off as a result.
Fixed
Assets
Fixed
assets are stated at cost, less accumulated depreciation. Depreciation is determined on a straight-line basis over the estimated
useful lives of the assets, which generally range from three to five years. Maintenance and repairs are charged against expense
as incurred. Depreciation expense for the quarters ended June 30, 2019 and June 30, 2018 was $691 and $433, respectively.
Impairment
of Long-Lived Assets
The
Company evaluates long-lived assets for impairment whenever events or change in circumstances indicate that the carrying amount
of an asset may not be recoverable as prescribed by ASC Topic 360-10-05, “Property, Plant and Equipment.” If the carrying
amount of the asset, including any intangible assets associated with that asset, exceeds its estimated undiscounted net cash flow,
before interest, the Company will recognize an impairment loss equal to the difference between its carrying amount and its estimated
fair value.
Research
and Development Costs
Research
and development costs are charged to expense as incurred and are typically comprised of salaries and benefits, pre-clinical studies,
clinical trial activities, drug development and manufacturing, fees paid to consultants and other entities that conduct certain
research and development activities on the Company’s behalf and third-party service fees, including clinical research organizations
and investigative sites. Costs for certain development activities, such as clinical trials are recognized based on an evaluation
of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations, or information
provided by vendors on their actual costs incurred. Payments for these activities are based on the terms of the individual arrangements,
which may differ from the pattern of costs incurred, and are reflected in the financial statements as operating expenses.
Income
Taxes
The
Company follows ASC Topic 740, Income Taxes, which requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred
tax assets and liabilities are based on the differences between the financial statements and tax bases of assets and liabilities
using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reduced
by a valuation allowance to the extent management concludes it is more likely than not that the asset will not be realized. 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
standard addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded
in the financial statements. Under ASC Topic 740, the Company may recognize the tax benefit from an uncertain tax position only
if it is more likely than not that the tax position will be sustained on examination by the tax authorities, based on the technical
merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based
on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC Topic
740 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods
and requires increased disclosures. At the date of adoption, and as of June 30, 2019 and 2018, the Company does not have a liability
for unrecognized tax uncertainties.
The
Company’s policy is to record interest and penalties on uncertain tax positions as income tax expense. As of June 30, 2019,
and 2018, the Company has not accrued any interest or penalties related to uncertain tax positions.
Stock-Based
Compensation and Issuance of Stock for Non-Cash Consideration
The
Company measures and recognizes compensation expense for all share-based payment awards made to employees and directors, including
employee stock options, based on estimated fair values equaling either the market value of the shares issued or the value of consideration
received, whichever is more readily determinable. The majority of the non-cash consideration pertains to services rendered by
consultants and others and has been valued at the fair value of the Company’s common stock at the date of the agreement.
The
Company’s accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services
follows the provisions of ASC Topic 505-50, “Equity-Based Payments to Non-Employees.” The measurement date for the
fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance
by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete.
Net
Loss per Share of Common Stock
Basic
net loss per share is calculated by dividing the net loss attributable to common stockholders by the weighted average number of
common shares outstanding for the period, without consideration for common stock equivalents. Diluted net loss per share is calculated
by dividing the net loss by the weighted-average number of common share equivalents outstanding for the period determined using
the treasury-stock method and the if-converted method. Dilutive common stock equivalents are comprised of common stock purchase
warrants and options outstanding. For all periods presented, there is no difference in the number of shares used to calculate
basic and diluted shares outstanding due to the Company’s net loss position
The
Company’s potential dilutive securities which include warrants (as described in Note 8 to the Financial Statements –
“Capital Structure – Common Stock and Common Stock Purchase Warrants”) and convertible debt (as described in
Note 6 to the Financial Statements – “Notes Payable”), have been excluded from the computation of diluted net
loss per share as the effect would be to reduce the net loss per share.
Recent
Accounting Standards
During
the quarter ended June 30, 2019, there were several new accounting pronouncements issued by the Financial Accounting Standards
Board. Each of these pronouncements, as applicable, has been or will be adopted by the Company. Management does not believe the
adoption of any of these accounting pronouncements has had or will have a material impact on the Company’s consolidated
financial statements.
3.
Fixed Assets
|
|
June
30, 2019
|
|
|
December
31, 2018
|
|
Fixed Assets:
|
|
|
|
|
|
|
|
|
Computer equipment
|
|
$
|
13,213
|
|
|
$
|
13,213
|
|
Less accumulated
depreciation
|
|
|
(11,138
|
)
|
|
|
(10,447
|
)
|
Fixed assets,
net
|
|
$
|
2,075
|
|
|
$
|
2,766
|
|
The
Company utilizes the straight-line method for depreciation, using three to five-year depreciable asset lives. Depreciation expense
was not material for all periods presented.
4.
Investments: Deconsolidation of Cytocom
In
accordance with the May 1, 2018 “Restated Agreement” with Cytocom, the Company no longer has any ongoing obligations
to pay for costs in connection with the assets of Cytocom. Accordingly, effective May 1, 2018, the Company deconsolidated Cytocom.
However, the Company exercises influence through its retained equity interest and through representation on Cytocom’s board
of directors. As a result, the Company uses the equity method to account for its retained interest in Cytocom.
On
May 1, 2018, the Company recorded an equity method investment in Cytocom of $1,189, the par value of Cytocom common stock multiplied
by the number of shares owned by the Company, due to the negative equity associated with Cytocom’s underlying financial
position. As a result of the continuing losses in Cytocom, the balance of this investment is currently $0.
At
June 30, 2019, Cytocom had no significant assets or income.
5.
Accrued Liabilities
Accrued
expenses and other liabilities consist of the following:
|
|
June
30, 2019
|
|
|
December
31, 2018
|
|
Accrued payroll to officers
and others
|
|
$
|
2,819,551
|
|
|
$
|
2,010,570
|
|
Accrued interest and penalties –
notes payable
|
|
|
959,412
|
|
|
|
877,571
|
|
Estimated legal settlements
|
|
|
136,057
|
|
|
|
136,057
|
|
Other accrued
liabilities
|
|
|
-
|
|
|
|
15,512
|
|
|
|
|
|
|
|
|
|
|
Total accrued
expenses and other liabilities
|
|
$
|
3,915,020
|
|
|
$
|
3,039,710
|
|
6. Notes payable
Notes payable consist of the following:
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
Promissory note issued July 29, 2014 to Ira Gaines. In 2016, the maturity date on the note was extended to December 1, 2017. As of June 30, 2019, the note is in default. The note earns interest at a rate of 18% per annum.
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
|
|
|
|
|
|
|
|
Promissory notes issued between November 26, 2014 and December 31, 2015, to raise up to $2,000,000 in debt. Lenders earn interest at a rate of 10% per annum, plus a pro-rata share of two percent of the Company’s gross receipts for sales of IRT-103-LDN in perpetuity. Notes will be repaid in 36 monthly installments of principal and interest commencing no later than October 15, 2015. These notes were in default at June 30, 2019, as the Company was unable to pay installments on their due dates.
|
|
|
286,000
|
|
|
|
286,000
|
|
|
|
|
|
|
|
|
|
|
Promissory notes issued
between May 1, 2015 and December 31, 2016 and maturing between June 14, 2015 and December 1, 2017. Lenders on loans aggregating
$375,994 earn interest at rates between 2% and 18% per annum. On loans aggregating $100,000, interest is payable in a fixed
amount not tied to a specific interest rate. The Company was unable to repay the notes at maturity and at June 30, 2019 the
note was in default.
|
|
|
725,994
|
|
|
|
725,994
|
|
|
|
|
|
|
|
|
|
|
Promissory notes issued to an officer
of the Company effective November 3, 2015 and maturing November 3, 2016 for settlement of accrued payroll, bearing interest
at 10% per annum and including a stock conversion feature. The Company was unable to repay the note at maturity and at June
30, 2019 the note was in default.
|
|
|
97,737
|
|
|
|
97,737
|
|
|
|
|
|
|
|
|
|
|
Promissory notes issued between July
1, 2016 and December 31, 2016. Lenders earn interest at 2% per annum. The notes mature on December 31, 2017, and at June 30,
2019 the notes were in default.
|
|
|
206,000
|
|
|
|
206,000
|
|
|
|
|
|
|
|
|
|
|
Promissory notes aggregating $1,350,000
issued in the fourth quarter 2016. The notes accrue interest at 2% per annum and mature between November 1, 2017 and December
31, 2017. As June 30, 2019, the notes were in default.
|
|
|
1,354,000
|
|
|
|
1,354,000
|
|
|
|
|
|
|
|
|
|
|
Promissory notes aggregating $500,000
issued in the first quarter of 2017. The notes accrue interest at 2% per annum and mature between January 12, 2018 and June
30, 2018. At June 30, 2019, the notes were in default.
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
Promissory notes issued January 25,
2017. The lenders earn interest at 7% per month. The notes mature on July 5, 2017, and at June 30, 2019 the notes were in
default.
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
Promissory notes aggregating $300,000
issued in the second quarter of 2017. The notes accrue interest at 2% per annum and mature between April 3, 2018 and May 31,
2018. At June 30, 2019, the notes were in default.
|
|
|
300,000
|
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
|
Promissory notes aggregating $191,800
issued in the third quarter of 2017. The notes accrue interest at 2% per annum and mature between June 16, 2018 and December
31, 2018. At June 30, 2019, the notes were in default.
|
|
|
191,800
|
|
|
|
191,800
|
|
|
|
|
|
|
|
|
|
|
Promissory note for $425,000 issued
in October 2017 with an original issue discount of $70,000. The note is in default, giving the holder an option to convert
the note to stock using the lowest value of the Company’s common stock 25 days prior to the conversion. In 2018, The
defaults also resulted in certain penalties, as a result of which the principal amount of the note outstanding at June 30,
2019 had increased to $454,032. $49,943 of accrued interest owed on the note has been converted to stock. The Company has
accrued a $908,873 derivative liability for the remaining conversion right.
|
|
|
454,032
|
|
|
|
455,122
|
|
|
|
|
|
|
|
|
|
|
Promissory notes aggregating $105,500
issued in the fourth quarter of 2017. The notes accrue interest at 2% per annum. At June 30, 2019, the notes were in default.
|
|
|
105,500
|
|
|
|
105,500
|
|
|
|
|
|
|
|
|
|
|
Promissory notes aggregating $47,975
issued in the first quarter of 2018. The notes accrue interest at 2% per annum and mature between May 2018 and January 2019.
At June 30, 2019, the notes were in default.
|
|
|
47,975
|
|
|
|
47,975
|
|
|
|
|
|
|
|
|
|
|
Promissory notes aggregating $125,000
issued in the first quarter of 2018. The notes accrue interest between 2% and 12% per annum and mature between April 2018
and June 2018. These notes include warrants between 5,000,000 and 20,000,000 shares with an exercise price of $0.0005. At
June 30, 2019 the notes were in default
|
|
|
125,000
|
|
|
|
125,000
|
|
|
|
|
|
|
|
|
|
|
Promissory notes aggregating $65,000
issued in the second quarter of 2018. The notes accrue interest between 2% per annum and mature between July 2018 and October
2018. These notes include warrants between 1,000,000 and 5,000,000 shares with an exercise price of $0.005. At June 30, 2019
the notes were in default
|
|
|
65,000
|
|
|
|
65,000
|
|
|
|
|
|
|
|
|
|
|
Promissory notes aggregating $193,000 issued in the third quarter of 2018. The notes accrue interest at 2% per annum and mature between November 2018 and January 2019. These notes include warrants between 600,000 and 5,000,000 shares with an exercise price of $0.005. At June 30, 2019, $103,000 of these notes were in default.
|
|
|
193,000
|
|
|
|
193,000
|
|
|
|
|
|
|
|
|
|
|
Promissory notes aggregating $533,855 issued in the fourth quarter of 2018. The notes accrue interest from 2% to 3.5% per annum and mature between February 2019 and December 2019. These notes include warrants between 200,000 and 39,500,000 shares with an exercise price of $0.005 to $0.04. At June 30, 2019, $479,000 of these notes were in default.
|
|
|
533,855
|
|
|
|
533,855
|
|
|
|
|
|
|
|
|
|
|
Promissory note for $23,000 issued in the first quarter of 2019. The note accrues interest at 2% per annum and matures during July 2019. The note includes warrants for 4,600,000 shares with an exercise price of $0.005. At June 30, 2019, the note was in default.
|
|
|
23,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Promissory note for $231,478 issued in the first quarter of 2019. The note accrues interest at 6% per annum and matures in February 2020.
|
|
|
231,478
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Promissory notes aggregating $50,000 issued in the second quarter of 2019. The notes accrue interest at 2% per annum and mature between July and September 2019. These notes include warrants for 10,000,000 shares with an exercise price of $0.005.
|
|
|
50,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Less: Original issue discount on notes payable and warrants issued with notes.
|
|
|
(59,238
|
)
|
|
|
(149,256
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,581,133
|
|
|
$
|
5,187,727
|
|
As
of June 30, 2019, the Company had accrued $959,412 in unpaid interest and default penalties. During the quarter ended June 30,
2019, no shares were issued by the Company in settlement of promissory notes.
As
of June 30, 2018, the Company had accrued $774,793 in unpaid interest and default penalties. During the quarter ended June 30,
2018, 8,607,200 shares with a fair value of $451,514 were issued by the Company for settlement of promissory notes.
7
.
Derivative Liabilities
As
of June 30, 2019, and December 31, 2018 the aggregate fair value of the outstanding derivative liability was $908,873 and $786,706,
respectively. The Company estimated the fair value of the derivative liability using the Black-Scholes option pricing model using
the following key assumption during the quarter June 30, 2019:
|
|
Three
months ended
June
30, 2019
|
|
Volatility
|
|
|
209.43
|
%
|
Risk-free interest rate
|
|
|
1.92
|
%
|
Expected dividends
|
|
|
-
|
%
|
Expected term
|
|
|
1
year
|
|
The
Company determines the fair values of its financial instruments based on the 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. The following three
levels of inputs may be used to measure fair value:
Level
1 Quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement
date.
Level
2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets
that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the
full term of the assets or liabilities.
Level
3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets
or liabilities.
The
Company uses Level 3 inputs to estimate the fair value of its derivative liabilities.
The
following schedule summarizes the valuation of financial instruments at fair value in the balance sheet as of June 30, 2019:
|
|
Fair
Value Measurements as of
June
30, 2019
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
option derivative liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
908,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
908,873
|
|
The
following table set forth a reconciliation of changes in the fair value of derivative liabilities classified as Level 3 in the
fair value hierarchy:
|
|
Significant
Unobservable Input (Level 3)
|
|
Beginning balance
|
|
$
|
786,706
|
|
Change in fair value
|
|
|
157,492
|
|
Partial settlements
of liability
|
|
|
(35,325
|
)
|
Ending balance
|
|
$
|
908,873
|
|
8
.
Capital Structure – Common Stock and Stock Purchase Warrants
Each
holder of common stock is entitled to vote on all matters and is entitled to one vote for each share held. No holder of shares
of stock of any class shall be entitled as a matter of right to subscribe for or purchase or receive any part of any new or additional
issue of shares of stock of any class, or of securities convertible into shares of stock or any class, whether now hereafter authorized
or whether issued for money, for consideration other than money, or by way of dividend.
As
of June 30, 2019, and 2018, the Company was authorized to issue 500,000,000 common shares at a par value of $0.0001 per share.
As
of June 30, 2019, the Company had 455,577,799 shares of common stock outstanding and 434,322,574 outstanding as of December 31,
2018.
Stock
Warrants
In
the quarter ended June 30, 2019, 10,000,000 new warrants were issued by the Company.
There
were no modifications of the terms of any warrants issued by the Company in the quarters ended June 30, 2019 and 2018.
Following
is a summary of outstanding stock warrants at, and activity during the six months ended, June 30, 2019:
|
|
Number
of Shares
|
|
|
Exercise
Price
|
|
|
Weighted
Average Price
|
|
Warrants as of December 31, 2018
|
|
|
281,782,856
|
|
|
$
|
0.001-3.74
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued in 2019
|
|
|
14,600,000
|
|
|
$
|
.005
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired and forfeited
|
|
|
(4,159,000
|
)
|
|
$
|
0.00-2.00
|
|
|
$
|
1.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants as of June 30, 2019
|
|
|
292,233,856
|
|
|
$
|
0.001-3.74
|
|
|
$
|
0.07
|
|
Summary
of outstanding warrants as of June 30, 2019:
Expiration
Date
|
|
Number
of Shares
|
|
|
Exercise
Price
|
|
|
Remaining
Life (years)
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter 2019
|
|
|
260,000
|
|
|
$
|
0.07-0.23
|
|
|
|
0.25
|
|
Fourth Quarter 2019
|
|
|
23,222,726
|
|
|
$
|
0.50-1.50
|
|
|
|
0.50
|
|
Second Quarter 2020
|
|
|
300,000
|
|
|
$
|
0.50
|
|
|
|
1.00
|
|
Fourth Quarter 2020
|
|
|
1,000,000
|
|
|
$
|
0.20
|
|
|
|
1.50
|
|
First Quarter 2021
|
|
|
12,600,000
|
|
|
$
|
0.20
|
|
|
|
1.75
|
|
Second Quarter 2021
|
|
|
5,812,252
|
|
|
$
|
0.01408-0.20
|
|
|
|
2.00
|
|
Third Quarter 2021
|
|
|
5,166,667
|
|
|
$
|
0.03-0.20
|
|
|
|
2.25
|
|
Fourth Quarter 2021
|
|
|
300,000
|
|
|
$
|
0.10
|
|
|
|
2.50
|
|
Second Quarter 2022
|
|
|
1,750,000
|
|
|
$
|
0.15
|
|
|
|
3.00
|
|
Third Quarter 2022
|
|
|
2,650,000
|
|
|
$
|
0.05-0.10
|
|
|
|
3.25
|
|
Fourth Quarter 2022
|
|
|
9,811,422
|
|
|
$
|
0.08-0.29
|
|
|
|
3.50
|
|
First Quarter 2023
|
|
|
8,000,000
|
|
|
$
|
0.005-0.04
|
|
|
|
3.75
|
|
Second Quarter 2023
|
|
|
15,000,000
|
|
|
$
|
0.005-0.20
|
|
|
|
4.00
|
|
Third Quarter 2023
|
|
|
76,700,000
|
|
|
$
|
0.005-0.10
|
|
|
|
4.25
|
|
Fourth Quarter 2023
|
|
|
60,243,000
|
|
|
$
|
0.005
|
|
|
|
4.50
|
|
First Quarter 2024
|
|
|
34,600,000
|
|
|
$
|
0.005
|
|
|
|
4.75
|
|
Second Quarter 2024
|
|
|
36,363,636
|
|
|
$
|
0.005
|
|
|
|
5.00
|
|
Third Quarter 2028
|
|
|
3,000,000
|
|
|
$
|
0.07
|
|
|
|
9.25
|
|
Second Quarter 2032
|
|
|
21,807,789
|
|
|
$
|
0.01-.0679
|
|
|
|
13.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
292,223,856
|
|
|
$
|
0.001-3.74
|
|
|
|
|
|
9
.
Stock Compensation
Shares
Issued for Services
During
the quarters ended June 30, 2019 and 2018, the Company issued 0 and 375,000 shares of common stock respectively for consulting
fees. The Company valued these shares at $0 and $125,899 respectively, based upon the fair value of the common stock at the dates
of the agreements. The consulting fees are amortized over the contract periods, which are typically between 12 and 24 months.
The amortization of prepaid services totaled $0 and $101,667 for the quarters ended June 30, 2019 and 2018.
10.
Income Taxes – Results of Operations
There
was no income tax expense reflected in the results of operations for the years ended June 30, 2019 and 2018 because the Company
incurred a net loss in both years.
On
December 22, 2018, the President of the United States signed the Tax Cuts and Jobs Act (“U.S. Tax Reform”), which
enacts a wide range of changes to the U.S. corporate income tax system. The impact of U.S. Tax Reform primarily represents the
Company’s estimates of revaluing the Company’s U.S. deferred tax assets and liabilities based on the rates at which
they are expected to be recognized in the future. For U.S. federal purposes the corporate statutory income tax rate was reduced
from 35% to 21%, effective for the 2018 tax year.
The
Company has recognized no tax benefit for the losses generated for the periods through June 30, 2019. ASC Topic 740 requires that
a valuation allowance be provided if it is more likely than not that some portion or all of a deferred tax asset will not be realized.
The Company’s ability to realize the benefit of its deferred tax asset will depend on the generation of future taxable income.
Because the Company has yet to recognize revenue, we believe that the full valuation allowance should be provided.
Our
effective tax rate for fiscal years 2019 and 2018 was 0%. Our tax rate can be affected by recurring items, such as tax rates in
foreign jurisdictions and the relative amount of income we earn in jurisdictions. It may also be affected by discrete items that
may occur in any given year but are not consistent from year to year.
11.
Licenses and Supply Agreements
Patent
and Subsidiary Acquisition
In
December 2014, the Company transferred to Cytocom certain of its rights, title and interest in or relating to intellectual property
(i) patents, patent applications, and all divisional, continuations and continuations-in-part thereof, together with all reissues,
reexaminations, renewals and extensions thereof and all rights to obtain such divisionals, continuations and continuations-in-part,
reissues, reexaminations, renewals and extensions, and all utility models and statutory invention registrations and any other
such analogous rights, (ii) trademarks, service marks, Internet domain names, trade dress, trade styles, logos, trade names, services
names, brand names, corporate names, assumed business names and general intangibles and other source identifiers of a like nature,
together with the goodwill associated with any of the foregoing, and all registrations and applications for registrations thereof,
together with all renewals and extensions thereof and all rights to obtain such renewals and extensions, (iii) copyrights, mask
work rights, database and design rights, moral rights and rights in Internet websites, whether registered or unregistered and
whether published or unpublished, all registrations and recordings thereof and all applications in connection therewith, together
with all renewals, continuations, reversions and extensions thereof and all rights to obtain such renewals, continuations, reversions
and extensions, and (iv) confidential and proprietary information, including, trade secrets and know-how. Cytocom licensed back
to the Company a perpetual, non-exclusive, royalty-free right and license to use the assigned intellectual property for veterinary
indications and for the marketing rights to emerging markets, access to all clinical data, use of the formulation for LDN and
MENK.
The
Original Agreement also granted the Company rights to market Lodonal™ and Met-Enkephalin (“MENK”) in “Emerging
Markets,” which included all countries excluding Canada, Italy, Japan, France, Germany, United Kingdom, European Community
and the United States. Pursuant to the Original Agreement, the Company was required to pay Cytocom a 5% royalty on all sales all
ongoing drug development and fees due in connection with the underlying patents until such time as Cytocom was funded.
On
May 1, 2018, the Company entered into an amended and restated licensing agreement (the “Restated Agreement”) with
Cytocom. The Restated Agreement restates the licensing arrangement between the Company and Cytocom as provided by the Original
Agreement. The Restated Agreement grants the Company distribution and marketing rights for Lodonal™ and MENK for humans
in Emerging Markets. In addition, the Company has been granted the rights to distribute and market Lodonal™ and MENK for
animal use in the United States. The royalty due to Cytocom has been reduced from 5% to 1% of sales and the Company no longer
has any ongoing obligations to pay for the cost in connection with the assets of Cytocom.
12.
Commitments and Contingencies
Distribution
Agreements in Nigeria
In
October 2013, the Company announced the signing of a Distribution Agreement with AHAR Pharma, a Nigerian company, to market Lodonal™,
in Nigeria for the treatment of autoimmune diseases and cancer. AHAR intends to distribute Lodonal™ through a local distributor
network, an Internet client base and directly to hospitals, pharmacists and doctors in Nigeria. The first deliveries under the
agreement took place in February 2018. Under the original agreement, the Company is obligated to provide delivery of an initial
supply of between 1 million and 1.5 million doses of Lodonal™ product to cover AHAR Pharma’s first-year purchase commitment.
Due to the fact that AHAR Pharma failed to meet its contractual purchase obligations, the Company formally issued notice of default
under the agreement.
On
April 18, 2018, AHAR Pharma transferred its rights under the Distribution Agreement to Fidson Healthcare Plc (“Fidson”),
and Fidson signed an exclusive distribution agreement with the Company to distribute Lodonal™. There were no shipments under
this agreement in the first half of 2019.
Contract
Manufacturing Agreements
On
October 25, 2016, the Company and Acromax Dominicana, SA (“Acromax”), which is based in the Dominican Republic, entered
into a contract for manufacturing of LDN tablets, capsules and/or creams (“Agreement”). Subject to the terms and conditions
of the Agreement, Acromax will obtain all necessary licenses and permits to carry out the manufacturing and packaging of LDN in
exchange for a fixed fee per tablet plus an additional fee for packaging, shipping and customs clearance. The Agreement has an
initial term of five years unless terminated by either party in accordance with the terms.
Operating
Leases
At
June 30, 2019, the Company was a party to an agreement to lease office space in Orlando, Florida. Rental expense for the three
months ended June 30, 2019 and 2018 was $2,162 and $4,451 respectively.
13.
Subsequent Events
None.