Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Organization and description of business operations
Timber Pharmaceuticals, Inc., formerly
known as BioPharmX Corporation (together with its subsidiary Timber Pharmaceuticals Australia Pty Ltd. and Timber Pharmaceuticals
LLC, the “Company” or “Timber”) is incorporated under the laws of the state of Delaware. Timber was founded
in 2019 to develop treatments for unmet needs in medical dermatology. Timber has a particular focus on rare diseases or conditions
of the skin for which there are no current treatments. Timber is initially targeting multiple indications in rare/orphan dermatology
with no approved treatments.
Merger Agreement
On May 18, 2020, BioPharmX Corporation
(“BioPharmX”) completed its business combination with Timber Pharmaceuticals LLC, a Delaware limited liability company
(“Timber Sub”), in accordance with the terms of the Agreement and Plan of Merger and Reorganization, dated as of January
28, 2020 (the “Merger Agreement”), by and among BioPharmX, Timber Sub and BITI Merger, Inc., a Delaware corporation
and wholly-owned subsidiary of the Company (“Merger Sub”), as amended by Amendment No. 1 thereto made and entered into
as of March 24, 2020 (the “First Amendment”) and Amendment No. 2 thereto made and entered into as of April 27, 2020
(the “Second Amendment”) (the Merger Agreement, as amended by the First Amendment and the Second Amendment, the “Amended
Merger Agreement”), pursuant to which Merger Sub merged with and into Timber Sub, with Timber Sub surviving as a wholly-owned
subsidiary of the Company (the “Merger”). In connection with, and immediately prior to the completion of, the Merger,
BioPharmX effected a reverse stock split of the Company’s common stock, par value $0.001 per share (the “Common Stock”),
at a ratio of 1-for-12 (the “Reverse Stock Split”). Immediately after completion of the Merger, BioPharmX changed its
name to “Timber Pharmaceuticals, Inc.” and the officers and directors of Timber Sub became the officers and directors
of the Company.
Under the terms of the Amended Merger Agreement,
BioPharmX issued shares of Common Stock to the holders of common units of Timber Sub. Immediately after the Merger, there were
approximately 11,849,031 shares of Common Stock outstanding (after the Reverse Stock Split). Pursuant to the terms of
the Amended Merger Agreement, the former holders of common units of Timber Sub (including the Investors, as defined below, but
excluding Value Appreciation Rights of Timber Sub (“VARs”), as defined below) owned in the aggregate approximately
88.5% of the outstanding Common Stock, with the Company’s stockholders immediately prior to the Merger owning approximately
11.5% of the outstanding Common Stock. The number of shares of Common Stock issued to the holders of common units of Timber Sub
for each common unit of Timber Sub outstanding immediately prior to the Merger was calculated using an exchange ratio of approximately
629.57 shares of Common Stock for each Timber Sub unit. In addition, the 584 VARs that were outstanding immediately prior to Merger
became denoted and payable in 367,670 shares of Common Stock at the Effective Time of the Merger (the “Effective Time”).
Further, the holder of the 1,819,289 preferred units of Timber Sub outstanding immediately prior to the Merger received 1,819 shares
of the newly created convertible Series A preferred stock at the Effective Time. As part of the Merger, the Company assumed 220,030
legacy BioPharmX warrants with a weighted average exercise price of $164.17 per share, and 97,870 legacy BioPharmX stock options
with a weighted average exercise price of $45.81 per share. In connection with the Merger Agreement, BioPharmX entered into a Credit
Agreement with Timber Sub, pursuant to which Timber Sub made a bridge loan to the Company (the “Bridge Loan”), in an
aggregate amount of $2.25 million with $250,000 original issue discount.
The Company incurred approximately $1.5
million of legal, consulting and other professional fees related to the Merger, which were classified as transaction expenses in
the accompanying unaudited condensed consolidated statement of operations for the nine months ended September 30, 2020.
Securities Purchase Agreement
On May 18, 2020, BioPharmX and Timber Sub
completed a previously announced private placement transaction with certain accredited investors for an aggregate purchase price
of approximately $25.0 million (comprised of (x) approximately $5 million credit with respect to the senior secured notes issued
in connection with the Bridge Loan that certain of the Investors made to Timber Sub at the time of the execution of the Merger
Agreement, and (y) approximately $17.5 million in cash from the Investors, net of issuance costs totaling $2.5 million, whereby,
among other things, Timber Sub issued to the Investors common units of Timber Sub immediately prior to the Merger (the “Pre-Merger
Financing”), pursuant to the Securities Purchase Agreement (the “Securities Purchase Agreement”), made and entered
into as March 27, 2020, as amended, by and among BioPharmX, Timber Sub and the institutional investors party thereto (the “Investors”).
In addition, pursuant to the terms of the
Securities Purchase Agreement, dated as of January 28, 2020 between Timber Sub and several of the Investors (the “Bridge
Investors”), the Company issued to the Bridge Investors, on May 22, 2020, warrants to purchase 413,751 shares of Common Stock
at an exercise price of $2.2362 (the “Bridge Warrants”).
Timber
Pharmaceuticals, Inc. & Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
On July 17, 2020, Timber entered into an
Amended and Restated Registration Rights Agreement (as amended, the “Registration Rights Agreement”) with the Investors.
Pursuant to the Registration Rights Agreement, the Company agreed to provide certain demand registration rights to the Investors
relating to the registration of the shares underlying the Investor Warrants (as defined below) and the Bridge Warrants. In connection
with the entry into the Registration Rights Agreement and pursuant to the Securities Purchase Agreement, Timber is restricted from
various financing activities until August 16, 2022. Timber will need to negotiate with the Investors with respect to future financings
in order to continue as a going concern.
Investor Warrants
On June 2, 2020, pursuant to the terms
of the Securities Purchase Agreement, the Company issued 8,384,764 Series A Warrants to purchase shares of Common Stock (“Series
A Warrants”) and 7,042,175 Series B Warrants to purchase shares of Common Stock (“Series B Warrants”).
Series A Warrants
The Series A Warrants were issued on June
2, 2020 at an initial exercise price of $2.7953 per share, were immediately exercisable upon issuance and have a term of five years
from the date of issuance. The Series A Warrants were initially exercisable for 8,384,764 shares of Common Stock in the aggregate.
The Series A Warrants provide that if the
Company issues or sells, enters into a definitive, binding agreement pursuant to which the Company is required to issue or sell
or is deemed, pursuant to the provisions of the Series A Warrants, to have issued or sold, any shares of Common Stock for a price
per share lower than the exercise price then in effect (a “Dilutive Issuance”), subject to certain limited exceptions,
then the exercise price of the Series A Warrants shall be reduced to such lower price per share. Notwithstanding the foregoing,
no adjustment to the exercise price of the Series A Warrants as a result of a Dilutive Issuance shall cause the exercise price
to be less than $1.2085, calculated based on a pre-money valuation (of the combined company, assuming for this purpose the pre-money
issuance of the converted shares) of $15 million.
In addition, the exercise price and the
number of shares of Common Stock issuable upon exercise of the Series A Warrants are subject to adjustment in connection with stock
splits, dividends or distributions or other similar transactions. Further, on each Reset Date (as defined below) the Series A Warrants
will be adjusted downward (but not increased) such that the exercise price thereof becomes 125% of the Reset Price (as defined
below), and the number of shares underlying the Series A Warrants will be increased (but not decreased) to the quotient of (a)(i)
the exercise price in effect prior to the Reset (as defined below) multiplied by (ii) the number of shares underlying the Series
A Warrants prior to the Reset divided by (b) the exercise price resulting from the Reset.
Pursuant to the Series A Warrants, the
Company has agreed not to enter into, allow or be party to certain fundamental transactions, generally including any merger with
or into another entity, sale of all or substantially all of the Company’s assets, tender offer or exchange offer, or reclassification
of the Common Stock (a “Fundamental Transaction”) until the 45th trading day immediately following the earlier to occur
of (x) the date a holder can sell all underlying securities pursuant to Rule 144 without restriction or limitation and without
the requirement to be in compliance with Rule 144(c)(1) of the Securities Act and (y) June 2, 2022 (the “Reservation Date”).
Thereafter, upon any exercise of a Series A Warrant, the holder shall have the right to receive, for each share of Common Stock
that would have been issuable upon such exercise immediately prior to the occurrence of a Fundamental Transaction, at the option
of the holder (without regard to any limitation on the exercise of the Series A Warrant), the number of shares of common stock
of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration
(the “Alternate Consideration”) receivable as a result of such Fundamental Transaction by a holder of the number of
shares of Common Stock for which the Series A Warrant is exercisable immediately prior to such Fundamental Transaction (without
regard to any limitation on the exercise of the Series A Warrant). For purposes of any such exercise, the determination of the
exercise price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration
issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the exercise
price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the
Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received
in a Fundamental Transaction, then the holder shall be given the same choice as to the Alternate Consideration it receives upon
any exercise of the Series A Warrant following such Fundamental Transaction. The Company shall cause any successor entity in a
Fundamental Transaction in which the Company is not the survivor (the “Successor Entity”) to assume in writing all
of the obligations of the Company under the Series A Warrants, upon which the Series A Warrants shall become exercisable for shares
of Common Stock, shares of the common stock of the Successor Entity or the consideration that would have been issuable to the holders
had they exercised the Series A Warrants prior to such Fundamental Transaction, at the holders’ election.
Timber
Pharmaceuticals, Inc. & Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Additionally, at the request of a holder
delivered before the 90th day after the consummation of a Fundamental Transaction, the Company or the successor entity must purchase
such holder’s warrant for the value calculated using the Black-Scholes option pricing model as of the day immediately following
the public announcement of the applicable Fundamental Transaction, or, if the Fundamental Transaction is not publicly announced,
the date the Fundamental Transaction is consummated.
The Series A Warrants also contain a “cashless
exercise” feature that allows the holders to exercise the Series A Warrants without making a cash payment in the event that
there is no effective registration statement registering the shares issuable upon exercise of the Series A Warrants. The Series
A Warrants are subject to a blocker provision which restricts the exercise of the Series A Warrants if, as a result of such exercise,
the holder, together with its affiliates and any other person whose beneficial ownership of Common Stock would be aggregated with
the holder’s for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)
would beneficially own in excess of 4.99% or 9.99% of the outstanding Common Stock (including the shares of Common Stock issuable
upon such exercise), as such percentage ownership is determined in accordance with the terms of the Series A Warrants.
If the Company fails to issue to a holder
of Series A Warrants the number of shares of Common Stock to which such holder is entitled upon such holder’s exercise of
the Series A Warrants, then the Company shall be obligated to pay the holder on each day while such failure is continuing an amount
equal to 1.5% of the market value of the undelivered shares determined using a trading price of Common Stock selected by the holder
while the failure is continuing and if the holder purchases shares of Common Stock in connection with such failure (“Series
A Buy-In Shares”), then the Company must, at the holder’s discretion, reimburse the holder for the cost of such Series
A Buy-In Shares or deliver the owed shares and reimburse the holder for the difference between the price such holder paid for the
Series A Buy-In Shares and the market price of such shares, measured at any time of the holder’s choosing while the delivery
failure was continuing.
Further, in the event that the Company
does not have sufficient authorized shares to deliver in satisfaction of an exercise of a Series A Warrant, then unless the holder
elects to void such attempted exercise, the holder may require the Company to pay an amount equal to the product of (i) the number
of shares that the Company is unable to deliver and (ii) the highest volume-weighted average price of a share of Common Stock as
quoted on NYSE American during the period beginning on the date of such attempted exercise and ending on the date that the Company
makes the applicable payment.
If the maximum number of warrants issuable
in connection with the Securities Purchase Agreement were to be issued, the result would be the issuance of an additional 14,890,245
Series A Warrants for 23,275,009 Series A Warrants in the aggregate. In addition, the exercise price of the Series A Warrants issued
since May 18, 2020 would be reset to $1.01.
Series B Warrants
The Series B Warrants have an exercise
price of $0.001, were exercisable upon issuance and will expire on the day following the later to occur of (i) the Reservation
Date, and (ii) the date on which the Investor’s Series B Warrants have been exercised in full (without giving effect to any
limitation on exercise contained therein) and no shares remain issuable thereunder. Upon their issuance on June 2, 2020, the Series
B Warrants were initially exercisable for 7,042,175 shares of Common Stock in the aggregate.
Timber
Pharmaceuticals, Inc. & Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Additionally, every ninth trading day up
to and including the 45th trading day (each, a “Reset Date”) following (i) the 15th trading day immediately following
the issuance date of the Series B Warrants and (ii) every 15th trading day thereafter (each such date provided in the foregoing
clauses (i) and (ii), an “End Reset Measuring Date”) (except if on such date (1) the holder cannot freely sell any
Registrable Securities (as defined below) pursuant to a resale registration statement and (2) the holder cannot sell any Registrable
Securities without restriction or limitation pursuant to Rule 144, and provided that no date following the occurrence of a Satisfaction
Event (as defined below) will be deemed an End Reset Measuring Date, and provided further that no such date will be deemed an End
Reset Measuring Date if an End Reset Measuring Date has previously occurred and either (1) if the holder was able to then freely
sell any Registrable Securities pursuant to a resale registration statement in accordance with such prior End Reset Measuring Date,
such ability continued uninterrupted through and including the applicable date of determination or (2) if the holder was able to
freely sell any Registrable Securities without restriction or limitation pursuant to Rule 144 in accordance with such prior End
Reset Measuring Date, such ability continued uninterrupted through and including the applicable date of determination) (such 45
trading day period, the “Reset Period” and each such 45th trading day after (i) or (ii), the “End Reset Date”),
the number of shares issuable upon exercise of each Investor’s Series B Warrants shall be increased (a “Reset”)
to the number (if positive) obtained by subtracting (i) the number of Converted Shares, from (ii) the quotient determined by dividing
(a) the pro rata portion of the Purchase Price paid by the Investor, by (b) the greater of (x) the arithmetic average of the five
lowest dollar volume-weighted average prices of a share of Common Stock on NYSE American during the applicable Reset Period immediately
preceding the applicable Reset Date to date and (y) provided that the Common Stock is then traded on the NYSE American, a floor
price per share of $0.8056 (the “Floor Price”) calculated based on a pre-money valuation (of the combined company,
assuming for this purpose the pre-money issuance of the Converted Shares) of $10 million (such number resulting in this clause
(b), the “Reset Price”). “Satisfaction Event” means (1) all Registrable Securities are able to be freely
sold without any restriction or limitation by the holder at all times during the 45 trading day period beginning on, and including,
any End Reset Measuring Date either (a) pursuant to a resale registration statement or (b) pursuant to Rule 144; or (2) the Reservation
Date has occurred.
Pursuant to the Series B Warrants, the
Company has agreed not to enter into, allow or be party to a Fundamental Transaction until the Reservation Date. Thereafter, upon
any exercise of a Series B Warrant, the holder shall have the right to receive, for each share of Common Stock that would have
been issuable upon such exercise immediately prior to the occurrence of a Fundamental Transaction, at the option of the holder
(without regard to any limitation on the exercise of the Series B Warrant), the number of shares of common stock of the successor
or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration (the “Alternate
Consideration”) receivable as a result of such Fundamental Transaction by a holder of the number of shares of Common Stock
for which the Series B Warrant is exercisable immediately prior to such Fundamental Transaction (without regard to any limitation
on the exercise of the Series B Warrant). For purposes of any such exercise, the determination of the exercise price shall be appropriately
adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share
of Common Stock in such Fundamental Transaction, and the Company shall apportion the exercise price among the Alternate Consideration
in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of
Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the
holder shall be given the same choice as to the Alternate Consideration it receives upon any exercise of the Series B Warrant following
such Fundamental Transaction. The Company shall cause any Successor Entity to assume in writing all of the obligations of the Company
under the Series B Warrants, upon which the Series B Warrants shall become exercisable for shares of Common Stock, shares of the
common stock of the Successor Entity or the consideration that would have been issuable to the holders had they exercised the Series
B Warrants prior to such Fundamental Transaction, at the holders’ election.
The Series B Warrants also contain a “cashless
exercise” feature that allows the holders to exercise the Series B Warrants without making a cash payment. The Series B Warrants
are subject to a blocker provision which restricts the exercise of the Series B Warrants if, as a result of such exercise, the
holder, together with its affiliates and any other person whose beneficial ownership of Common Stock would be aggregated with the
holder’s for purposes of Section 13(d) of the Exchange Act would beneficially own in excess of 4.99% or 9.99% of the outstanding
Common Stock (including the shares of Common Stock issuable upon such exercise), as such percentage ownership is determined in
accordance with the terms of the Series B Warrants.
If the Company fails to issue to a holder
of Series B Warrants the number of shares of Common Stock to which such holder is entitled upon such holder’s exercise of
the Series B Warrants, then the Company shall be obligated to pay the holder on each day while such failure is continuing an amount
equal to 1.5% of the market value of the undelivered shares determined using a trading price of Common Stock selected by the holder
while the failure is continuing and if the holder purchases shares of Common Stock in connection with such failure (“Series
B Buy-In Shares”), then the Company must, at the holder’s discretion, reimburse the holder for the cost of such Series
B Buy-In Shares or deliver the owed shares and reimburse the holder for the difference between the price such holder paid for the
Series B Buy-In Shares and the market price of such shares, measured at any time of the holder’s choosing while the delivery
failure was continuing.
Timber
Pharmaceuticals, Inc. & Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Further, the Series B Warrants provide
that, in the event that the Company does not have sufficient authorized shares to deliver in satisfaction of an exercise of a Series
B Warrant, then unless the holder elects to void such attempted exercise, the holder may require the Company to pay an amount equal
to the product of (i) the number of shares that is unable to deliver and (ii) the highest volume-weighted average price of a share
of Common Stock as quoted on NYSE American during the period beginning on the date of such attempted exercise and ending on the
date that the Company makes the applicable payment.
If the maximum number of warrants issuable
in connection with the Securities Purchase Agreement were to be issued, the result would be the issuance of an additional 19,853,090
Series B Warrants for 26,895,265 Series B Warrants in the aggregate.
Bridge Warrants
The Bridge Warrants, were issued on May
22, 2020 to the Bridge Investors, have an exercise price of $2.2362 per share, were immediately exercisable upon issuance and have
a term of five years from the date of issuance. The Bridge Warrants are exercisable for 413,751 shares of Common Stock in the aggregate.
The Bridge Warrants provide that if Timber
issues or sells or in accordance with the terms of the Bridge Warrants, is deemed to have issued or sold any shares of Common Stock
for a price per share lower than the exercise price then in effect subject to certain limited exceptions, then the exercise price
of the Bridge Warrants shall be reduced to such lower price per share.
Upon the consummation of Fundamental Transaction
by the Company, upon any exercise of a Bridge Warrant, the holder shall have the right to receive, for each share of Common Stock
that would have been issuable upon such exercise immediately prior to the occurrence of a Fundamental Transaction, at the option
of the holder (without regard to any limitation on the exercise of the Bridge Warrant), the number of shares of Common Stock of
the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration
(the “Alternate Consideration”) receivable as a result of such Fundamental Transaction by a holder of the number of
shares of Common Stock for which the Bridge Warrant is exercisable immediately prior to such Fundamental Transaction (without regard
to any limitation on the exercise of the Bridge Warrant). For purposes of any such exercise, the determination of the exercise
price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable
in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the exercise price among
the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration.
If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction,
then the holder shall be given the same choice as to the Alternate Consideration it receives upon any exercise of the Bridge Warrant
following such Fundamental Transaction. The Company shall cause any Successor Entity to assume in writing all of the obligations
of the Company under the Bridge Warrants, upon which the Bridge Warrants shall become exercisable for shares of Common Stock, shares
of the Common Stock of the Successor Entity or the consideration that would have been issuable to the holders had they exercised
the Bridge Warrants prior to such Fundamental Transaction, at the holders’ election.
Additionally, at the request of a holder
of a Bridge Warrant delivered before the 90th day after the consummation of a Fundamental Transaction, Timber or the successor
entity must purchase such holder’s warrant for the value calculated using the Black-Scholes option pricing model as of the
day immediately following the public announcement of the applicable Fundamental Transaction, or, if the Fundamental Transaction
is not publicly announced, the date the Fundamental Transaction is consummated.
The Bridge Warrants also contain a “cashless
exercise” feature that allows the holders to exercise the Bridge Warrants without making a cash payment in the event that
there is no effective registration statement registering the shares issuable upon exercise of the Bridge Warrants. The Bridge Warrants
are subject to a blocker provision which restricts the exercise of the Bridge Warrants if, as a result of such exercise, the holder,
together with its affiliates and any other person whose beneficial ownership of Common Stock would be aggregated with the holder’s
for purposes of Section 13(d) of the Exchange Act would beneficially own in excess of 4.99% or 9.99% of the outstanding shares
of Common Stock (including the shares of Common Stock issuable upon such exercise), as such percentage ownership is determined
in accordance with the terms of the Bridge Warrants.
Timber
Pharmaceuticals, Inc. & Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Liquidity and Capital Resources
The Company has no product revenues, incurred
operating losses since Inception, and expects to continue to incur significant operating losses for the foreseeable future and
may never become profitable. The Company had an accumulated deficit of approximately $19.1 million at September 30, 2020, a net
loss of approximately $15.9 million, and approximately $6.6 million of net cash used in operating activities for the nine months
ended September 30, 2020.
Going Concern
The Company has evaluated whether there
are any conditions and events, considered in the aggregate, that raise substantial doubt about its ability to continue as a going
concern within one year beyond the filing of this Quarterly Report on Form 10-Q. Based on such evaluation and the Company’s
current plans, which are subject to change, management believes that the Company’s existing cash and cash equivalents as
of September 30, 2020 are not sufficient to satisfy its operating cash needs for the year after the filing of this Quarterly Report
on Form 10-Q.
The accompanying condensed consolidated
financial statements have been prepared assuming the Company will continue to operate as a going concern, which contemplates the
realization of assets and settlement of liabilities in the normal course of business, and do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities
that may result from uncertainty related to its ability to continue as a going concern.
The Company’s future liquidity and
capital funding requirements will depend on numerous factors, including:
·
its ability to raise additional funds to finance its operations, including its ability to access financing that may be unavailable
due to contractual limitations under the Securities Purchase Agreement;
·
the outcome, costs and timing of clinical trial results for the Company’s current or future product candidates, including
the timing, progress, costs and results of its Phase 2b clinical trial of TMB-001 for the treatment of congenital ichthyosis as
well as its ongoing Phase 2b clinical trial of TMB-002 for the treatment of facial angiofibromas in tuberous sclerosis complex;
·
the outcome, timing and cost of meeting regulatory requirements established by the FDA and other comparable foreign regulatory
authorities;
·
the emergence and effect of competing or complementary products;
·
its ability to maintain, expand and defend the scope of its intellectual property portfolio, including the amount and timing
of any payments the Company may be required to make, or that it may receive, in connection with the licensing, filing, prosecution,
defense and enforcement of any patents or other intellectual property rights;
·
the cost and timing of completion of commercial-scale manufacturing activities;
·
the cost of establishing sales, marketing and distribution capabilities for its products in regions where it chooses to
commercialize its products on its own;
·
the initiation, progress, timing and results of the commercialization of its product candidates, if approved for commercial
sale;
·
its ability to retain its current employees and the need and ability to hire additional management and scientific and medical
personnel; and
·
the terms and timing of any collaborative, licensing or other arrangements that it has or may establish.
The Company will need to raise substantial
additional funds through one or more of the following: issuance of additional debt or equity and/or the completion of a licensing
or other commercial transaction for one or more of the Company’s product candidates. If the Company is unable to maintain
sufficient financial resources, its business, financial condition and results of operations will be materially and adversely affected.
This could affect future development and business activities and potential future clinical studies and/or other future ventures.
There can be no assurance that the Company will be able to obtain the needed financing on acceptable terms or at all. Additionally,
equity or convertible debt financings will likely have a dilutive effect on the holdings of the Company’s existing stockholders.
Further, on July 17, 2020, Timber entered
into the Registration Rights Agreement with the Investors, pursuant to which the Company agreed to provide certain demand registration
rights to the Investors relating to the registration of the shares underlying the Investor Warrants and the Bridge Warrants. In
connection with the entry into the Registration Rights Agreement and pursuant to the Securities Purchase Agreement, the Company
was restricted from certain financing activities until August 16, 2022.
Timber
Pharmaceuticals, Inc. & Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
The impact of the worldwide spread of a novel strain of coronavirus
(“COVID 19”) has been unprecedented and unpredictable, but based on the Company’s current assessment, the Company
does not expect any material impact on its long-term strategic plans, operations and its liquidity due to the worldwide spread
of COVID-19. Site activation and patient enrollment have recently been impacted by the COVID-19 pandemic in the larger and longer
TMB-002 study, especially at our contracted test sites in Eastern Europe. At this time, we expect all sites to be opened by year-end
2020 and are working closely with the sites to better estimate any delay to the recruitment timelines. However, the Company is
continuing to assess the effect on its operations by monitoring the spread of COVID-19 and the actions implemented to combat the
virus throughout the world and its assessment of the impact of COVID-19 may change.
Note 2. Significant accounting policies
Basis of presentation
The accompanying unaudited condensed financial
statements have been prepared in accordance with the accounting principles generally accepted in the United States of America (“U.S.
GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X of
the SEC. In the opinion of management, the accompanying unaudited condensed financial statements reflect all adjustments, consisting
of normal recurring adjustments, considered necessary for a fair presentation of such interim results.
The results for the unaudited condensed
statement of operations are not necessarily indicative of results to be expected for the year ending December 31, 2020 or for any
future interim period. The unaudited condensed financial statements do not include all of the information and notes required by
U.S. GAAP for complete financial statements.
Use of estimates
The preparation of consolidated financial
statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the
reported amounts of expenses during the reporting period. The most significant estimates in the Company’s consolidated financial
statements relate to the valuations of investments, loans, warrants, notes, and equity-based awards and member units. These estimates
and assumptions are based on current facts, historical experience and various other factors believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and
the recording of expenses that are not readily apparent from other sources. Actual results may differ materially and adversely
from these estimates. To the extent there are material differences between the estimates and actual results, the Company’s
future results of operations will be affected.
Research and development
Research and development costs, including
in-process research and development acquired as part of an asset acquisition for which there is no alternative future use, are
expensed as incurred. Advance payments for goods and services that will be used in future research and development activities are
expensed when the activity has been performed or when the goods have been received rather than when the payment is made.
Accrued Outsourcing Costs
Substantial portions of the Company’s
preclinical studies and clinical trials are performed by third-party laboratories, medical centers, contract research organizations
and other vendors (collectively “CROs”). These CROs generally bill monthly or quarterly for services performed, or
bill based upon milestone achievement. For preclinical studies, the Company accrues expenses based upon estimated percentage of
work completed and the contract milestones remaining. Clinical trial costs are a significant component of research and development
expenses and include costs associated with third-party contractors. The Company outsources a substantial portion of its clinical
trial activities, utilizing external entities such as CROs, independent clinical investigators, and other third-party service providers
to assist the Company with the execution of its clinical studies. For each clinical trial that the Company conducts, certain clinical
trial costs are expensed immediately, while others are expensed over time based on the number of patients in the trial, the attrition
rate at which patients leave the trial, and/or the period over which clinical investigators or CROs are expected to provide services.
The Company’s estimates depend on the timeliness and accuracy of the data provided by the CROs regarding the status of each
program and total program spending. The Company periodically evaluates the estimates to determine if adjustments are necessary
or appropriate based on information it receives.
Timber
Pharmaceuticals, Inc. & Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Fair Value Measurement
The Company follows the accounting guidance
in ASC 820 for its fair value measurements of financial assets and liabilities measured at fair value on a recurring basis. Under
this accounting guidance, fair value is defined as an exit price, representing the amount that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value
is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset
or a liability.
The accounting guidance requires fair value
measurements be classified and disclosed in one of the following three categories:
Level 1: Quoted prices
in active markets for identical assets or liabilities.
Level 2: Observable inputs other
than Level 1 prices, for similar assets or liabilities that are directly or indirectly observable in the marketplace.
Level 3: Unobservable inputs
which are supported by little or no market activity and that are financial instruments whose values are determined using pricing
models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value
requires significant judgment or estimation.
The fair value hierarchy also requires
an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Assets
and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant
to the fair value measurement.
As of September 30, 2020 and December 31,
2019, the recorded values of prepaid expenses, accounts payable, accrued expenses, and license payable, approximate the fair values
due to the short-term nature of the instruments.
Leases
The Company accounts for its leases under
the Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 842, Leases (“ASC 842”).
Under this guidance, arrangements meeting the definition of a lease are classified as operating or financing leases, and are recorded
on the condensed consolidated balance sheet as both a right of use asset and lease liability, calculated by discounting fixed lease
payments over the lease term at the rate implicit in the lease or the Company’s incremental borrowing rate. Lease liabilities
are increased by interest and reduced by payments each period, and the right of use asset is amortized over the lease term. For
operating leases, interest on the lease liability and the amortization of the right of use asset result in straight-line rent expense
over the lease term.
In calculating the right of use asset and
lease liability, the Company elects to combine lease and non-lease components as permitted under ASC 842. The Company excludes
short-term leases having initial terms of 12 months or less from the new guidance as an accounting policy election and recognizes
rent expense on a straight-line basis over the lease term.
Revenue Recognition
The Company has not yet generated any revenue
from product sales. The Company’s source of revenue in both 2020 and 2019 has been from grants. When grant funds are received
after costs have been incurred, the Company records grant revenue upon the receipt of cash.
Warrant Liability
The Company accounts for certain common
stock warrants outstanding as a liability at fair value and adjusts the instruments to fair value at each reporting period. This
liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in
the Company’s statements of operations. The Company issued Series A Warrants to purchase 8,384,764 shares of its common stock
to investors in connection with the $20 million financing in May 2020, and recorded these outstanding warrants as a liability at
fair value utilizing a Monte Carlo simulation model. As further described in Note 6, the fair value of the warrants issued by the
Company in connection with the $5.0 million Bridge Notes has been estimated using a probability-weighted Black-Scholes option pricing
model. Upon consummation of the Merger the Series B Warrants are classified as equity.
Timber
Pharmaceuticals, Inc. & Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Stock-Based Compensation
The Company expenses stock-based compensation
to employees, non-employees and board members over the requisite service period based on the estimated grant-date fair value of
the awards and actual forfeitures. The Company accounts for forfeitures as they occur. Stock-based awards with graded-vesting schedules
are recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award. The
Company estimates the fair value of stock option grants using the Black-Scholes option pricing model, and the assumptions used
in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties
and the application of management’s judgment. All stock-based compensation costs are recorded in general and administrative
or research and development costs in the condensed consolidated statements of operations based upon the underlying individual’s
role at the Company.
In 2019, the Company granted VARs to certain
employees at specified exercise prices. The Company estimates the fair value of VARs using the Black-Scholes option pricing model,
and the assumptions used in calculating the fair value of equity-based awards represent management’s best estimates and involve
inherent uncertainties and the application of management’s judgment. All equity-based compensation costs are recorded in
general and administrative or research and development costs in the statements of operations.
Convertible Preferred Stock
The Company records
shares of convertible preferred stock at their respective fair values on the dates of issuance, net of issuance costs. The Company
has applied the guidance in ASC 480-10-S99-3A, Securities and Exchange Commission (“SEC”) Staff Announcement: Classification
and Measurement of Redeemable Securities and has therefore classified the Series A convertible preferred stock as mezzanine
equity. The convertible preferred stock is recorded outside of stockholders’ deficit because, in the event of certain change
of control events considered not solely within the Company’s control, such as a merger, acquisition and sale of all or substantially
all of the Company’s assets, the convertible preferred stock will become redeemable at the option of the holders.
Income (Loss) Per Share
Basic net income (loss) per share (“EPS”)
of common stock is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the
period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.
Timber
Pharmaceuticals, Inc. & Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
To calculate the basic EPS numerator, income
available to common stockholders must be computed by deducting both the dividends declared in the period on preferred stock (whether
or not paid) and the dividends accumulated for the period on cumulative preferred stock (whether or not declared) from income from
continuing operations and also from net income. If there is a loss from continuing operations or a net loss, the amount of the
loss shall be increased by those preferred dividends. The outstanding Series A Preferred Stock has cumulative dividends, whether
or not declared. Accordingly, the Company reduced the numerator for Basic EPS by deducting/(increasing) the amount of cumulative
preferred dividend from net income/(loss) in each period presented.
The basic and diluted net loss
amounts are the same for the three months ended September 30, 2019, and for the nine months ended September 30, 2020 and the
period from inception through September 30, 2019, as a result of the net loss and anti-dilutive impact of the potentially
dilutive securities. For the three months ended September 30, 2020, the Company recorded net income and therefore, earnings
per share was calculated using the treasury stock method. Dilutive potential common shares include outstanding value
appreciation rights and Series A Preferred Stock. Potentially dilutive shares are determined by applying the treasury stock
method to the assumed exercise of outstanding stock options, value appreciation rights, and warrants. Potentially dilutive
shares issuable upon conversion of the Series A Preferred Stock are calculated using the if-converted method.
The following is a reconciliation of the
numerator and denominator of the diluted net income (loss) per share computations for the periods presented below:
|
|
Three
Months Ended
September 30, 2020
|
|
|
Three
Months Ended
September 30, 2019
|
|
|
Nine
Months Ended
September 30, 2020
|
|
|
For the Period from
February 26, 2019
(Inception) through
September 30, 2019
|
|
Basic and diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2,836,495
|
|
|
$
|
(577,379
|
)
|
|
$
|
(15,927,714
|
)
|
|
$
|
(855,917
|
)
|
Accrued dividend on preferred stock units
|
|
|
-
|
|
|
|
(4,701
|
)
|
|
|
(52,669
|
)
|
|
|
(9,159
|
)
|
Cumulative dividends on Series A preferred stock
|
|
|
(36,685
|
)
|
|
|
-
|
|
|
|
(53,831
|
)
|
|
|
-
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
2,799,810
|
|
|
$
|
(582,080
|
)
|
|
$
|
(16,034,214
|
)
|
|
$
|
(865,076
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average number of shares outstanding
|
|
|
18,891,206
|
|
|
|
6,295,724
|
|
|
|
12,161,048
|
|
|
|
6,092,636
|
|
Add: Series A convertible preferred stock
|
|
|
100,775
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Add: Value appreciation rights
|
|
|
365,390
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diluted weighted average number of shares outstanding
|
|
|
19,357,370
|
|
|
|
6,295,724
|
|
|
|
12,161,048
|
|
|
|
6,092,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share attributable to common stockholders
|
|
$
|
0.15
|
|
|
$
|
(0.09
|
)
|
|
$
|
(1.32
|
)
|
|
$
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share attributable to common stockholders
|
|
$
|
0.14
|
|
|
$
|
(0.09
|
)
|
|
$
|
(1.32
|
)
|
|
$
|
(0.14
|
)
|
Securities that could potentially dilute income (loss) per share
in the future were not included in the computation of diluted income (loss) per share for the three and nine months ended September
30, 2020, the three months ended September 30, 2019 and the period from inception through September 30, 2019, because their inclusion
would be anti-dilutive are as follows (unaudited):
|
|
Three
Months Ended
September 30, 2020
|
|
|
Three
Months Ended
September 30, 2019
|
|
|
Nine
Months Ended
September 30, 2020
|
|
|
For the Period from
February 26, 2019
(Inception) through
September 30, 2019
|
|
Series A warrants
|
|
|
8,384,764
|
|
|
|
-
|
|
|
|
8,384,764
|
|
|
|
-
|
|
Bridge warrants
|
|
|
413,751
|
|
|
|
-
|
|
|
|
413,751
|
|
|
|
-
|
|
Series A preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
1,819,289
|
|
|
|
-
|
|
Unvested variable appreciation rights
|
|
|
-
|
|
|
|
436,293
|
|
|
|
367,670
|
|
|
|
436,293
|
|
Options to purchase common stock
|
|
|
232,996
|
|
|
|
-
|
|
|
|
232,996
|
|
|
|
-
|
|
Legacy stock options
|
|
|
16,459
|
|
|
|
-
|
|
|
|
16,459
|
|
|
|
-
|
|
Legacy warrants
|
|
|
219,928
|
|
|
|
-
|
|
|
|
219,928
|
|
|
|
-
|
|
|
|
|
9,267,898
|
|
|
|
436,293
|
|
|
|
11,454,857
|
|
|
|
436,293
|
|
Timber
Pharmaceuticals, Inc. & Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Income taxes
Income taxes are accounted for under the
asset and liability method. Deferred income taxes are recorded for temporary differences between financial statement carrying amounts
and the tax basis of assets and liabilities. Deferred tax assets and liabilities reflect the tax rates expected to be in effect
for the years in which the differences are expected to reverse. A valuation allowance is provided if it is more-likely than not
that some or all of the deferred tax assets will not be realized.
The Company also follows the provisions
of accounting for uncertainty in income taxes which prescribes a model for the recognition and measurement of a tax position taken
or expected to be taken in a tax return, and provides guidance on derecognition, classification, interest and penalties, disclosure
and transition. In accordance with this guidance, tax positions must meet a more-likely than not recognition threshold and measurement
attribute for the financial statement recognition and measurement of tax position.
The Company’s policy is to account
for income tax related interest and penalties in income tax expense in the accompanying condensed consolidated statements of operations.
Note 3. Acquisition of BioPharmX
As described in Note 1, on May 18, 2020,
the Company completed its acquisition of BioPharmX in accordance with the terms of the Merger Agreement. The acquisition was accounted
for as an asset acquisition/reverse merger.
Pursuant to the Merger Agreement, following
the Merger, the Timber Sub members, including the investors funding the $20 million investment and the bridge investors, own approximately
88.5% of the outstanding common stock of BioPharmX, and the BioPharmX stockholders own approximately 11.5% of the outstanding common
stock as of the date of the merger. The cost of the BioPharmX acquisition, which represents the consideration transferred to BioPharmX
stockholders in the BioPharmX acquisition, of $12.4 million consists of the following:
Number of shares of the combined company owned by BioPharmX stockholders
|
|
|
1,367,326
|
|
Multiplied by the fair value per share of BioPharmX common stock
|
|
$
|
6.12
|
|
Total estimated fair value of common stock
|
|
|
8,368,033
|
|
Add: net liabilities acquired
|
|
|
(2,833,453
|
)
|
Add: investment in BioPharmX
|
|
|
(1,169,846
|
)
|
Total consideration - recorded as research and development acquired
|
|
$
|
12,371,332
|
|
The total cost of the BioPharmX acquisition was allocated to
the net liabilities acquired as follows:
Cash and cash equivalents
|
|
$
|
340,786
|
|
Other current assets
|
|
|
2,027
|
|
Deposits
|
|
|
114,534
|
|
ROU asset
|
|
|
904,370
|
|
Accounts payable
|
|
|
(610,882
|
)
|
Credit cards
|
|
|
760
|
|
Accrued expenses
|
|
|
(148,999
|
)
|
Note - short term
|
|
|
(2,456,614
|
)
|
Operating lease liability - short term
|
|
|
(259,712
|
)
|
Other long term liabilities
|
|
|
(73,682
|
)
|
Operating lease liability - long term
|
|
|
(646,041
|
)
|
Net liabilities acquired
|
|
$
|
(2,833,453
|
)
|
Timber
Pharmaceuticals, Inc. & Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note 4. Credit Agreement with BioPharmX
Loan to BioPharmX
In 2020, prior to the BioPharmX
acquisition the Company loaned BioPharmX $2.5 million in three tranches. During the three and nine months ended September 30,
2020, the Company recorded interest income of approximately $0 and $42,000, respectively. In connection with the loan the Company
also received a warrant which was subsequently exercised for 193,596 common shares of BioPharmX.
The following is a summary of the loan
and investment in BioPharmX during the nine months ended September 30, 2020:
|
|
Loan to
BioPharmX
|
|
|
Investment
in
BioPharmX
|
|
|
Total
|
|
Balance as of January 1, 2020
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Principal balance
|
|
|
2,400,000
|
|
|
|
-
|
|
|
|
2,400,000
|
|
Accrued interest
|
|
|
41,655
|
|
|
|
-
|
|
|
|
41,655
|
|
Fair value of BioPharmX common stock
|
|
|
-
|
|
|
|
625,000
|
|
|
|
625,000
|
|
Change in fair value
|
|
|
-
|
|
|
|
559,805
|
|
|
|
559,805
|
|
Balance as of May 18, 2020
|
|
$
|
2,441,655
|
|
|
$
|
1,184,805
|
|
|
$
|
3,626,460
|
|
Acquisition of BioPharmX
|
|
|
(2,456,614
|
)
|
|
|
-
|
|
|
|
(2,456,614
|
)
|
Loan and investment in BioPharmX - recorded as research and development license acquired
|
|
|
14,959
|
|
|
|
(1,184,805
|
)
|
|
|
(1,169,846
|
)
|
Balance as of September 30, 2020
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Note 5. Purchases of Assets
Acquisition of Licenses from Patagonia
Pharmaceuticals LLC (“Patagonia”)
On February 28, 2019, the Company acquired
the license for a topical formulation of isotretinoin for the treatment of congenital ichthyosis and identified as TMB-001, formerly
PAT-001, from Patagonia (the “TMB-001 License”).
Upon closing of the TMB-001 License, the
Company paid a one-time upfront payment of $50,000 to Patagonia. Patagonia is entitled to up to $27.0 million of cash milestone
payments relating to certain regulatory and commercial achievements of the TMB-001 License, with the first being $4.0 million for
the initiation of a Phase 3 pivotal trial, as agreed with the FDA. In addition, Patagonia is entitled to net sales royalties ranging
from low single digits to mid double digits for the program licensed. The Company is responsible for all development activities
under the license. The potential regulatory and commercial milestones are not yet considered probable, and no milestone payments
have been accrued at September 30, 2020 and December 31, 2019.
On June 26, 2019, the Company acquired
the license for a locally administered (e.g. topical or subcutaneous) formulation of sitaxsentan for the treatment of cutaneous
fibrosis and/or pigmentation disorders, and identified as TMB-003, formerly PAT-S03, from Patagonia (the “TMB-003 License”).
Timber Pharmaceuticals,
Inc. & Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Upon closing of the TMB-003 License Agreement,
the Company paid a one-time upfront payment of $20,000 to Patagonia. Patagonia is entitled to up to $10.25 million of cash milestone
payments relating to certain regulatory and commercial achievements of the TMB-003 License, with the first being a one-time payment
of $250,000 upon the opening of an IND with the FDA. In addition, Patagonia is entitled to net sales earn-out payments ranging
from low to mid-single digits for the program licensed. The Company is responsible for all development activities under the license.
The potential regulatory and commercial milestones are not yet considered probable, and no milestone payments have been accrued
at September 30, 2020 and December 31, 2019.
The TMB-001 License and TMB-003 License
acquisitions were accounted for as asset acquisitions pursuant to ASC Topic 805, Business Combinations (Topic 805”) as the
majority of the fair value of the assets acquired were concentrated in a group of similar assets, and the acquired assets did not
have outputs or employees. Because the assets had not yet received regulatory approval, the purchase price of $50,000 paid for
these assets was recorded as research and development expense in the accompanying unaudited condensed consolidated statement of
operations for the period from Inception to September 30, 2020.
Acquisition of License from AFT Pharmaceuticals Limited (“AFT”)
On July 5, 2019, the Company and AFT Pharmaceuticals
Limited (“AFT”) entered into a license agreement which provides the Company with (i) an exclusive license to certain
licensed patents, licensed know-how and AFT trademarks to commercialize the Pascomer® product in the United States, Canada
and Mexico (collectively, the “Company’s territory”) and (2) a co-exclusive license to develop the Pascomer®
product in the Company’s territory. Concurrently, the Company granted to AFT an exclusive license to commercialize the Pascomer®
product outside of the Company’s territory and co-exclusive sublicense to develop and manufacture the licensed product for
commercialization outside of the Company’s territory (the “AFT License Agreement”).
The AFT License Agreement also provides
for the formation of a joint steering committee to oversee, coordinate and review recommendations and approve decisions in respect
of the matters the development and commercialized of the Pascomer® product. The committee will be comprised of four members,
and each of the Company and AFT shall have the right to appoint two members. The Company shall have final decision making authority
on all matters relating to the commercialization of the Pascomer® product in its territory and on all matters related to the
development (and regulatory approval) of the Pascomer® product, with certain exceptions.
The development of the Pascomer® product
shall be conducted pursuant to a written development plan, written by AFT and approved by the joint steering committee. AFT shall
perform clinical trials of the Pascomer® product in the Company’s territory and shall perform all CMC (chemistry, manufacturing
and controls) and related activities to support regulatory approval. The Company is responsible for all expenses incurred by AFT
during the term of the AFT License Agreement and the Company and AFT shall equally share all costs and expenses incurred by AFT
for development and marketing work performed in furtherance of regulatory approval and commercialization worldwide, outside of
the Company’s territory.
Pursuant to the AFT License Agreement,
the Company is obligated to reimburse AFT for previously spent development costs, subject to certain limitations, and to pay a
one-time, irrevocable and non-creditable upfront payment of $1.0 million to AFT, payable in scheduled installments. Specifically,
the Company paid $0.25 million in October 2019 and the remaining $0.75 million was due in quarterly installments with the last
payment on July 1, 2020. As of September 30, 2020, the Company had no remaining payments due.
AFT is entitled to up to $25.5 million
of cash milestone payments relating to certain regulatory and commercial achievements of the AFT License, with the first being
$1.0 million upon the successful completion of Phase IIb Clinical Trial, where the results of such clinical trial meet the clinical
trials primary clinical endpoints. In addition, AFT is entitled to net sales royalties ranging from high single digits to low double
digits for the program licensed. The potential regulatory and commercial milestones are not yet considered probable, and no milestone
payments have been accrued at September 30, 2020 and December 31, 2019.
Timber Pharmaceuticals,
Inc. & Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The AFT License Agreement was accounted
for as an asset acquisition pursuant to Topic 805 as the majority of the fair value of the assets acquired were concentrated in
a group of similar assets, and the acquired assets did not have outputs or employees. Because the assets had not yet received
regulatory approval, the purchase price paid for these assets was recorded as research and development expense in the Company’s
statement of operations for the period from inception to December 31, 2019.
Note 6. Fair Value Measurements
During the nine months ended September
30, 2020, in connection with the Bridge Notes, the Company assumed a warrant obligation to purchase shares of the Company’s
common stock. Each warrant was exercisable into a number of shares of $0.001 par value common stock of BioPharmX, and had a term
of 5 years from the closing date of the Merger (See Note 8). The warrant obligation was recognized as a Level 3 liability on the
funding dates and adjusted to fair value. Upon issuance of the warrant on May 18, 2020, the warrant liability was reclassified
to equity.
The inputs using the probability Black-Scholes model to calculate
the fair value of the warrants related to the Bridge Notes are as follows:
|
|
For the period
January 28, 2020 -
May 18, 2020
|
|
Dividend yield
|
|
|
-
|
|
Expected price volatility
|
|
|
84.9
|
%
|
Risk free interest rate
|
|
|
0.38% - 1.48
|
%
|
Expected term
|
|
|
5.0 - 5.3 years
|
|
On June 2, 2020, in connection with the
Merger Agreement, the Company issued Series A Warrants with an initial exercise price of $2.7953 per share, are immediately exercisable
upon issuance, and have a term of five years from the date of issuance. The Series A Warrants were initially exercisable for 8,384,764
shares of common stock in the aggregate.
The inputs using the Monte Carlo simulation
model in measuring the Company’s Series A Warrants at the issuance date of June 2, 2020 and for the three and nine months
ended September 30, 2020, are as follows:
|
|
June 2, 2020
|
|
|
Three and Nine
Months Ended
September 30, 2020
|
|
Dividend yield
|
|
|
-
|
|
|
|
-
|
|
Expected price volatility
|
|
|
78.2
|
%
|
|
|
78.8
|
%
|
Risk free interest rate
|
|
|
0.32
|
%
|
|
|
0.26% - 0.32
|
%
|
Expected term (in years)
|
|
|
5.0
|
|
|
|
4.7
|
|
The warrants are classified as liabilities
and measured at fair value on the issuance date, with changes in fair value recognized as other expense on the condensed consolidated
statement of operations.
There were no assets or liabilities measured at fair value during
the three and nine months ended September 30, 2019.
Unobservable inputs were used to determine the fair value of
positions that the Company has classified within the Level 3 category.
Timber Pharmaceuticals,
Inc. & Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table presents changes in Level 3 liabilities
measured at fair value for the three and nine months ended September 30, 2020:
|
|
Bridge Warrants
|
|
|
Series A Warrants
|
|
|
Total
|
|
Balance at January 1, 2020
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
January 28, 2020 - First closing issuance
|
|
|
929,899
|
|
|
|
-
|
|
|
|
929,899
|
|
February 14, 2020 - Second closing issuance
|
|
|
981,557
|
|
|
|
-
|
|
|
|
981,557
|
|
March 13, 2020 - Third closing issuance
|
|
|
1,021,262
|
|
|
|
-
|
|
|
|
1,021,262
|
|
Sub-total
|
|
|
2,932,718
|
|
|
|
-
|
|
|
|
2,932,718
|
|
Change in fair value
|
|
|
321,051
|
|
|
|
-
|
|
|
|
321,051
|
|
Balance at March 31, 2020
|
|
$
|
3,253,769
|
|
|
$
|
-
|
|
|
$
|
3,253,769
|
|
Issuance of Series A warrants
|
|
|
-
|
|
|
|
16,511,634
|
|
|
|
16,511,634
|
|
Change in fair value
|
|
|
169,435
|
|
|
|
(1,673,946
|
)
|
|
|
(1,504,511
|
)
|
Reclassification of bridge warrants to equity
|
|
|
(3,423,204
|
)
|
|
|
-
|
|
|
|
(3,423,204
|
)
|
Balance at June 30, 2020
|
|
$
|
-
|
|
|
$
|
14,837,688
|
|
|
$
|
14,837,688
|
|
Change in fair value
|
|
|
-
|
|
|
|
(4,423,833
|
)
|
|
|
(4,423,833
|
)
|
Balance at September 30, 2020
|
|
$
|
-
|
|
|
$
|
10,413,855
|
|
|
$
|
10,413,855
|
|
Note 7. Accrued Expenses
As of September 30, 2020 and December 31, 2019, the Company’s
accrued expenses consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Research and development
|
|
|
116,430
|
|
|
|
128,239
|
|
Professional fees
|
|
|
66,280
|
|
|
|
-
|
|
Personnel expenses
|
|
|
320,615
|
|
|
|
86,421
|
|
Other
|
|
|
26,130
|
|
|
|
-
|
|
Total
|
|
$
|
529,455
|
|
|
$
|
214,660
|
|
Note 8. Bridge Notes Payable
In connection with the Merger Agreement
and the Credit Agreement, Timber entered into a Securities Purchase Agreement, dated as of January 28, 2020 (the “SPA”)
with certain institutional investors (the “Buyers”), pursuant to which the Buyers agreed to purchase, and Timber agreed
to issue, senior secured promissory notes (the “Bridge Notes”) from Timber in the aggregate principal amount of $5
million, in exchange for an aggregate purchase price of $3.75 million, representing aggregate discount of $1.25 million. Timber
also agreed to reimburse the Buyer’s representative $50,000 in transaction costs. The Company was also obligated to issue
warrants to the Buyers (as further discussed below) In the quarter ended March 31, 2020, the Company received a total of $3.7 million.
The Bridge Notes bear interest at a rate of 15% per annum (25% upon the occurrence of an event of default thereunder) and are repayable
upon the earlier of (i) the closing of a fundamental transaction of Timber, (ii) the date on which Timber’s equity is registered
under the Securities Exchange Act of 1934, as amended or is exchanged for equity so registered the Public Company Date or (iii)
July 28, 2020. The Bridge Notes and any unpaid interest are automatically exchangeable into securities issued pursuant to the Securities
Purchase Agreement, described in Note 1, based on the per share price received from investors in the Securities Purchase Agreement,
which was $6.0423, per share. The Company issued 827,499 shares to settle the Bridge Notes.
In connection with the SPA, the Company
was obligated, within five trading days following the consummation of the first capital raising transaction, post-Merger (see Note
1), to issue to the Buyers, warrants to purchase a total number shares of common stock that equates to 100% of the as-converted
shares, as if the Bridge Notes were convertible at the lowest price any securities are sold, convertible or exercisable into in
the Timber Funding or the next round of financing. Each warrant would be exercisable into a number of shares of $0.001 par value
common stock of BioPharmX, and have a term of 5 years from the closing date of the Merger. The warrants do not meet the scope exception
of ASC 815, Derivative Accounting, and therefore, have been accounted for as a liability. The warrant liability had initially
been recorded at the fair value on the date the Company became obligated to issue the warrants (each closing date of the Bridge
Notes), with subsequent changes in fair value recognized at each reporting period end date (See Note 6). There was no change in
fair value of the warrants recognized during the three months ended September 30, 2020, and during the nine months ended September
30, 2020, the Company recorded approximately $0.6 million as the change in fair value of the warrants as reflected in the condensed
consolidated statement of operations.
Timber Pharmaceuticals,
Inc. & Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Company recorded the debt less its
discount and less the fair value of the warrant liability. Pursuant to the Merger Agreement, as of May 18, 2020, the Company reclassified
its Bridge Notes and related warrant liability to equity. The following table reflects the activity related to the Company’s
Bridge Notes during the three and nine months ended September 30, 2020 and as of September 30, 2020:
|
|
Bridge Notes Payable
|
|
Balance at January 1, 2020
|
|
$
|
-
|
|
January 28, 2020 - First closing issuance
|
|
|
1,666,666
|
|
February 14, 2020 - Second closing issuance
|
|
|
1,666,667
|
|
March 13, 2020 - Third closing issuance
|
|
|
1,666,667
|
|
Original issue discount
|
|
|
(1,300,000
|
)
|
Discount resulting from allocation of proceeds to warrant liability
|
|
|
(2,932,718
|
)
|
Sub-total
|
|
|
767,282
|
|
Amortization of debt discount
|
|
|
1,019,273
|
|
Balance at March 31, 2020
|
|
$
|
1,786,555
|
|
Amortization of debt discount
|
|
|
3,213,445
|
|
Reclassification of bridge note to equity
|
|
|
(5,000,000
|
)
|
Balance at June 30, 2020
|
|
$
|
-
|
|
Balance at September 30, 2020
|
|
$
|
-
|
|
The debt discount resulting from the allocation of proceeds
to the warrant liability was amortized through interest expense during the nine months ended September 30, 2020.
The inputs used to calculate the fair value of the warrants
using the probability Black-Scholes model are as follows:
|
|
For the period
January 28,
2020 -
May 18, 2020
|
|
Dividend yield
|
|
|
-
|
|
Expected price volatility
|
|
|
84.9
|
%
|
Risk free interest rate
|
|
|
0.38% - 1.48
|
%
|
Expected term
|
|
|
5.0 - 5.3 years
|
|
Note 9. Temporary Equity, and Members’ and Stockholder’s
Equity (Deficit)
The Company entered into a Merger Agreement
with BioPharmX and effective May 18, 2020, the Company converted its common and preferred units into shares of common and preferred
stock.
Common Stock
On May 18, 2020, immediately prior to the
Merger, the Company filed an amendment to the Certificate of Incorporation with the Secretary of State of the State of Delaware
to effect a Reverse Stock Split. As a result of the Reverse Stock Split, the number of issued and outstanding shares of common
stock immediately prior to the Reverse Stock Split was reduced into a smaller number of shares, such that every 12 shares of common
stock held by a stockholder of the Company immediately prior to the Reverse Stock Split were combined and reclassified into one
share of common stock after the Reverse Stock Split. All outstanding and unexercised warrants to purchase shares of common stock
otherwise remain in effect pursuant to their terms, subject to adjustment to account for the Reverse Stock Split. Immediately following
the Reverse Stock Split there were approximately 1,367,326 shares of common stock outstanding prior to the Merger. No fractional
shares were issued in connection with the Reverse Stock Split. Stockholders who otherwise would be entitled to receive fractional
shares instead received cash in lieu of their fractional shares.
Timber Pharmaceuticals,
Inc. & Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Under the terms of the Amended Merger Agreement,
the Company issued shares of common stock to the holders of common units. The 9,000 common units issued to TardiMed have been converted
into 5,666,152 shares of common stock, and the 1,000 common units issued to Patagonia have been converted into 629,572 shares of
common stock.
On May 18, 2020, pursuant to the Merger
Agreement (see Note 1), 1,367,326 shares of common stock were issued for the acquisition of BioPharmX (see Note 4), with a fair
value of approximately $8.4 million or $6.12 per share.
On May 18, 2020, pursuant to the Merger
Agreement, 4,185,981 shares of common stock were issued to the investors of the $20 million private placement financing (See Note
1), aggregate net proceeds received totaled $17.5 million) and to settle the $5 million Bridge Notes.
Bridge Warrants
On May 22, 2020, pursuant to the Securities
Purchase Agreement, the Company issued the Bridge Warrants exercisable for 413,751 shares of Common Stock in the aggregate (see
Note 1). The Bridge Warrants have an exercise price of $2.2362 per share, were immediately exercisable upon issuance and have a
term of five years from the date of issuance.
Series A Preferred Stock
In connection with the Merger, on May 18,
2020, the Company filed a Certificate of Designation of Preferences, Rights and Limitations (the “Certificate of Designations”)
with the Secretary of State of the State of Delaware that became effective immediately.
Pursuant to the Certificate of Designations,
the Company designated 2,500 shares of the Company’s previously undesignated preferred stock as Series A Preferred (the “Series
A Preferred Stock”). The shares of Series A Preferred Stock have no voting rights. The holders of the Series A Preferred
Stock are entitled to cumulative dividends from an after the date of issuance at a per annum of eight percent (8.00%) of the stated
value. Dividends will be payable as and if declared by the Board out of amounts legally available therefore or upon a liquidation
or redemption. Each share of Series A Preferred Stock is convertible at any time at the holder’s option into a number of
shares of common stock (subject to adjustment for reverse and forward stock splits, stock dividends, stock combinations and other
similar transactions as specified in the Certificate of Designations) at a conversion price equal to the stated value of the Series
A Preferred Stock of $1,000 (plus any accrued dividends) divided by the conversion price, which shall be the greater of (i) $18.054
and (ii) the amount that is 110% of the Final Price Per Share (as defined in the Financing Purchase Agreement), or $2.46. Holders
of the Series A Preferred Stock are entitled to a liquidation preference in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Company. In addition, upon a Change of Control, the Series A Preferred Stock shall be redeemable
for cash at the option of the holders, in whole or in part.
As of May 18, 2020, pursuant to the Merger
Agreement, the holder of 1,819,289 preferred units of Timber Sub outstanding immediately prior to the Merger, received 1,819 shares
of newly created convertible Series A preferred stock. The following table summarizes the Company’s Series A preferred stock
for the nine months ended September 30, 2020:
|
|
Series A Preferred Stock
|
|
|
|
Shares
|
|
|
Amount
|
|
Total temporary equity as of January 1, 2020
|
|
|
-
|
|
|
$
|
-
|
|
Conversion of preferred units to Series A preferred stock pursuant to BioPharmX acquisition
|
|
|
1,819
|
|
|
|
1,819,289
|
|
Total temporary equity as of September 30, 2020
|
|
|
1,819
|
|
|
$
|
1,819,289
|
|
Timber Pharmaceuticals,
Inc. & Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 10. Stock-based compensation
On May 18, 2020, the Company’s 2020
Omnibus Equity Incentive Plan (the “2020 Plan”) became effective, and the 2020 Plan reserved a total of 970,833 shares
of common stock for issuance. The 2020 Plan provides for options to purchase shares of common stock, stock appreciation rights,
restricted stock units, restricted or unrestricted shares of common stock, performance shares, performance units, incentive bonus
awards, other stock-based awards and other cash-based awards. Options granted generally vest over a period of three years and have
a maximum term of ten years from the date of grant.
Furthermore, the Company maintains its
2019 Equity Incentive Plan (the “2019 Plan”). The 2019 Plan permits the granting of incentive units (the “Incentive
Units”). The maximum aggregate Incentive Units that may be subject to awards and issued under the Plan is 699,454. At September
30, 2020 and December 31, 2019, Incentive Units outstanding under the 2019 Plan were 367,670 and 437,553 units, respectively.
During the three and nine months ended
September 30, 2020, the period from inception through September 30, 2019, and the three months ended September 30, 2019, stock-based
compensation expenses were as follows (unaudited):
|
|
Three Months Ended
September 30, 2020
|
|
|
Three Months
Ended September
30, 2019
|
|
|
Nine Months Ended
September 30, 2020
|
|
|
For the Period from
February 26, 2019
(Inception) through
September 30, 2019
|
|
Employee value appreciation right awards
|
|
$
|
16,431
|
|
|
$
|
24,326
|
|
|
$
|
58,320
|
|
|
$
|
41,433
|
|
Stock options
|
|
|
79,094
|
|
|
|
-
|
|
|
|
98,867
|
|
|
|
-
|
|
|
|
$
|
95,525
|
|
|
$
|
24,326
|
|
|
$
|
157,187
|
|
|
$
|
41,433
|
|
Value Appreciation Rights
In 2019 the Company granted equity-based
awards similar to stock options under the 2019 Plan as Value Appreciation Rights (“VARs”). The VARs have an exercise
price, a vesting period and an expiration date, in addition to other terms similar to typical equity option grant terms.
The following is a summary of VARs issued
and outstanding as of September 30, 2020 and for the nine months ended September 30, 2020:
|
|
Number of Units
|
|
|
Weighted Average
Exercise Price
|
|
|
Total Intrinsic Value
|
|
|
Weighted Average
Remaining
Contractual Life (in
years)
|
|
Outstanding as of December 31, 2019
|
|
|
437,552
|
|
|
$
|
0.01
|
|
|
$
|
279,077
|
|
|
|
9.4
|
|
Cancelled
|
|
|
(69,882
|
)
|
|
$
|
0.01
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding as of September 30, 2020 (Unaudited)
|
|
|
367,670
|
|
|
$
|
0.01
|
|
|
$
|
361,787
|
|
|
|
8.6
|
|
Value appreciation right awards vested and expected to vest
|
|
|
367,670
|
|
|
$
|
0.01
|
|
|
$
|
361,787
|
|
|
|
8.6
|
|
Value appreciation right awards vested and exercisable
|
|
|
76,808
|
|
|
$
|
0.01
|
|
|
$
|
75,579
|
|
|
|
8.6
|
|
On January 6, 2020, 69,882 VARs were cancelled
due to the voluntary termination of the Company’s Chief Science Officer. During the nine months ended September 30, 2020,
approximately $8,000 of compensation costs were reversed related to the cancelled VARs.
As of September 30, 2020, the unrecognized
compensation costs were approximately $0.1 million, which will be recognized over an estimated weighted-average amortization period
of 1.3 years.
Timber
Pharmaceuticals, Inc. & Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Stock Options
During the three and nine months ended
September 30, 2020, the Company granted 232,996 options to purchase shares of the Company’s common stock to employees and
board members. The following is a summary of the options outstanding as of September 30, 2020:
|
|
Shares
Underlying
Options
|
|
|
Weighted
Average Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term (Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding as of December 31, 2019
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
232,996
|
|
|
$
|
2.87
|
|
|
|
9.9
|
|
|
|
-
|
|
Outstanding as of September 30, 2020 (Unaudited)
|
|
|
232,996
|
|
|
$
|
2.87
|
|
|
|
9.7
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2020 (Unaudited)
|
|
|
-
|
|
|
$
|
2.87
|
|
|
|
9.7
|
|
|
$
|
-
|
|
As part of the Merger, the Company assumed
the following legacy stock options and warrants:
|
|
Shares Underlying
Options and
Warrants
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Term (Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Legacy BioPharmX options
|
|
|
16,459
|
|
|
$
|
79.78
|
|
|
|
2.6
|
|
|
$
|
-
|
|
Legacy BioPharmX warrants
|
|
|
219,928
|
|
|
$
|
164.09
|
|
|
|
3.0
|
|
|
$
|
-
|
|
The
fair value of stock option grants are estimated on the date of grant using the Black-Scholes
option-pricing model. The Company was historically a private company and lacked company-specific historical and implied volatility
information. Therefore, it estimates its expected stock volatility based on the historical volatility of a publicly traded set
of peer companies. Additionally, due to an insufficient history with respect to stock option activity and post-vesting cancellations,
the expected term assumption for employee grants is based on a permitted simplified method, which is based on the vesting period
and contractual term for each tranche of awards. The mid-point between the weighted-average vesting term and the expiration date
is used as the expected term under this method. The risk-free interest rate is determined by reference to the U.S. Treasury yield
curve in effect for time periods approximately equal to the expected term of the award. Expected dividend yield is zero
based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable
future.
Timber
Pharmaceuticals, Inc. & Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
The following are the key assumptions used
to estimate the fair value of the stock options granted during the three and nine months ended September 30, 2020:
|
|
Nine
Months Ended
September 30,
2020
|
|
Expected life
|
|
|
5-7 years
|
|
Expected volatility
|
|
|
79.0
|
%
|
Risk-free interest rate
|
|
|
0.3
|
%
|
Expected dividend yield
|
|
|
-
|
|
As of September 30, 2020, the unrecognized
compensation costs related to stock options were approximately $0.3 million, which will be recognized over an estimated weighted-average
amortization period of 1.7 years. There were no options outstanding during the three and nine months ended September 30, 2019.
Note 11. Commitments and contingencies
Leases
In connection with the Merger of BioPharmX,
the Company acquired a lease and corresponding sublease for the BioPharmX facility in San Jose, California. The sublease is to
be used for general office and research laboratory purposes, has an effective date of February 1, 2020, and has a lease term of
4 years which expires on December 30, 2023. The lease expense is significantly reduced by the payments received in connection with
the sublease.
The components of lease expense were as
follows:
|
|
Three Months Ended
September 30, 2020
|
|
|
Nine Months Ended
September 30, 2020
|
|
Operating leases:
|
|
|
|
|
|
|
|
|
Operating lease cost
|
|
$
|
82,335
|
|
|
$
|
109,780
|
|
Variable lease cost
|
|
|
24,725
|
|
|
|
31,621
|
|
Operating lease expense
|
|
$
|
107,060
|
|
|
$
|
141,401
|
|
Short-term lease rent expense
|
|
|
-
|
|
|
|
-
|
|
Lease income - sub lease
|
|
|
(103,307
|
)
|
|
|
(103,307
|
)
|
Net rent expense
|
|
$
|
3,753
|
|
|
$
|
38,094
|
|
Other information:
|
|
Nine Months Ended
September 30,
2020
|
|
Operating cash flows - operating leases
|
|
$
|
104,252
|
|
Right-of-use assets obtained in exchange for operating lease liabilities
|
|
$
|
904,370
|
|
Weighted-average remaining lease term – operating leases
|
|
|
3.3
|
|
Weighted-average discount rate – operating leases
|
|
|
15.0
|
%
|
Timber
Pharmaceuticals, Inc. & Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
As of September 30, 2020, future minimum
payments for the lease are as follows:
|
|
Operating
|
|
|
|
Leases
|
|
Remaining Months in Year Ended December 31, 2020
|
|
$
|
78,189
|
|
Year Ended December 31, 2021
|
|
|
322,656
|
|
Year Ended December 31, 2022
|
|
|
332,568
|
|
Year Ended December 31, 2023
|
|
|
342,468
|
|
Total
|
|
$
|
1,075,881
|
|
Less present value discount
|
|
|
(231,661
|
)
|
Operating lease liabilities
|
|
$
|
844,220
|
|
The Company had no operating leases for
the three months ended and the period from inception through September 30, 2019.
Litigation
As of September 30, 2020 and December 31,
2019 there was no litigation against the Company.
Note 12. Related party transactions
Patagonia
On February 28, 2019 and June 26, 2019,
the Company acquired the TMB-001 and TMB-003 licenses from Patagonia (see Note 3 for the payment terms and more details), respectively.
The Chief Operating Officer, Executive Vice-President and Secretary of the Company is also the President of Patagonia.
TardiMed
The Chairman of the Board of the Company
is also a Managing Member of TardiMed. The Chief Operating Officer, Executive Vice President and Secretary of the Company is also
a Partner of TardiMed. As of September 30, 2020 TardiMed holds 5,437,517 shares of common stock, which represents 46% of the total
voting shares outstanding. From February 26, 2019 to December 31, 2019, TardiMed contributed $1.4 million in exchange for 1.4 million
preferred units. During the nine months ended September 30, 2020, TardiMed contributed an additional $0.1 million in exchange for
142,392 preferred units. In connection with the Merger Agreement, these preferred units and dividends have converted into 1,819
shares of Series A preferred stock. The company reimbursed TardiMed $364,274 and $7,145 for management fees and reimbursed expenses
for the nine months ended September 30, 2020 and the period from inception through September 30, 2019, respectively.
Note 13. Subsequent Events
None.
Item 2. Financial Information.