NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
QSAM
Biosciences Inc. (hereinafter the “Company”, “we”, “our”, “us”), incorporated in Delaware
on August 26, 2004, is currently engaged in the business of developing a novel radiopharmaceutical drug candidate for the treatment of
bone cancer. This business line commenced in earnest in the fourth fiscal quarter of 2020 as a result of the separation and transfer
pursuant to an Omnibus Separation Agreement dated November 6, 2020 (the “Separation Agreement”) of the Company’s prior
business of managing compost and soil manufacturing facilities (the “Legacy Business”) through an unconsolidated investee
entity called Earth Property Holdings LLC, a Delaware limited liability company (“EPH”). Pursuant to the Separation Agreement,
the Company transferred to EPH all assets and related liabilities in connection with the Legacy Business in return for a forgiveness
of debt. The financial statements presented herein have been adjusted to account for the Legacy Business as discontinued operations (see
Note 4 – Separation Agreement and Note 9 – Discontinued Operations). The Company sold its entire equity interest in EPH to
a third party in the first quarter of 2021 for $100,000, and currently holds no ownership in EPH.
In
April 2020, the Company established QSAM Therapeutics Inc. (“QSAM”) as a wholly-owned subsidiary incorporated in the state
of Texas, and through QSAM, executed a Patent and Technology License Agreement and Trademark Assignment (the “License Agreement”)
with IGL Pharma, Inc. (“IGL”). The License Agreement provides QSAM with exclusive, worldwide and sub-licensable rights to
all of IGL’s patents, product data and knowhow with respect to Samaium-153 DOTMP aka CycloSam® (the “Technology”),
a clinical stage novel radiopharmaceutical meant to treat different types of bone cancer and related diseases.
In
connection with the transition to the biosciences sector, the Company changed its name to QSAM Biosciences Inc. on September 4, 2020,
and subsequently changed its stock symbol to QSAM, to better reflect its business moving forward.
On
September 4, 2020, the Company completed a 25:1 reverse stock split of its common shares. All shares and share prices set forth in
this report have been adjusted to account for this reverse stock split as if it had occurred on the date presented.
Prior
to 2017, the Company owned and licensed technology that converts waste fuels and heat to power, which it sold to a licensee in August
of that year. Much of these operations were conducted through a wholly-owned subsidiary of the Company called Q2Power Corp. (“Q2P”),
which still exists but has no current operations. Q2P and QSAM are sometimes referred to herein as the “Subsidiary”.
Formerly, the Company’s name was Q2Power Technologies, Inc., and before that, Anpath Group, Inc.
The
recent outbreak of the novel coronavirus (COVID-19) is impacting worldwide economic activity. COVID-19 poses the risk that we or our
employees and our other partners may be prevented from conducting business activities for an indefinite period of time, including
due to the spread of the disease or shutdowns that may be requested or mandated by governmental authorities. While it is not possible
at this time to estimate the full impact that COVID-19 could have on our business, the continued spread of COVID-19 could disrupt our
research and development of CycloSam and other related activities, which could have a material adverse effect on our business, financial
condition and results of operations. In addition, a severe or prolonged economic downturn could result in a variety of risks to the business.
While we have not yet experienced any material disruptions in our business or other negative consequences relating to COVID-19, the extent
to which the COVID-19 pandemic impacts our results will depend on future developments that are highly uncertain and cannot be predicted.
NOTE
2 – BASIS OF PRESENTATION AND GOING CONCERN
The
accompanying unaudited condensed financial statements are prepared in accordance with Rule 8-01 of Regulation S-X of the Securities Exchange
Commission (“SEC”). Accordingly, certain information and note disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles in the United States of America (“US GAAP”) have been condensed
or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures included in these unaudited condensed
financial statements are adequate to make the information presented not misleading. The unaudited condensed financial statements included
in this document have been prepared on the same basis as the annual financial statements, and in our opinion reflect all adjustments,
which include normal recurring adjustments necessary for a fair presentation in accordance with US GAAP and SEC regulations for interim
financial statements. The results for the three and nine months ended September 30, 2021 are not necessarily indicative
of the results that the Company will have for any subsequent period or for the calendar year ended December 31, 2021. These unaudited
condensed financial statements should be read in conjunction with the audited financial statements and the notes to those statements
for the year ended December 31, 2020 which was filed with the SEC on April 15, 2021.
The
Company raised a total of $2,851,908
in convertible bridge notes (the “Bridge
Notes”) starting in March 2017 and ending in 2019. In 2020, $2,928,679
of the Bridge Notes inclusive of principal and
accrued and capitalized interest were converted by the holders into 13,312,175
shares of common stock. As of March 31,
2021, all remaining Bridge Notes of $1,447,315
inclusive of principal and accrued and capitalized
interest were converted into 6,578,701
shares of common stock. There are no Bridge Notes
currently outstanding as of September 30, 2021.
The
Company’s convertible debentures of $35,000 and $480,000 of redeemable
convertible preferred stock was in default as of September 30, 2021. Management is in discussions with
the holders of these debt and equity securities to reach an agreement to convert the outstanding balances into common stock or
otherwise amend the respective maturity and redemption dates.
For
the nine months ended September 30, 2021, the Company used net cash in operating activities for its continuing operations of $1,128,525 and
incurred a loss from its continuing operations of $8,364,454. The Company’s accumulated deficit is $25,837,433 and has cash of
$1,067,287.
The Company has supported
operations through the issuance of common stock, preferred stock and debt over the last 12 months. This includes the Series B
preferred stock offering in the first quarter of 2021, the recent exercise of warrants issued in connection with the Series B
offering, and also a recent convertible debt offering conducted after the end of the third quarter of 2021. Management expects expenses to increase in 2022 as our drug technology
enters into clinical trials, and as a result, we will need to raise additional capital to support these operations. Management
believes that it can do so through equity raises in 2022; however, there is no guarantee that such plan will be successful. If we
are not successful in raising additional capital, we may need to delay clinical trials, reduce overhead, or in the most extreme
scenario, shut down operations.
These
conditions raise substantial doubt about the Company’s ability to continue as a going concern. There is no guarantee whether the
Company will be able to generate revenue and/or raise capital sufficient to support its continuing operations. The ability of the Company
to continue as a going concern is dependent on management’s plans which include implementation of its business model to develop
and commercialize its drug candidate, seek strategic partnerships to advance clinical trials and other research endeavors which could
provide additional capital to the Company, and continue to raise funds for the Company through equity or debt offerings. There is
no assurance, however, that the Company will be successful in raising the needed capital and, if funding is available, that it will be
available on terms acceptable to the Company. The unaudited condensed financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
In
January 2021, the Company closed a $2.5 million Series B Preferred Stock private placement to advance its new business model, which is
expected to support continuing operations through the end of 2021. In 2020 and the first quarter of 2021, management also was able to
reduce debt significantly, in part from the forgiveness of notes payable owed to EPH (see Note 4 – Separation Agreement) and also
by converting a significant portion of additional liabilities into common stock (see Note 7 – Debentures, Convertible Bridge Notes
and Notes Payable).
Subsequent to
September 30, 2021, eight non-affiliated investors in the Company’s Series B Preferred stock exercised their warrants at
$0.25
per share and the proceeds received were $467,858
plus a subscription receivable of $35,714.
The Company issued 1,871,432
shares of common stock, not including 142,857
unissued shares of common stock subject to the subscription receivable. See Note 13- Subsequent Events.
Also, subsequent to
September 30, 2021, the Company issued six convertible promissory notes in a private placement offering among six non-affiliated
accredited investors in the total amount of $555,000. The notes are convertible into common stock prior to the maturity date of
December 31, 2023, or automatically upon the Company completing a qualified offering in the amount of $5
million or uplisting its common shares to NASDAQ. The note bears interest at the rate of 6%
per annum, with all interest and principal due at maturity, unless earlier converted. The investors also received a total of 925,001
common stock warrants, exercisable at $0.60
per share at any time prior to October 31, 2022. See Note 13- Subsequent Events.
NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The
unaudited condensed financial statements include the accounts of the Company and its Subsidiaries. All significant inter-company
transactions and balances have been eliminated in consolidation. References herein to the Company include the Company and its Subsidiary
unless the context otherwise requires.
Cash
and Cash Equivalents
The
Company considers cash, short-term deposits, and other investments with original maturities of no more than ninety days when acquired
to be cash and cash equivalents for the purposes of the statement of cash flows. The Company maintains cash balances at one financial
institution and has experienced no losses with respect to amounts on deposit. The Company held no cash equivalents as of September 30,
2021 and 2020.
Revenue
Recognition
The
Company recognizes revenue in accordance with ASC Topic 606, “Revenue from Contracts with Customers (“ASC 606”) and
all the related amendments.
The
core principle of ASC 606 requires that an entity recognize revenue to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASC
606 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required
within the revenue recognition process than previously required under U.S. GAAP, including identifying performance obligations in the
contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to
each separate performance obligation.
The
Company had no revenue in 2021 and 2020 from continuing operations.
Stock
Based Compensation
The
Company applies the fair value method of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) 718, “Share Based Payment”, in accounting for its stock-based compensation with employees and
non-employees. This standard states that compensation cost is measured at the grant date based on the fair value of the award and is
recognized over the service period, which is usually the vesting period. The Company values stock-based compensation at the market price
for the Company’s common stock and other pertinent factors at the grant date.
The
Black-Scholes option pricing valuation method is used to determine fair value of stock options consistent with ASC 718, “Share
Based Payment”. Use of this method requires that the Company make assumptions regarding stock volatility, dividend yields,
expected term of the awards and risk-free interest rates.
Research
and Development
Research
and development costs are expensed as incurred. Research and development costs were $164,378 and $385,785 for the three
and nine months ended September 30, 2021, respectively, and are a result of the Company’s activities to commence clinical trials
of its drug Technology, as secured by the Company under a License Agreement executed in the second quarter of 2020. Research and development
costs were $96,943 and $206,943 for the three and nine months ended September 30, 2020, respectively, and are also a result
of the License Agreement as well as expenses incurred on the Technology prior to the signing of the License Agreement (see Note 10 –
Commitments and Contingencies).
Fair
Value Measurement
The
Company measures fair value in accordance with a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure
fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities
(Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The Company’s convertible Bridge
Notes are valued by using Monte Carlo Simulation methods and discounted future cash flow models. Where possible, the Company verifies
the values produced by its pricing models to market prices. Valuation models require a variety of inputs, including contractual terms,
market prices, yield curves, credit spreads, measures of volatility and correlations of such inputs. These convertible Bridge Notes do
not trade in liquid markets, and as such, model inputs cannot generally be verified and do involve significant management judgment. Such
instruments are typically classified within Level 3 of the fair value hierarchy.
Equity
Method Investment
Investments
in partnerships, joint ventures and less-than majority-owned subsidiaries in which we have significant influence are accounted for under
the equity method. The Company’s consolidated net income includes the Company’s proportionate share of the net income or
loss of our equity method investee. When we record our proportionate share of net income, it increases income (loss) — net in our
consolidated statements of operations and our carrying value in that investment. Conversely, when we record our proportionate share of
a net loss, it decreases income (loss) — net in our consolidated statements of income and our carrying value in that investment.
The Company’s proportionate share of the net income or loss of our equity method investees includes significant operating and nonoperating
items recorded by our equity method investee. These items can have a significant impact on the amount of income (loss) — net in
our consolidated statements of operations and our carrying value in those investments. The Company divested its investment in its equity
method investee in March 2021.
Discontinued
Operations
In
accordance with ASC 205-20 Presentation of Financial Statements: Discontinued Operations, a disposal of a component of an entity
or a group of components of an entity is required to be reported as discontinued operations if the disposal represents a strategic shift
that has (or will have) a major effect on an entity’s operations and financial results when the components of an entity meets the
criteria in paragraph 205-20-45-10. In the period in which the component meets held-for-sale or discontinued operations criteria the
major current assets, other assets, current liabilities, and noncurrent liabilities shall be reported as components of total assets and
liabilities separate from those balances of the continuing operations. At the same time, the results of all discontinued operations,
less applicable income taxes (benefit), shall be reported as components of net income (loss) separate from the net income (loss) of continuing
operations.
The
Company disposed of a component of its business pursuant to a Separation Agreement in November 2020, which met the definition of a
discontinued operation. Accordingly, the operating results of the business disposed are reported as income (loss) from discontinued
operations in the accompanying unaudited condensed statements of operations for the three months ended September 30, 2021 and 2020.
For additional information, see Note 4 – Separation Agreement and Note 9 - Discontinued Operations.
Income
Taxes
Income
taxes are accounted for under the asset and liability method as stipulated by FASB ASC 740, “Income Taxes” (“ASC
740”). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit
carry forwards. 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. Under ASC 740, the effect on deferred tax assets and liabilities
or a change in tax rate is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced to estimated
amounts to be realized by the use of a valuation allowance. A valuation allowance is applied when in management’s view it is more
likely than not (50%) that such deferred tax will not be utilized.
In
the event that an uncertain tax position exists in which the Company could incur income taxes, the Company would evaluate whether there
is a probability that the uncertain tax position taken would be sustained upon examination by the taxing authorities. Reserves for uncertain
tax positions would be recorded if the Company determined it is probable that a position would not be sustained upon examination or if
payment would have to be made to a taxing authority and the amount is reasonably estimated. As of September 30, 2021 and December 31,
2020, the Company does not believe it has any uncertain tax positions that would result in the Company having a liability to the taxing
authorities; however, federal returns have not been filed since the Company’s inception in 2014. Such delinquencies are being resolved
by management and a retained tax expert. Interest and penalties related to any unrecognized tax benefits is recognized in the unaudited
condensed consolidated financial statements as a component of income taxes. The Company will need to be in compliance with the
tax authorities by filing past federal and state income tax returns.
Basic
and Diluted Loss Per Share
Net
loss per share is computed by dividing the net loss attributable to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted net loss per share is calculated by dividing the net loss attributable to common stockholders
by the weighted average number of common shares outstanding during the period plus any potentially dilutive shares related to the issuance
of stock options, shares from the issuance of stock warrants, shares issued from the conversion of redeemable convertible preferred stock
and shares issued for the conversion of convertible debt.
As
of September 30, 2021, there were the following potentially dilutive
securities that were excluded from diluted net loss per share because their effect would be anti-dilutive:
SCHEDULE OF ANTIDILUTIVE SECURITIES EXCLUDED FROM COMPUTATION OF EARNINGS PER SHARE
Shares from the conversion of Series B Preferred Stock not inclusive of dividends
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9,431,250
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Shares from the conversion of Series E-1 Preferred Stock (subject to vesting in 2021 through 2023 and potential forfeiture)
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8,500,000
|
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Shares from common stock options
|
|
|
1,112,619
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Shares from common stock warrants
|
|
|
7,559,289
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|
Shares from the conversion of debentures
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218,750
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Shares from the conversion of redeemable convertible preferred stock (based upon an assumed conversion price at September 30, 2021 of $0.16 per share; inclusive of cumulative dividends which may be converted to shares of common stock under certain conditions)
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4,286,875
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As
of September 30, 2020, there were the following potentially dilutive
securities that were excluded from diluted net loss per share because their effect would be anti-dilutive:
Shares from common stock options
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468,619
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Shares from common stock warrants
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46,154
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Shares from the conversion of debentures
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66,000
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|
Shares that may be converted from Bridge Notes (based upon an assumed conversion price at September 30, 2020 of $1.98 per share)
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8,079,617
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Shares from the conversion of redeemable convertible preferred stock (inclusive of cumulative dividends which may be converted to shares of common stock under certain conditions).
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3,522,591
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Significant
Estimates
U.S.
Generally Accepted Accounting Principles (“GAAP”) requires the Company to make judgments, estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited
financial statements, the reported amounts of revenues and expenses, cash flows and the related footnote disclosures during the period.
On an on-going basis, the Company reviews and evaluates its estimates and assumptions, including, but not limited to, those that relate
to the fair value of stock-based compensation fair value of convertible bridge notes, and a valuation allowance on deferred
tax assets and contingencies. Actual results could differ from these estimates.
Recent
Accounting Pronouncements
In
August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06,
Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s
Own Equity (Subtopic 815-40) (“ASU 2020-06”) to simplify accounting for certain financial instruments. ASU 2020-06 eliminates
the current models that require separation of beneficial conversion and cash conversion features from convertible instruments and simplifies
the derivative scope exception guidance pertaining to equity classification of contracts in an entity’s own equity. The new standard
also introduces additional disclosures for convertible debt and freestanding instruments that are indexed to and settled in an entity’s
own equity. ASU 2020-06 amends the diluted earnings per share guidance, including the requirement to use the if-converted method
for all convertible instruments. ASU 2020-06 is effective January 1, 2022 and should be applied on a full or modified retrospective
basis, with early adoption permitted beginning on January 1, 2021. The Company adopted ASU 2020-06 effective January 1, 2021. The
adoption of ASU 2020-06 did not have an impact on the Company’s financial statements.
Management
does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect
on its unaudited financial statements.
Reclassifications
Certain
reclassifications of prior year amounts have been made to conform to the 2021 presentation. These reclassifications had no effect
on net loss or loss per share as previously reported.
Concentration
of Risk
The
Company expects cash to be the asset most likely to subject the Company to concentrations of credit risk. The Company’s bank deposits
may at times exceed federally insured limits. The Company’s policy is to maintain its cash with high credit quality financial institutions
to limit its risk of loss exposure. The Company’s cash balance as of September 30, 2021, is in excess of FDIC limits in the amount
of approximately $808,800.
The
Company is subject to a number of risks similar to those of other companies at a clinical-stage for radiopharmaceutical drug candidates, including dependence on key individuals; the need to develop commercially viable therapeutics;
competition from other companies, many of which are larger and better capitalized; and the need to obtain adequate additional financing
to fund the development of its products. The Company currently depends on third-party, suppliers for key materials and services used
in its research and development manufacturing process, and is subject to certain risks related to the loss of these third-party suppliers
or their inability to supply the Company with adequate materials and services.
The Company had no revenue
from its continuing operations for the three and nine months ended September 30, 2021 and 2020. Revenue
included in discontinued operations was generated from one related customer for the three and nine months ended September 30,
2020.
Fair
Value of Financial Instruments
In
accordance with Accounting Standards Codification (“ASC”) 825, Financial Instruments, disclosures of fair value
information about financial instruments are required, whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. Cash is carried fair value.
Other
financial instruments, including accounts payable, accrued liabilities and short-term debt, are carried at cost, which approximates fair
value given their short-term nature.
Deferred Offering Cost
Costs incurred prior to
an equity offering are capitalized until the offering occurs. Upon the equity offering, all accumulated costs are charged against
proceeds. If the Company determines that the equity offering will not occur, the accumulated costs are charged to operations.
Segment
Reporting
Operating
segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation
by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. To date, the Company
views its operations and manages its business as one segment.
NOTE
4 – SEPARATION AGREEMENT
On
November 6, 2020, the Company entered into the Separation Agreement with its unconsolidated investee, EPH. The Company’s board
of directors approved the Separation Agreement in support of the Company’s previously disclosed plan to secure new technologies
and business opportunities in the broader biosciences sector, and to significantly reduce debt and liabilities of the Company and eliminate
under-performing assets and agreements. The Separation Agreement resulted in the discontinuance of the Company’s management of
businesses and assets focused on compost and soil manufacturing to focus solely on the development of its exclusively licensed pharmaceutical
Technology, as well as other drug candidates that it may license or otherwise secure in the future. Pursuant to the Separation Agreement:
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●
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The
Management Agreement, dated January 18, 2019, as amended, between EPH and the Company was terminated by mutual agreement of the parties.
Fees from this agreement constituted most of the Company’s revenue over the prior two years.
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●
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In
lieu of any severance or other termination payments due under the Management Agreement, EPH released the Company from a total of
$993,985 in liabilities, inclusive of advanced management fees and multiple promissory notes, including accrued and unpaid interest.
An additional $114,700 in promissory notes owed to an affiliate of EPH were converted into Company common stock at a price of $0.22
per share.
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The
Company agreed to transfer to EPH its license agreement with Agrarian Technologies LLC and Mulch Masters Inc. for the ABS soil enhancement
product and all associated knowhow, trade secrets and trademark/service marks. Accrued license fees in connection with this license
agreement were also assumed by EPH in the amount of $37,500.
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●
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The
prior officers and employees of the Company engaged in the Legacy Business were released from any non-competition, non-solicitation
or other restricted covenant pursuant to their respective employment agreements. Effective October 1, 2020, several of these employees
had already separated from the Company.
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●
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EPH
received the right in its sole discretion to use the name “Q2Earth” in all jurisdictions of the United States and worldwide.
|
Pursuant
to ASC 205-20 Presentation of Financial Statements: Discontinued Operations and amended by ASU No. 2014-08, management has determined
that the Separation Agreement results in the disposal of a component that represents a strategic shift in the Company’s business
operations that will have a major effect on the Company’s operations and financial results. Therefore, the net income (loss) generated
from this disposed component have been presented as discontinued operations for the period ended September 30, 2020 on the statement
of operations.
NOTE
5 – EQUITY METHOD INVESTMENT
During
November 2018, the Company invested $50,000 for a 19.9% Class B limited liability membership interest in EPH and recorded this transaction
as an equity method investment due to the Company’s ability to exercise significant influence over EPH. The carrying value of the
investment in EPH was reduced to zero after recording the proportionate share of the investee’s net loss for the 2018 fiscal year.
In January 2019, the Company committed an additional $21,588 through a subscription payable to maintain its 19.9% Class B limited liability
interests in EPH, after additional Class A units were sold to investors, which was fully paid in April 2020. The carrying value of the
investment at December 31, 2020 was zero due to continued losses incurred by EPH. In the first quarter of 2021, the Company sold this
equity interest to an unrelated third party for $100,000. There were no distributions received from the equity method investment in 2021
or 2020. See Note 4 for discussion of the Separation Agreement with our equity method investment in November 2020.
Our
prior Chairman and CEO of the Company, also serves as President of EPH; and Christopher Nelson, General Counsel and Director of the Company,
also serves as General Counsel and Secretary of EPH. See Note 6 – Related Party Transactions for transactions with our equity method
investment during the three and nine months ended September 30, 2021 and 2020.
NOTE
6 – RELATED PARTY TRANSACTIONS
The
Company currently has a License Agreement with IGL Pharma, Inc., an entity in which the Company’s Executive Chairman serves as
President, holds options to purchase less than a 1%
non-controlling equity interest and receives
a $500
per month fee (see Note 12).
The
Company currently maintains an executive office in Florida, which is leased by an investment firm in which the Company’s General
Counsel serves as an officer but does not hold any equity or voting rights. The Company has no formal agreement for this space and pays
no rent.
During
the three and months ended September 30, 2020, the Company received $174,999 and $524,997 from its equity method investee,
EPH, as management fee revenue, respectively. The Company did not
receive any revenue from EPH for any period in 2021. Due to the Separation Agreement disclosed in Note 4, management fee revenues
received during the period ended September 30, 2020 have been presented on the statement of operations as discontinued operations (see
Note 9 – Discontinued Operations). Management fee revenues were the Company’s primary source of revenue during that period.
In
the nine-month period ended September 30, 2021, the Company paid to EPH $34,136
arising from notes payable and accrued interest
which was included in notes payable-related parties in prior periods in the consolidated balance sheet.
During
the year ended December 31, 2020, the Company received $45,500 of
proceeds from short-term notes payable with officers and directors of the Company bearing interest at 10%.
As of September 30, 2021, $7,500 of
principal remains outstanding on certain of these short-term notes payable. During the nine months ended September 30, 2021, $23,000 of
these short-term notes payable was converted into 23 shares
of the Company’s Series B preferred stock at a conversion ratio of $1,000 per
share and warrants to purchase 65,714 shares
of common stock at an exercise price of $0.35 per
share, which resulted in no gain or loss on conversion (see Note 9).
During
the three and nine months ended September 30, 2021, the Company incurred $8,163 and $58,043 in legal fees with a law firm
in which the Company’s audit committee chair is an employee. During the three and nine months ended September 30, 2020, the
Company incurred $10,993 and $52,752 of legal services with this related party. As of September 30, 2021 and December 31, 2020,
accounts payable and accrued expenses include $25,942 and $32,716 for legal fees due to the law firm for services, respectively.
NOTE
7 – DEBENTURES, CONVERTIBLE BRIDGE NOTES, AND NOTES PAYABLE
Debentures
The
Company has Original Issue Discount Senior Secured Convertible Debentures (the “Debentures”) in the aggregate amount of $35,000
and $165,000
outstanding as of September 30, 2021 and 2020,
respectively. All assets of the Company are secured under the Debentures. The Debentures contain certain anti-dilutive protection provisions
in the instance that the Company issues stock at a price below the conversion price of the Debentures, as adjusted from time to time,
as well as other standard protections for the holder. There is no interest on these notes. In the first quarter of 2021, the two institutional
holders of the debentures converted an aggregate of $102,500
into 517,086
shares of common stock, and the Company recognized
a loss on the two debenture conversions of $356,454.
As of September 30, 2021, the outstanding amount of $35,000
was
in default.
Convertible
Bridge Notes
In
2017 and 2018, the Company issued a total of $2,771,908 in a convertible promissory note (the “Bridge Notes”) offering, which
included three of the Company’s directors converting $156,368 and one shareholder converting $11,784 of prior notes and cash advances,
including interest thereon, into the offering. In 2019, an additional $30,000 Bridge Note was issued to one investor. In June 2018, one
of the original Bridge Notes for $50,000 plus $7,664 accrued interest was converted by its holder into 24,538 shares of common stock.
Maturity for the Bridge Notes was 36 months from issuance (24 months for the Bridge Notes issued in 2018 and 2019) with 15% annual interest
which is capitalized each year into the principal of the Bridge Notes and paid in kind.
As
of March 31, 2021, all Bridge Notes remaining at the end of 2020, inclusive of principal and accrued and capitalized interest, were settled
with the holders of these notes converting their debt into a total of 6,627,692
shares of common stock of the Company with a
fair value of $4,378,488
based on the stock price of the Company on the
date of conversion. The Company recorded a loss on extinguishment of these Bridge Notes of $744,205
for
the nine months ended September 30, 2021, which is included in loss on conversion of bridge notes and accrued interest, as other income
expenses in the unaudited condensed statements of operations.
Pursuant
to ASC 825-10-25-1, Fair Value Option, the Company made an irrevocable election at the time of issuance to report the Bridge Notes at
fair value, with changes in fair value recorded through the Company’s condensed consolidated statements of operations as other
income (expense) in each reporting period. The estimated fair value of the remaining outstanding Bridge Notes as of September 30, 2021
and December 31, 2020 was $0
and $0 (see Note 8 – Fair Value
Measurement), respectively. During the three and nine month ended September 30, 2020, the change in fair value resulted in a loss
of $1,348,237
and $1,666,422, respectively, which
is presented as change in fair value of convertible bridge notes on the unaudited condensed statements of operations (see Note 8 - Fair
Value Measurement).
Paycheck
Protection Program
On
April 14, 2020, the Company received $142,942
under the Paycheck Protection Program (PPP) overseen
by the U.S. Small Business Administration. The loan has an annual interest rate of 1%
with loan payments being deferred six months
from the date of the loan with a maturity date of April
2022. On July 14, 2021, the Company’s PPP
loan was forgiven, resulting in $142,492
gain on forgiveness of debt which is included
as other income (expense) in the unaudited condensed statements of operations.
NOTE
8 – FAIR VALUE MEASUREMENT
The
Company measures fair value in accordance with a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure
fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities
(Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy
are described below:
|
Level
1
|
Unadjusted
quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
|
|
|
|
|
Level
2
|
Quoted
prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term
of the asset or liability; and
|
|
|
|
|
Level
3
|
Prices
or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by
little or no market activity).
|
As
disclosed in Note 7, the Bridge Notes are reported at fair value, with changes in fair value recorded through the Company’s condensed
consolidated statements of operations as a component of other income (expense) in each reporting period.
The
following tables set forth the Company’s unaudited financial assets and liabilities measured at fair value by level within
the fair value hierarchy as of September 30, 2021 and December 31, 2020. Assets and liabilities are classified in their entirety
based on the lowest level of input that is significant to the fair value measurement.
SCHEDULE OF LIABILITIES MEASURED AT FAIR VALUE
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Convertible Bridge Notes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Fair value as of September 30, 2021
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Convertible Bridge Notes
|
|
$
|
3,598,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,598,000
|
|
Fair value as of December 31, 2020
|
|
$
|
3,598,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,598,000
|
|
The
following tables present a reconciliation of the beginning and ending balances of items measured at fair value on a recurring basis that
use significant unobservable inputs (Level 3) that has been recorded in the condensed consolidated balance sheets which
is as follows:
SCHEDULE OF RECONCILIATION OF LEVEL 3 CONVERSION OPTION LIABILITY
Fair value, December 31, 2020
|
|
$
|
3,598,000
|
|
Accrued interest
|
|
|
35,983
|
|
Conversion to shares of common stock
|
|
|
(3,633,983
|
)
|
Fair value, September 30, 2021
|
|
$
|
-
|
|
NOTE
9 – DISCONTINUED OPERATIONS
On
November 6, 2020, the Company executed a Separation Agreement (see Note 4 – Separation Agreement), whereby the Company transferred
its Legacy Business and the related assets and liabilities to EPH, a related party and equity method investee.
ASC
205-20 “Discontinued Operations” establishes that the disposal or abandonment of a component of an entity or a group of components
of an entity should be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major
effect on an entity’s unaudited operations and financial results. As a result, the component’s results of operations
have been reclassified as discontinued operations on a retrospective basis for the period ended September 30, 2020. There were no results
of operations from the component in the current period. As of September 30, 2021, there were no assets or liabilities held associated
with this business. The results of operations of this component, for all periods, are separately reported as “discontinued operations”
on the unaudited condensed statements of operations.
As
disclosed in Note 4 – Separation Agreement, the Company sold its equity interest in EPH as of March 31, 2021. There have been no
transactions between the Company and EPH since the Separation Agreement.
A
reconciliation of the major classes of line items constituting the income (loss) from discontinued operations, net of income taxes as
is presented in the consolidated statements of operations for the three and nine month ended September 30, 2021 and 2020, are
summarized below:
Reconciliation
of revenue and expense items in discontinued operations in the unaudited condensed statements of operations:
SCHEDULE OF DISCONTINUED OPERATION
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2020
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
191,199
|
|
|
$
|
541,197
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
Payroll and related expenses
|
|
|
106,310
|
|
|
|
320,463
|
|
General and administrative
|
|
|
13,562
|
|
|
|
51,375
|
|
Total operating expenses
|
|
|
119,872
|
|
|
|
371,838
|
|
Operating Income
|
|
|
71,327
|
|
|
|
169,359
|
|
Financing costs including interest
|
|
|
(15,271
|
)
|
|
|
(42,395
|
)
|
OTHER EXPENSE
|
|
|
(15,271
|
)
|
|
|
(42,395
|
)
|
INCOME FROM DISCONTINUED OPERATIONS
|
|
$
|
56,056
|
|
|
$
|
126,964
|
|
Reconciliation
of cash flows from operating activities and financing activities on the unaudited condensed statements of cash flows:
|
Nine Months ended
|
|
|
September 30,
|
|
|
|
2020
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
Net income from discontinued operations
|
|
$
|
126,964
|
|
Adjustments to reconcile net income to net cash provided by discontinued
operations:
|
|
|
|
|
Changes in operating assets and liabilities
|
|
|
|
|
Increase in accounts payable and accrued expenses
|
|
|
22,500
|
|
Increase in accrued interest - related party
|
|
|
42,395
|
|
Net cash provided by operating activities
|
|
|
276,649
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
Proceeds from promissory notes - related parties
|
|
|
290,373
|
|
Net cash provided by financing activities
|
|
|
290,373
|
|
|
|
|
|
|
Net cash provided by discontinued operations
|
|
$
|
482,232
|
|
NOTE
10 – COMMON STOCK, PREFERRED STOCK AND WARRANTS
Common
Stock
During
the three months ended September 30, 2021, the Company issued 6,525,378
shares of common stock in connection with
the conversion of Series B Preferred stock with an original investment amount of $911,000
plus $53,061
in accrued dividends. The Company also
issued 700,000
shares of common stock to a service provider
under a consulting agreement in the period. The fair market value of the common stock was $245,00
was recorded as stock compensation expense.
As
of March 31, 2021, $125,007 of
debentures and accrued expenses plus bridge notes with principal and accrued interest of $1,447,315 for
an aggregate of $1,572,315 of
obligations were converted into 632,995 shares
of common stock at a price of $0.22 per
share. Further, $120,000 of
Series A preferred stock was converted into 750,000 shares
of common stock at a price of $0.16 per
share. Due to the timing of the conversions and the Company’s stock price at that time of conversion, the Company recorded the
following losses from liability conversions in the nine months ended September 30, 2021: $744,505 from
the conversion of Bridge Notes including accrued interest, and $390,068 from
the conversion of a debenture and accrued expenses. A deemed dividend was recognized in the amount of $542,500 for
the difference between the value of the common stock shares using market price on the date of conversion and the $120,000 stated
value of the Series A preferred stock upon conversion into common stock which has been presented as an increase to the net loss
available to common stockholders in the condensed consolidated statement of operations.
In September 2020, the Company
issued 600,000 shares of common stock to three consultants in connection with services provided. All services were provided in the third
quarter of 2020, and the Company incurred a professional fee expense of $127,000 related to the issuance of these shares during the three-month
period ended September 30, 2020. The Company measured the fair value of the common stock issued based on the market price on contract
execution date.
The Company issued 200,000
shares of common stock in the first quarter of 2020 in connection with a services contract valued at $50,000, which is being expensed
over the six-month service term of the contract. During the nine months ended September 30, 2020, the Company recognized $50,000 of stock-based
compensation which is included in professional fees in the unaudited condensed consolidated statements of operations. The Company measured
the fair value of the common stock issued based on the market price on contract execution date as no specific performance by the grantee
is required to retain the issued shares.
Series
A Redeemable Convertible Preferred Stock
The
Company has 480 shares of Preferred Stock issued and outstanding as of September 30, 2021, which currently are convertible at $0.16
per share of the Company’s common stock
(the “Conversion Price”), which was adjusted to match the conversion price of the Company’s Series B Preferred Stock.
The Preferred Stock bears a 6%
dividend per annum, calculable and payable per quarter in cash
or additional shares of common stock as determined in the Certificate of Designation. The Preferred Stock has no voting rights until
converted to common stock and has a liquidation preference equal to the aggregate purchase price of $480,000
plus accrued dividends. The Preferred Stock is
currently in default, and the Company is negotiating a modification with the holders, including the conversion of these shares into common
stock. Each share of Preferred Stock received warrants, all of which had expired as of the first quarter of 2021.
The
Preferred Stock has price protection provisions in the case that the Company issues any shares of stock not pursuant to an “Exempt
Issuance” at a price below the Conversion Price. Exempt Issuances include: (i) shares of Common Stock or common stock equivalents
issued pursuant to the original merger of the company or any funding contemplated by that transaction; (ii) any common stock or convertible
securities outstanding as of the date of closing; (iii) common stock or common stock equivalents issued in connection with strategic
acquisitions; (iv) shares of common stock or equivalents issued to employees, directors or consultants pursuant to a plan, subject to
limitations in amount and price; and (v) other similar transactions. The Certificate of Designation contains restrictive covenants not
to incur certain debt, repurchase shares of common stock, pay dividends or enter into certain transactions with affiliates without consent
of holders of 67% of the Preferred Stock.
Management
has determined that the Preferred Stock is more akin to a debt security than equity primarily because it contains a mandatory 2-year
redemption at the option of the holder, which only occurs if the Preferred Stock is not converted to common stock. Therefore, management
has presented the Preferred Stock outside of permanent equity as mezzanine equity, which does not factor into the totals of either liabilities
or equity.
The
Preferred Stock carries a 6% per annum dividend calculated on the stated value of the stock and is cumulative and payable quarterly beginning
July 1, 2016. These dividends are accrued at each reporting period. They add to the redemption value of the stock; however, as the Company
shows an accumulated deficit, the charge has been recognized in additional paid-in capital.
Series
B Preferred Stock
In
December 2020, the Company filed an amendment to its Articles of Incorporation to authorize the issuance of up to 2,500
shares of Series B Convertible Preferred Stock
(the “Series B Stock”), par value $0.001
per share, pursuant to a Certificate of Designation.
The Series B Preferred Shares provide the holders a 10%
annual paid-in-kind dividend, a liquidation preference
equal to the purchase price of the shares ($1,000
per share) followed by the right to participate
with the common stockholders in the instance of a liquidation or other exit event, and provide the holders the right to vote along with
the common holders based on the common conversion amount of their holdings. The Series B Preferred Shares are convertible into common
stock at a price of $0.16
per share, subject to anti-dilution protections
in the case of certain issuances of securities below that conversion price. The Series B Preferred Shares are not redeemable.
In
January 2021, the Company closed a private offering of its Series B Stock for $1,000
per share, raising a total of $2,500,000,
inclusive of $156,000
in prior debt conversion and $23,000
of notes payable with directors converted to
shares of Series B Stock and warrants. As of September 30, 2021, and December 31, 2021, 1,509
and
2,500
shares of Series B Stock were issued and outstanding.
Between July 27 and August 24, 2021, 15 holders of an aggregate of 991
shares of Series B preferred stock converted
their preferred shares into 6,525,378
shares of common stock, which included $53,061
of accrued dividends.
Series
E-1 Preferred Stock
On
December 3, 2020, the Company filed an amendment to its Articles of Incorporation to authorize the issuance of up to 8,500 shares of
Series E-1 Preferred Stock (the “Series E-1 Stock”) pursuant to a Certificate of Designation. The shares of Series E-1 Stock
are incentive-based, vesting and forfeitable securities that provide the holders the right in the aggregate to receive an “earnout”
equal to 20% of the total consideration received by the Company in the instance of a sale or sub-license of its core licensed radiopharmaceutical
Technology, or sale or merger of the Company, which is paid on a priority, senior basis. In addition, the holders of the Series E-1 Stock
can convert their vested preferred stock at anytime or after an event resulting in an earnout payment, such as an acquisition of the
Company, into an aggregate of 8.5 million common shares. The holders of the Series E-1 Stock have the right to vote along with the common
stockholders based on the common conversion amount of their holdings, and have the right to nominate two members of the Board of Directors.
On
December 30, 2020, 7,650
shares of Series E-1 Stock were issued
to five individuals, including the Company’s Executive Chairman, CEO and General Counsel which vest starting in July 2021 through
January 2023 and are forfeitable by the holders prior to vesting. In February 2021, the remaining 850
shares of Series E-1 Stock were issued to one
newly-appointed director, vesting half in February 2022 and the balance in February 2023. Upon these shares of Series E-1 preferred stock
becoming fully vested, they are convertible in the aggregate into 8,500,000
shares of common stock. During the three and
nine months ended September 30, 2021, employee and director stock option expense for vested Series E-1 amounted to $394,935
and $5,220,407,
respectively, which is included in compensation and related expenses on the condensed statements of operations.
As of September 30, 2021, $1,307,593 of
unrecognized compensation remains which will be recognized over a weighted average period of 1.06
years.
The
Company computed the total grant date fair value of the Series E-1 Stock to be approximately $6,528,000
using an option pricing model and the
following assumptions: (1) with respect to the shares granted in 2020: expected term of four years, dividend yield of -0-%,
volatility of 96.12%,
and a risk-free rate of .27%;
and (2) with respect to the shares granted in 2021: expected term of four years, dividend yield of 0%,
volatility of 96.12%,
and a risk-free rate of 0.27%.
The value of these shares will be recognized as stock-based compensation
expense over the vesting period through February 2023.
Warrants
During
the nine months ended September 30, 2021, the Company issued 6,743,575
warrants in connection with its Series B offering,
and 750,000
warrants to a service provider. On June 17, 2021,
by resolution of the Company’s board of directors, the expirations of 6,268,575
of the warrants issued in connection with the
Series B offering, including those issued to directors, and the 750,000
warrants issued to the service provider were
extended to from July 8, 2021 to September
30, 2021. On September 22, 2021, by resolution
of the Company’s board of directors, the expirations of 6,268,575
of the warrants issued in connection with the
Series B offering, including those issued to directors, and 750,000
warrants issued to the service provider were
extended from September 30, 2021 to October
15, 2021; and the exercise price of the
Series B warrants was reduced from $0.35
per share to $0.25
per share.
The
following is a summary of the outstanding common stock warrants as of September 30, 2021:
SCHEDULE OF STOCKHOLDERS' EQUITY NOTE, WARRANTS OR RIGHTS
|
|
Number of
Warrants
|
|
|
Exercise price
per share
|
|
|
Expiration
Date
|
|
Warrants issued in connection with issuance of Series B Preferred Stock (1)
|
|
|
6,202,861
|
|
|
$
|
0.25
|
|
|
|
October 15, 2021
|
|
Warrants issued in connection with issuance of Series B Preferred Stock to lead investor
|
|
|
475,000
|
|
|
$
|
0.45
|
|
|
|
January
15, 2022
|
|
Warrants issued in connection with the issuance of Series B Preferred Stock to directors
|
|
|
65,714
|
|
|
$
|
0.25
|
|
|
|
October 15, 2021
|
|
Warrants issued to a service provider (2)
|
|
|
750,000
|
|
|
$
|
0.22
|
|
|
|
October 15, 2021
|
|
|
(1)
|
On September 22, 2021,
the Company’s board of directors approved an extension of the expiration date of these Series B warrants from September 30,
2021 to October 15, 2021, and approved a reduction in the exercise price from $0.35 per share to $0.25 per share.
|
|
(2)
|
On September 22, 2021,
the Company’s board of directors approved an extension of the expiration date of these warrants issued to a service provider
from September 30, 2021 to October 15, 2021.
|
During
the period ended March 31, 2021, the Company issued a service provider fully vested warrants in connection with the execution of a service
agreement to purchase 750,000
shares of common stock for an exercise price
of $0.22
and exercise period of six months. The Company
computed the total grant date fair value of the warrants to be approximately $404,000
using a Black-Scholes option pricing model and
the following assumptions: expected term of 0.5
years, dividend yield of -0%-,
volatility of 129.81%,
and a risk-free rate of .08%.
The value of these warrants was recognized as stock-based compensation expense on the date of grant and is included in professional fees
on the condensed consolidated statement of operations for the nine months ended September 30, 2021, as the warrants were fully earned
upon issuance. On June 17, 2021, the term of these warrants was extended until September 30, 2021, resulting in incremental compensation
expense of $7,841 which
has been included in professional fees in the condensed statement of operations for the nine months ended September 30, 2021.
On September 22,
2021, the term of the 750,000 service
warrants were extended from September 30, 2021 to October
15, 2021. The warrant modification resulted in an incremental compensation expense of $101,366
which has been included in professional fees during the three and nine months in the unaudited statement of operations. The incremental value associated
with these modified warrants was determined using a Black-Scholes pricing model using the original terms of the warrants and the
modified terms and the following assumptions: expected term of 0.04 years,
dividend yield of 0%,
volatility of 183.2%,
and a risk-free rate of 0.07%.
On June 22, 2021, the
maturity of the 6,268,575 Series B warrants was extended until September 30, 2021. The incremental compensation expense associated
with this modification has been recognized has a deemed dividend charge of $155,639
in the nine months ended September 30,
2021, which has been presented as a reduction of net loss available to commons stockholders on the condensed consolidated
statements of operations. The incremental value associated with these modified warrants was determined using a Black-Scholes pricing
model using the original terms of the warrants and the modified terms and the following assumptions: expected term of 0.1,
0.3
years, dividend yield of 0%,
volatility of 107%-
111%,
and a risk-free rate of 0.04%-0.05%.
On September 22,
2021, the terms of all 6,268,575
Series B warrants were extended from September 30, 2021 to October
15, 2021, and the exercise price of the Series B warrants was reduced from $0.35
per share to $0.25
per share. This modification resulted in an increase in the fair market value and a deemed dividend of $694,575.
There was no change to stockholders’ equity as the increase in the fair market fair of the warrant modification was recorded
to additional paid-in-capital and the deemed dividend was recorded to accumulative deficit. In addition, the deemed dividend for the
three and nine months ended September 30, 2021 of $694,575
has been presented as a reduction of net loss available to common stockholders in the unaudited condensed statements of operations.
The incremental value associated with these modified warrants was determined using a Black-Scholes pricing model using the original
terms of the warrants and the modified terms and the following assumptions: expected term of 0.04
years, dividend yield of 0%,
volatility of 183,2%,
and a risk-free rate of 0.07%.
NOTE
11 – STOCK OPTIONS AND RESTRICTED STOCK UNITS
In
2016 to compensate officers, directors and other key service providers with equity grants, the Board approved the 2016 Omnibus Equity
Incentive Plan (“2016 Plan”), which initially allowed for 160,000
shares of common stock, stock options, stock
rights (restricted stock units), or stock appreciation rights to be granted by the Board in its discretion. This authorized amount was
increased to 400,000
shares by Board resolution and amendment in 2017,
and further increased to 1
million shares by Board resolution in 2021. There
are currently no shares available under the 2016 Plan for future issuance; however, the Board may increase the authorized shares under the 2016
Plan each year.
The
Company issued 644,000 stock
options to purchase common stock to officers and directors of the Company during the three and nine months ended September
30, 2021 to officers and directors of the Company. These options have a 10 year
term, a vesting period of 50% six
months after issuance and the balance 12 months after issuance,
and an exercise price of $0.36 per
share. The Company recorded $32,192 of
stock-based compensation expense to compensation and related expenses for the three and nine month ended September 30, 2021 for
these stock options.
A
summary of stock option activity and related information is as follows:
SUMMARY OF STOCK OPTION ACTIVITY
|
|
Options
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual
Term
|
|
|
Aggregate Intrinsic Value
|
|
Outstanding as of December 31, 2020
|
|
|
468,619
|
|
|
$
|
1.31
|
|
|
|
5.6
|
|
|
$
|
-
|
|
Granted
|
|
|
644,000
|
|
|
$
|
0.36
|
|
|
|
9.9
|
|
|
$
|
-
|
|
Outstanding as of September 30, 2021
|
|
|
1,112,619
|
|
|
$
|
0.76
|
|
|
|
7.8
|
|
|
$
|
-
|
|
Exercisable as of September 30, 2021
|
|
|
468,619
|
|
|
$
|
1.31
|
|
|
|
4.9
|
|
|
$
|
-
|
|
The aggregate intrinsic
value of options exercised is the difference between the fair market value of the Company’s closing price of our common stock
at each reporting date, less the exercise price multiplied by the number of options granted which was nil at September 30,
2021.
As
of September 30, 2021, the unrecognized stock-based compensation of approximately $179,000
is expected to be expensed over the next nine months based on the option vesting
requirements. The weighted average fair value of options granted was $0.33
per share for the nine months ended September 30, 2021.
We estimate the fair value
of stock-based awards on the date of grant using the Black-Scholes option pricing model using the fair market value of our common stock
on the date of grant and a number of other assumptions. These assumptions include estimates regarding the expected term of the awards,
estimates of the stock volatility over a duration that approximates the expected term of the awards, estimates of the risk-free rate,
and estimates of expected dividend rates.
The
assumptions that were used in Black-Scholes option pricing model for the nine months ended September 30, 2021 were as
follows:
SCHEDULE OF FAIR VALUE OF STOCK OPTIONS GRANTED USING THE ASSUMPTIONS
|
|
|
|
|
|
|
|
Expected term (years)
|
|
|
5
|
|
Expected volatility
|
|
|
153.9
|
%
|
Risk-free interest rate
|
|
|
0.08
|
%
|
Expected dividend yield
|
|
|
0.0
|
%
|
Option
Repricing
On
January 6, 2020, the compensation committee of the Company’s Board of Directors, approved a one-time stock option repricing program
(the “Option Repricing”) to permit the Company to reprice certain options to purchase the Company’s Common Stock held
by its current directors, officers and employees (the “Eligible Options”), which actions became effective on January 6, 2020.
Under the Option Repricing, Eligible Options with an exercise price at or above $2.50
per share (representing an aggregate of 252,440
options, or 54%
of the total outstanding) were amended to reduce
such exercise price to $0.50
per share.
The
impact of the Option Repricing was a one-time incremental non-cash charge of $6,304,
which was recorded as stock option expense for the three months ended September 20, 2020 which was included in general
and administrative expenses in the unaudited condensed consolidated statement of operations.
NOTE
12 – COMMITMENTS AND CONTINGENCIES
The
employment agreements for the Company’s Executive Chairman and CEO each contain termination provisions whereby if they are terminated
without cause or following a material change, as defined therein, they will receive salary through the date of termination plus an additional
12 months, bonus that would be earned during the full year when the termination became effective (or a lump sum of 50% of the full target
bonus), all stock options shall vest and healthcare benefits will continue for 12 months. The Company’s General Counsel’s
employment agreement contains a twelve month severance payment in the instance of a termination without cause, as defined therein.
The
QSAM License Agreement requires multiple milestone-based payments including: $60,000
and other expense reimbursements within 60 days
of signing, which have been paid, up to $150,000
as the Technology advances through multiple stages
of clinical trials, and $1.5
million upon commercialization. IGL will also
receive equity in the form of a warrant in QSAM equal to 5%
of the company to be issued within 60 days of
signing, which has not yet been issued. Upon commercialization, IGL will receive an on-going royalty equal to 4.5%
of Net Sales, as defined in the License Agreement,
and between 10% and 50%
of any Sublicense Consideration received by QSAM,
as defined in the License Agreement and dependent on the stage of development of the technology (currently that amount is 25%).
QSAM will also pay for ongoing patent filing and maintenance fees, and has certain requirements to defend the patents against infringement
claims. In connection with the License Agreement, QSAM signed a two-year Consulting and Confidentiality Agreement (the “Consulting
Agreement”) with IGL, which provides IGL with payments of $8,500
per month starting 60 days after signing. The
Consulting Agreement is to provide QSAM with additional consulting and advisory services from the technology’s founders to assist
in the clinical development of CycloSam. The Company has paid $60,000
under the QSAM License Agreement representing
the full upfront license fee, as well $60,000
in expense reimbursements required under that
agreement. The expense for three and nine months ended September 30, 2021 was $166,929
and $388,336,
respectively, in additional related drug development costs to service
providers including the fixed $8,500
monthly consulting fee, which has been reflected
as research and development expenses on the unaudited condensed consolidated statements of operations.
Pursuant
to a services agreement signed in 2018, an additional 6,000
warrants with a five-year term and exercisable at $1.00
per share are issuable to the provider but
have not formally been issued as of September 30, 2021 and are not considered outstanding.
NOTE
13 – SUBSEQUENT EVENTS
On October 15, 2021,
eight non-affiliated accredited investors in the Company’s Series B Preferred stock offering exercised their warrants at
$0.25
per share, earning for the Company a total of $467,858
plus a subscription receivable of $35,714.
The Company issued 1,871,432
shares of common stock, not including 142,857
unissued shares subject to the subscription receivable.
Commencing on October
31 and as of November 15, 2021, the Company issued six convertible promissory notes in a private placement offering among six
non-affiliated investors in the total amount of $555,000. The
notes are convertible into common stock at a price of $0.20 per share prior to the maturity date of December
31, 2023, or automatically upon the Company completing a qualified offering in the amount of $5 million or uplisting its
common shares to NASDAQ. The note bears interest at the rate of 6%
per annum, with all interest and principal due at maturity, unless earlier converted. The investors also received a total of 925,001
common stock warrants, exercisable at $0.60
per share at any time prior to October 31, 2022.