(Name, address, including zip code, and
telephone number, including area code, of agent for service)
If any of the securities being registered
on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the
following box: ☒
If this Form is filed to register additional
securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment
filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment
filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate
by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided to Section 7(a)(2)(B) of the Securities Act. ☐
ABOUT THIS PROSPECTUS
We have not, and the underwriters have
not, authorized anyone to provide any information or to make any representations other than those contained in this prospectus
or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We take no responsibility for,
and can provide no assurance as to the reliability of, any other information that others may give to you.
You should rely only on the information
contained in this prospectus. No dealer, salesperson or other person is authorized to give information that is not contained in
this prospectus. This prospectus is not an offer to sell nor is it seeking an offer to buy these securities in any jurisdiction
where the offer or sale is not permitted. The information in this prospectus is accurate only as of the date of this prospectus,
regardless of the time of delivery of this prospectus or of any sale of these securities.
PROSPECTUS SUMMARY
The following summary highlights selected
information contained elsewhere in this prospectus and is qualified in its entirety by the more detailed information and financial
statements included elsewhere in this prospectus. It does not contain all the information that may be important to you and your
investment decision. You should carefully read this entire prospectus, including the matters set forth under “Risk Factors,”
“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our financial statements
and related notes included elsewhere in this prospectus. In this prospectus, unless context requires otherwise, references to “we,”
“us,” “our,” “Silo” or “the Company” refer to Silo Pharma, Inc. and its subsidiary.
Overview
We
are a developmental stage biopharmaceutical company focused on merging traditional therapeutics with psychedelic research. We
seek to acquire assets to license and fund research which we believe will be transformative to the well-being of patients and the
health care industry, and we are committed to developing innovative solutions to address a variety
of underserved conditions. In these uncertain times, the mental health of the nation and beyond is being put to the test.
More than ever, creative new therapies are needed to address the health challenges of today. Combining our resources with world-class
medical research partners, we hope to make significant advances in the medical and psychedelic space.
In
addition to our primary focus on psychedelic research, we have been engaged in
the development of the streetwear apparel brand, NFID, which stands for “No Found Identification.”
Rare Disease Therapeutics
We have been exploring opportunities to
expand our business by seeking to acquire and/or develop intellectual property or technology rights from leading universities and
researchers to treat rare diseases, including the use of psychedelic drugs, such as psilocybin, and the potential benefits they
may have in certain cases involving depression, mental health issues and neurological disorders. We intend to focus
on merging traditional therapeutics with psychedelic research for people suffering from indications such as depression, post-traumatic
stress disorder (“PTSD”), Parkinson’s and other rare neurological disorders. Our mission is to identify assets
to license and fund the research which we believe will be transformative to the well-being of patients and the health care industry.
The potential of psilocybin therapy in
mental health conditions has been demonstrated in a number of academic-sponsored studies over the last decade. In these early studies,
it was observed that psilocybin therapy provided rapid reductions in depression symptoms after a single high dose, with antidepressant
effects lasting for up to at least six months for a number of patients. These studies assessed symptoms related to depression and
anxiety through a number of widely used and validated scales. The data generated by these studies suggest that psilocybin is generally
well-tolerated and has the potential to treat depression when administered with psychological support.
We have recently engaged in discussions with
a number of world-renowned educational institutions and advisors regarding potential opportunities and have formed a scientific
advisory board that is intended to help advise management regarding potential acquisition and development of products.
In addition to the foregoing, effective July
15, 2020, we entered into a commercial evaluation license and option agreement (the “Option Agreement”) with the University
of Maryland, Baltimore (“UMB”) pursuant to which, UMB has granted us an exclusive, non-sublicensable, non-transferable
license with respect to the exploration of the potential use of central nervous system-homing peptides in vivo and their use for
the investigation and treatment of multiple sclerosis and other neuroinflammatory pathology. The option was extended and exercised.
On February 12, 2021, we entered into a Master License Agreement (the “UMB License Agreement”) with UMB pursuant to
which UMB granted us an exclusive, worldwide, sublicensable, royalty-bearing license to certain intellectual property (i) to make,
have made, use, sell, offer to sell, and import certain licensed products and (ii) to use the invention titled, “Central
nervous system-homing peptides in vivo and their use for the investigation and treatment of multiple sclerosis and other neuroinflammatory
pathology” and UMB’s confidential information to develop and perform certain licensed processes for the therapeutic
treatment of neuroinflammatory disease.
We plan to actively pursue the acquisition
and/or development of intellectual property or technology rights to treat rare diseases, and to ultimately expand our business
to focus on this new line of business.
Apparel
On September 29, 2018, we entered into
an Asset Purchase Agreement with Blind Faith Concepts Holdings, Inc. pursuant to which we completed the acquisition of the assets
of NFID which consisted of three trademarks related to the NFID brand, the NFID website, shoe designs and samples, and the assumption
of a one-year Brand Ambassador Agreement in exchange for 2,000,000 shares of our common stock. NFID is a recently developed unisex
clothing brand, and we plan on continuing product development to fully launch the product.
Since the completion of the acquisition of
the assets of NFID in September 2018, we have been engaged in the development of NFID, which stands for “No Found Identification.”
We have developed NFID as an exclusive brand of apparel consisting initially of sweatshirts, hoodies, t-shirts, jackets and hats.
Our clothing brand features lifestyles graphic designs. The collection is inspired towards the lifestyle and wellness culture.
Recent Developments
Investigator-sponsored Study Agreement
with Maastricht University of the Netherlands
On December 1, 2020, we entered into an
investigator-sponsored study agreement with Maastricht University of the Netherlands. The research project is a clinical study
to examine the effects of repeated low doses of psilocybin and lysergic acid diethylamide
(“LSD”) on cognitive and emotional dysfunctions in Parkinson’s disease and to understand its mechanism of action.
Patent License Agreement with AIKido
Pharma Inc.
On January 5, 2021, we entered into a Patent
License Agreement (the “Patent License Agreement”) with Silo Pharma, Inc., a Florida corporation, our wholly-owned
subsidiary, and our and our subsidiary’s affiliates and subsidiaries, as licensor, and AIkido Pharma Inc. (“AIkido”)
pursuant to which we granted AIkido an exclusive, worldwide, sublicensable, royalty-bearing license to certain intellectual property
(i) to make, have made, use, provide, import, export, lease, distribute, sell, offer for sale, develop and advertise certain licensed
products and (ii) to develop and perform certain licensed processes for the treatment of cancer and symptoms caused by cancer.
In addition, if we exercise the option granted to us pursuant to the Option Agreement, we shall grant AIKido a non-exclusive sublicense
to certain UMB patent rights in the field of neuroinflammatory diseases occurring in patients diagnosed with cancer.
Binding Letter of Intent to Grant Sublicense
with AIKido Pharma Inc.
On February 12, 2021, we entered into a binding
letter of intent (the “Letter of Intent”) with AIkido pursuant to which we agreed to grant AIkido a worldwide, exclusive
sublicense of our licensed patents under the UMB License Agreement for use in the therapeutic treatment of neuroinflammatory disease
in cancer patients (the “Sublicense”). The parties have agreed to use their best efforts to complete the Sublicense
arrangement as soon as reasonably possible. The terms and conditions of the Sublicense are subject to compliance with the terms
and conditions of the UMB License Agreement, including, but not limited to, the provisions regarding the granting of sublicenses
set forth in the UMB License Agreement.
Investigator-sponsored Study Agreement
with UMB
On January 5, 2021, we entered into a entered
into an investigator-sponsored study agreement with UMB. The research project is a clinical study to examine a novel peptide-guided
drug delivery approach for the treatment of multiple sclerosis (“MS”). More specifically, the study is designed to
evaluate (1) whether MS-1-displaying liposomes can effectively deliver dexamethasone to the central nervous system and (2) whether
MS-1-displaying liposomes are superior to plain liposomes, also known as free drug, in inhibiting the relapses and progression
of Experimental Autoimmune Encephalomyelitis.
February 2021 Private Placement
On February 9, 2021, we entered into securities
purchase agreements (collectively, the “Purchase Agreements”) with certain institutional and accredited investors (collectively,
the “Investors”) for the sale of an aggregate of 4,276 shares of our newly designated Series C Preferred Stock (“Series
C Preferred Stock”) and warrants (“Warrants”) to purchase up to 14,253,323 shares of our common stock for gross
proceeds of approximately $4,276,000, before deducting placement agent and other offering expenses. The closing of the offering
occurred on February 12, 2021. In connection with the offering, we entered into a registration rights agreement with the Investors
pursuant to which we agreed to file a registration, of which this prospectus is a part, to
register, under the Securities Act, the resale of the shares (the “Conversion Shares”) of common stock issuable upon
conversion of the Series C Preferred Stock and the shares (the “Warrant Shares”) of common stock issuable upon exercise
of the Warrants. Accordingly, this prospectus relates to the offering by the selling stockholders of up to 28,506,646 Resale
Shares, which includes the Conversion Shares and the Warrant Shares.
In addition, pursuant to the terms of the
offering, we issued the placement agents warrants to purchase up to an aggregate of 2,850,664 shares of our common stock.
Intellectual Property
We have filed four provisional patent applications related to
the use of the central nervous system-homing peptides covered by the UMB Option Agreement to deliver certain compounds, including
a nonsteroidal anti-inflammatory drug and/or psilocybin, for the treatment of arthritis, central nervous system diseases, neuroinflammatory
diseases as well as cancer. In addition, pursuant to our acquisition of NFID, we acquired three trademarks related to the NFID
brand.
Potential Corporate Actions to be Approved
at a Meeting of Stockholders
On February 10, 2021, we filed a preliminary
proxy statement on Schedule 14A with the Securities and Exchange Commission (“SEC”) in connection with the following
proposed corporate actions to be voted upon at a special meeting of our stockholders (“Special Meeting”): (i) an amendment
to our Certificate of Incorporation, as amended (“Certificate of Incorporation”) to increase the number of authorized
shares of common stock from 100,000,000 shares to 500,000,000 shares (Proposal
No. 1); (ii) a reverse stock split of our issued and outstanding common stock in a ratio to be determined by our board of directors,
which ratio shall not be less than 1-for-5 nor more than 1-for-50, with the exact ratio to be set at a whole number within this
range as determined by our board of directors, provided that, we shall not effect reverse stock splits that, in the aggregate,
exceed 1-for-50, and any reverse stock split is completed no later than February 5, 2022 (Proposal No. 2); and (iii) approval
of our 2020 Omnibus Equity Incentive Plan and the reservation of 8,500,000 shares of common stock for issuance thereunder (Proposal
No. 3) (collectively, the “Corporate Actions”). Prior to this prospectus being declared effective by the SEC, we will
need our stockholders to approve Proposal No. 1.
Important Additional Information
In connection with the Special Meeting
and the Corporate Actions, we filed a preliminary proxy statement (the “Preliminary Proxy Statement”) with the SEC
and we intend to file a definitive proxy statement (the “Definitive Proxy Statement” and together with the Preliminary
Proxy Statement, the “Proxy Statement) with the SEC.
The Proxy Statement contains important
information regarding the Corporate Actions including, among other things, the recommendation of our board of directors with respect
to the Corporate Actions. STOCKHOLDERS ARE URGED TO READ THE PROXY STATEMENT AND OTHER PROXY MATERIALS THAT WE MAY FILE WITH THE
SEC WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT THE SPECIAL MEETING AND THE CORPORATE ACTIONS.
You will be able to obtain the Proxy Statement, as well as other filings containing information about us, free of charge, at the
website maintained by the SEC at www.sec.gov. Copies of the Proxy Statement and other filings made by us with the SEC can
also be obtained, free of charge, by directing a request to Silo Pharma, Inc., 560 Sylvan Avenue, Suite 3160, Englewood Cliffs,
NJ 07632, Attention: Corporate Secretary.
Participants in the Solicitation
We and our executive officers and directors
may be deemed, under SEC rules, to be participants in the solicitation of consents from our stockholders with respect to the proposed
Corporate Actions. Information regarding our executive officers and directors and their respective ownership of our common stock
is included in the Proxy Statement. To the extent that holdings of our securities have changed since the amounts printed in the
Proxy Statement, such changes have been or will be reflected on Statements of Change in Ownership on Form 4 filed with the SEC.
More detailed information regarding the identity of the potential participants, and their direct or indirect interests, by security
holdings or otherwise, is set forth in the Proxy Statement and other materials to be filed with SEC in connection with the proposed
Corporate Actions.
Risks Associated with Our Business
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There is substantial doubt about our ability to continue
as a going concern.
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We will require additional financing in the future
to fund our operations, and raising additional capital may cause dilution to holders of our stockholders, restrict our operations
or require us to relinquish certain rights.
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Clinical drug development is a lengthy and expensive
process with uncertain timelines and uncertain outcomes. If clinical trials of any future therapeutic candidates are prolonged
or delayed, we or our current or future collaborators may be unable to obtain required regulatory approvals, and therefore we
will be unable to commercialize our future therapeutic candidates on a timely basis or at all, which will adversely affect our
business.
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Even if any of our future therapeutic candidates obtain
regulatory approval, we will be subject to ongoing obligations and continued regulatory review, which may result in significant
additional expense. Additionally, any such therapeutic candidates, if approved, could be subject to labeling and other restrictions
and market withdrawal, and we may be subject to penalties if we fail to comply with regulatory requirements or experience unanticipated
problems with any of our future therapeutic candidates.
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Psilocybin and psilocin are listed as Schedule I controlled substances under the Controlled Substances
Act in the U.S., and similar controlled substance legislation in other countries and any significant breaches in our compliance
with these laws and regulations, or changes in the laws and regulations may result in interruptions to our development activity
or business continuity.
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Any therapeutic candidates we may develop in the future may be subject to controlled substance
laws and regulations in the territories where the product will be marketed, and failure to comply with these laws and regulations,
or the cost of compliance with these laws and regulations, may adversely affect the results of our business operations and our
financial condition.
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Our product candidates may contain controlled substances, the use of which may generate public
controversy. Adverse publicity or public perception regarding psilocybin or our current or future investigational therapies using
psilocybin may negatively influence the success of these therapies.
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We have never commercialized a therapeutic candidate before and may lack the necessary expertise,
personnel and resources to successfully commercialize our therapies on our own or with suitable collaborators.
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The future commercial success of our future therapeutic candidates will depend on the degree of
market access and acceptance of our potential therapies among healthcare professionals, patients, healthcare payors, health technology
assessment bodies and the medical community at large.
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We may become exposed to costly and damaging liability claims, and our product liability insurance
may not cover all damages from such claims.
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Our business operations and current and future relationships with investigators, health care professionals,
consultants, third-party payors and customers may be subject, directly or indirectly, to U.S. federal and state healthcare fraud
and abuse laws, false claims laws, health information privacy and security laws, other healthcare laws and regulations and other
foreign privacy and security laws. If we are unable to comply, or have not fully complied, with such laws, we could face substantial
penalties.
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The failure to obtain or maintain patents, licensing agreements and other intellectual property
could materially impact our ability to compete effectively.
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If we fail to comply with our obligations in the agreements under which we may license intellectual
property rights from third parties or otherwise experience disruptions to our business relationships with our licensors, we could
lose rights that are important to our business.
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If we do not continually enhance our brand recognition with respect to our apparel segment, increase
distribution of our products, attract new customers and introduce new products, either on a timely basis or at all, our business
may suffer.
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A rise in the cost of raw materials, labor and transportation could increase our cost of sales
with respect to our apparel segment and cause our results of operations and margins to decline.
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We have never paid cash dividends and have no plans to pay cash dividends in the future.
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Corporate Information
We were incorporated as a Nevada corporation
on May 16, 2017. Our principal executive offices are located at 560 Sylvan Avenue, Suite 3160, Englewood Cliffs, NJ 07632 and our
telephone number is (718) 400-9031.
THE OFFERING
Common stock offered by selling stockholders:
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28,506,646 shares of common stock including 14,253,323shares of common stock issuable upon exercise of outstanding warrants and 14,253,323 shares of common stock issuable upon conversion of outstanding shares of Series C Preferred Stock
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Offering price:
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Market price or privately negotiated prices.
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Common stock outstanding after the offering:
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85,176,956
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Use of proceeds:
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We will not receive any proceeds from the sale of the Resale Shares by the selling stockholders; however, we will receive the proceeds from any cash exercise of warrants.
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Risk factors:
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An investment in our securities involves a high degree of risk and could result in a loss of your entire investment. Prior to making an investment decision, you should carefully consider all of the information in this prospectus and, in particular, you should evaluate the risk factors set forth under the caption “Risk Factors” beginning on page 7.
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OTCQB Symbol:
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SILO
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The number of shares of common stock to
be outstanding immediately after this offering is based on 85,176,956 shares of common stock outstanding as of February 12, 2021
and excludes:
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250,000 shares of common stock issuable upon exercise of warrants
with an exercise price of $0.20 per share;
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14,253,323 shares of common stock issuable upon conversion of 4,276 shares of Series C Preferred
Stock; and
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300,000 shares of common stock issuable upon exercise of options
with a weighted average exercise price of $0.0001 per share.
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RISK FACTORS
Any investment
in our common stock involves a high degree of risk. Before deciding whether to purchase our common stock, investors should carefully
consider the risks described below. Our business, financial condition, operating results and prospects are subject to the following
material risks. Additional risks and uncertainties not presently foreseeable to us may also impair our business operations. If
any of the following risks actually occurs, our business, financial condition or operating results could be materially adversely
affected. In such case, the trading price of our common stock could decline, and our stockholders may lose all or part of their
investment in the shares of our common stock.
Risks Related to Our Financial Position
and Need for Capital
We have only a limited history upon
which an evaluation of our prospects and future performance can be made and have no history of profitable operations.
We commenced operations in 2010 and have
a limited history upon which an evaluation of our prospects and future performance can be made and have no history of profitable
operations. We may sustain losses in the future as we implement our business plan. We have not yet achieved positive cash flow
on a monthly basis during any fiscal year including the fiscal year ended December 31, 2019, and there can be no assurance that
we will ever generate revenues or operate profitably.
There is substantial doubt about
our ability to continue as a going concern.
Our financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the
normal course of business. We had a net loss of $1,013,294 and $969,463 for the years ended December 31, 2019 and 2018, respectively.
For the year ended December 31, 2019, we used cash in operations of $794,324. Additionally, we had an accumulated deficit and stockholders’
deficit of $2,655,804 and $22,892 at December 31, 2019. We have generated minimal revenues under our new business plan. These
conditions coupled with our current liquidity position raise substantial doubt about our ability to continue as a going concern.
Furthermore, since we are pursuing new products and services, this diminishes our ability to accurately forecast our revenues and
expenses. We expect that our ability to continue as a going concern depends, in large part, on our ability to generate sufficient
revenues, limit our expenses and/or obtain necessary financing. If we are unable to generate sufficient revenues, limit our expenses
and/or obtain necessary financing, we may be forced to curtail or cease operations.
We will require additional financing
in the future to fund our operations.
We will need additional capital in the
future to continue to execute our business plan. Therefore, we will be dependent upon additional capital in the form of either
debt or equity to continue our operations. At the present time, we do not have arrangements to raise all of the needed additional
capital, and we will need to identify potential investors and negotiate appropriate arrangements with them. Our ability to obtain
additional financing will be subject to a number of factors, including market conditions, our operating performance and investor
sentiment. If we are unable to raise additional capital when required or on acceptable terms, we may have to significantly delay,
scale back or discontinue our operations.
Raising additional capital may cause
dilution to holders of our stockholders, restrict our operations or require us to relinquish certain rights.
We may seek additional capital through
a combination of equity offerings, debt financings, strategic collaborations and alliances or licensing arrangements. To the extent
that we raise additional capital through the sale of equity, convertible debt securities or other equity-based derivative securities,
your ownership interest will be diluted and the terms may include liquidation or other preferences that adversely affect your rights
as a stockholder. Any indebtedness we incur could involve restrictive covenants, such as limitations on our ability to incur additional
debt, acquire or license intellectual property rights, declare dividends, make capital expenditures and other operating restrictions
that could adversely impact our ability to conduct our business. Furthermore, the issuance of additional securities, whether equity
or debt, by us, or the possibility of such issuance, may cause the market price of our common stock to decline. If we raise additional
funds through strategic collaborations and alliances or licensing arrangements with third parties, we may have to relinquish valuable
rights including to our apparel brand and future therapeutic candidates or otherwise agree to terms unfavorable to us, any of which
may have a material adverse effect on our business, operating results and prospects. Adequate additional financing may not be available
to us on acceptable terms, or at all. If we are unable to raise additional funds when needed, we may be required to delay, limit,
reduce or terminate our product development or future commercialization efforts or grant rights to develop and market our future
therapeutic candidates that we would otherwise prefer to develop and market ourselves.
Risks Related to our Rare Disease
Therapeutics Business
We cannot give any assurance that
any product candidates will successfully complete clinical trials or receive regulatory approval, which is necessary before they
can be commercialized.
We currently have no therapies that are
approved for commercial sale and may never be able to develop marketable therapies. We entered into the Option Agreement with UMB
pursuant to which, UMB has granted us an exclusive, non-sublicensable, non-transferable license with respect to the exploration
of the potential use of central nervous system-homing peptides in vivo and their use for the investigation and treatment of MS
and other neuroinflammatory pathology. Accordingly, our business may depend on the successful regulatory approval of potential
in-licensed product candidates. We cannot be certain that any product candidates will receive regulatory approval or that our therapy
will be successfully commercialized even if we receive regulatory approval.
The research, testing, manufacturing, safety,
efficacy, labeling, approval, sale, marketing, and distribution of any in-licensed product is, and will remain, subject to comprehensive
regulation by the FDA, the U.S. Drug Enforcement Administration (“DEA”), the European Medicines Agency (“EMA”),
the Medicines and Healthcare Products Regulatory Agency (“MHRA”) and foreign regulatory authorities.
Any therapeutic candidates we may
develop in the future may be subject to controlled substance laws and regulations in the territories where the product will be
marketed, and failure to comply with these laws and regulations, or the cost of compliance with these laws and regulations, may
adversely affect the results of our business operations, both during clinical development and post approval, and our financial
condition.
In the United States, psychedelics, or
psilocybin, and its active metabolite, psilocin, are listed by the DEA as “Controlled Substances” or scheduled substances,
under the Comprehensive Drug Abuse Prevention and Control Act of 1970, also known as the Controlled Substances Act (“CSA”)
specifically as a Schedule I substance. The DEA regulates chemical compounds as Schedule I, II, III, IV or V substances. Schedule
I substances by definition have a high potential for abuse, have no currently “accepted medical use” in the United
States, lack accepted safety for use under medical supervision, and may not be prescribed marketed or sold in the United States.
Pharmaceutical products approved for use in the United States may be listed as Schedule II, III, IV or V, with Schedule II substances
considered to present the highest potential for abuse or dependence and Schedule V substances the lowest relative risk of abuse
among such substances. Schedule I and II drugs are subject to the strictest controls under the CSA, including manufacturing and
procurement quotas, security requirements and criteria for importation. In addition, dispensing of Schedule II drugs is further
restricted. For example, they may not be refilled without a new prescription and may have a black box warning. Further, most, if
not all, state laws in the United States classify psilocybin and psilocin as Schedule I controlled substances. For any product
containing psilocybin to be available for commercial marketing in the United States, psilocybin and psilocin must be rescheduled,
or the product itself must be scheduled, by the DEA to Schedule II, III, IV or V. Commercial marketing in the United States will
also require scheduling-related legislative or administrative action.
Scheduling determinations by the DEA are
dependent on FDA approval of a substance or a specific formulation of a substance. Therefore, while psilocybin and psilocin are
Schedule I controlled substances, products approved by the FDA for medical use in the United States that contain psilocybin or
psilocin should be placed in Schedules II-V, since approval by the FDA satisfies the “accepted medical use” requirement.
If one of our product candidates receives FDA approval, we anticipate that the DEA will make a scheduling determination and place
it in a schedule other than Schedule I in order for it to be prescribed to patients in the United States. This scheduling determination
will be dependent on FDA approval and the FDA’s recommendation as to the appropriate schedule. During the review process,
and prior to approval, the FDA may determine that it requires additional data, either from non-clinical or clinical studies, including
with respect to whether, or to what extent, the substance has abuse potential. This may introduce a delay into the approval and
any potential rescheduling process. That delay would be dependent on the quantity of additional data required by the FDA. This
scheduling determination will require DEA to conduct notice and comment rule making including issuing an interim final rule. Such
action will be subject to public comment and requests for hearing which could affect the scheduling of these substances. There
can be no assurance that the DEA will make a favorable scheduling decision. Even assuming categorization as a Schedule II or lower
controlled substance (i.e., Schedule III, IV or V), at the federal level, such substances would also require scheduling determinations
under state laws and regulations.
In addition, therapeutic candidates containing
controlled substances are subject to DEA regulations relating to manufacturing, storage, distribution and physician prescription
procedures, including:
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DEA registration and inspection of facilities. Facilities conducting research, manufacturing, distributing, importing or exporting, or dispensing controlled substances must be registered (licensed) to perform these activities and have the security, control, recordkeeping, reporting and inventory mechanisms required by the DEA to prevent drug loss and diversion. All these facilities must renew their registrations annually, except dispensing facilities, which must renew every three years. The DEA conducts periodic inspections of certain registered establishments that handle controlled substances. Obtaining and maintaining the necessary registrations may result in delay of the importation, manufacturing or distribution of product candidates. Furthermore, failure to maintain compliance with the CSA, particularly non-compliance resulting in loss or diversion, can result in regulatory action that could have a material adverse effect on our business, financial condition and results of operations. The DEA may seek civil penalties, refuse to renew necessary registrations, or initiate proceedings to restrict, suspend or revoke those registrations. In certain circumstances, violations could lead to criminal proceedings.
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State-controlled substances laws. Individual U.S. states have also established controlled substance laws and regulations. Though state-controlled substances laws often mirror federal law, because the states are separate jurisdictions, they may separately schedule product candidates. While some states automatically schedule a drug based on federal action, other states schedule drugs through rule making or a legislative action. State scheduling may delay commercial sale of any product for which we obtain federal regulatory approval and adverse scheduling could have a material adverse effect on the commercial attractiveness of such product. We or any partners must also obtain separate state registrations, permits or licenses in order to be able to obtain, handle, and distribute controlled substances for clinical trials or commercial sale, and failure to meet applicable regulatory requirements could lead to enforcement and sanctions by the states in addition to those from the DEA or otherwise arising under federal law.
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Clinical trials. Because any product candidates may contain psilocybin, to conduct clinical trials in the United States prior to approval, each of our research sites must submit a research protocol to the DEA and obtain and maintain a DEA researcher registration that will allow those sites to handle and dispense such product candidates and to obtain the product from our importer. If the DEA delays or denies the grant of a researcher registration to one or more research sites, the clinical trial could be significantly delayed, and we could lose clinical trial sites.
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Importation. If any of our product candidates is approved and classified as a Schedule II, III or IV substance, an importer can import it for commercial purposes if it obtains an importer registration and files an application for an import permit for each import. The DEA provides annual assessments/estimates to the International Narcotics Control Board, which guides the DEA in the amounts of controlled substances that the DEA authorizes to be imported. The failure to identify an importer or obtain the necessary import authority, including specific quantities, could affect the availability of our product candidates and have a material adverse effect on our business, results of operations and financial condition. In addition, an application for a Schedule II importer registration must be published in the Federal Register, and there is a waiting period for third-party comments to be submitted. It is always possible that adverse comments may delay the grant of an importer registration.
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Manufacture. If, because of a Schedule II classification or voluntarily, we were to conduct manufacturing or repackaging/relabeling in the United States, our contract manufacturers would be subject to the DEA’s annual manufacturing and procurement quota requirements.
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Distribution. If any of our product candidates is scheduled as Schedule II, III or IV, we would also need to identify wholesale distributors with the appropriate DEA registrations and authority to distribute any future therapeutic candidates. These distributors would need to obtain Schedule II, III or IV distribution registrations.
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The potential reclassification of
psilocybin and psilocin in the United States could create additional regulatory burdens on our operations and negatively affect
our results of operations.
If psilocybin and/or psilocin, other than
the FDA-approved formulation, is rescheduled under the CSA as a Schedule II or lower controlled substance (i.e., Schedule III,
IV or V), the ability to conduct research on psilocybin and psilocin would most likely be improved. However, rescheduling psilocybin
and psilocin may materially alter enforcement policies across many federal agencies, primarily the FDA and DEA. The FDA is responsible
for ensuring public health and safety through regulation of food, drugs, supplements, and cosmetics, among other products, through
its enforcement authority pursuant to the Federal Food, Drug, and Cosmetic Act (“FDCA”). The FDA’s responsibilities
include regulating the ingredients as well as the marketing and labeling of drugs sold in interstate commerce. Because it is currently
illegal under federal law to produce and sell psilocybin and psilocin, and because there are no federally recognized medical uses,
the FDA has historically deferred enforcement related to psilocybin and psilocin to the DEA. If psilocybin and psilocin were to
be rescheduled to a federally controlled, yet legal, substance, the FDA would likely play a more active regulatory role. The DEA
would continue to be active in regulating manufacturing, distribution and dispensing of such substances. The potential for multi-agency
enforcement post-rescheduling could threaten or have a materially adverse effect on our business.
Psilocybin and psilocin are listed
as Schedule I controlled substances under the CSA in the U.S., and similar controlled substance legislation in other countries
and any significant breaches in our compliance with these laws and regulations, or changes in the laws and regulations may result
in interruptions to our development activity or business continuity.
Psilocybin and psilocin are categorized
as Schedule I controlled substances under the CSA, and are similarly categorized by most states and foreign governments. Even assuming
any future therapeutic candidates containing psilocybin or psilocin are approved and scheduled by regulatory authorities to allow
their commercial marketing, the ingredients in such therapeutic candidates would likely continue to be Schedule I, or the state
or foreign equivalent. Violations of any federal, state or foreign laws and regulations could result in significant fines, penalties,
administrative sanctions, convictions or settlements arising from civil proceedings conducted by either the federal government
or private citizens, or criminal charges and penalties, including, but not limited to, disgorgement of profits, cessation of business
activities, divestiture or prison time. This could have a material adverse effect on us, including on our reputation and ability
to conduct business, the potential listing of our shares, our financial position, operating results, profitability or liquidity
or the market price of our shares. In addition, it is difficult for us to estimate the time or resources that would be needed for
the investigation or defense of any such matters or our final resolution because, in part, the time and resources that may be needed
are dependent on the nature and extent of any information requested by the applicable authorities involved, and such time or resources
could be substantial. It is also illegal to aid or abet such activities or to conspire or attempt to engage in such activities.
An investor’s contribution to and involvement in such activities may result in federal civil and/or criminal prosecution,
including, but not limited to, forfeiture of his, her or its entire investment, fines and/or imprisonment.
Various federal, state, provincial and
local laws govern our business in any jurisdictions in which we may operate, and to which we may export our products, including
laws relating to health and safety, the conduct of our operations, and the production, storage, sale and distribution of our products.
Complying with these laws requires that we comply concurrently with complex federal, state, provincial and/or local laws. These
laws change frequently and may be difficult to interpret and apply. To ensure our compliance with these laws, we will need to invest
significant financial and managerial resources. It is impossible for us to predict the cost of such laws or the effect they may
have on our future operations. A failure to comply with these laws could negatively affect our business and harm our reputation.
Changes to these laws could negatively affect our competitive position and the markets in which we operate, and there is no assurance
that various levels of government in the jurisdictions in which we operate will not pass legislation or regulation that adversely
impacts our business.
In addition, even if we or third parties
were to conduct activities in compliance with U.S. state or local laws or the laws of other countries and regions in which we conduct
activities, potential enforcement proceedings could involve significant restrictions being imposed upon us or third parties, while
diverting the attention of key executives. Such proceedings could have a material adverse effect on our business, revenue, operating
results and financial condition as well as on our reputation and prospects, even if such proceedings conclude successfully in our
favor. In the extreme case, such proceedings could ultimately involve the criminal prosecution of our key executives, the seizure
of corporate assets, and consequently, our inability to continue business operations. Strict compliance with state and local laws
with respect to psilocybin and psilocin does not absolve us of potential liability under U.S. federal law or EU law, nor provide
a defense to any proceeding which may be brought against us. Any such proceedings brought against us may adversely affect our operations
and financial performance.
Despite the current status of psilocybin
and psilocin as Schedule I controlled substances in the United States, there may be changes in the status of psilocybin or psilocin
under the laws of certain U.S. cities or states. For instance, the city of Denver voted to decriminalize the possession of psilocybin
in 2019 and five other cities have decriminalized psilocybin since (Oakland, California; Santa Cruz, California; Ann Arbor, Michigan;
Cambridge, Massachusetts; and Somerville, Massachusetts). Moreover, in the November 2020 election, Oregon passed Measure 109 which
legalizes medical use of “psilocybin products,” including magic mushrooms, to treat mental health conditions in licensed
facilities with registered therapists.
The legalization of psilocybin without
regulatory oversight may lead to the setup of clinics without proper therapeutic infrastructure or adequate clinical research,
which could put patients at risk and bring reputational and regulatory risk to the entire industry, making it harder for us to
achieve regulatory approval.
Our product candidates may contain
controlled substances, the use of which may generate public controversy. Adverse publicity or public perception regarding psilocybin
or our current or future investigational therapies using psilocybin may negatively influence the success of these therapies.
Therapies containing controlled substances
may generate public controversy. Political and social pressures and adverse publicity could lead to delays in approval of, and
increased expenses for any future therapeutic candidates we may develop. Opponents of these therapies may seek restrictions on
marketing and withdrawal of any regulatory approvals. In addition, these opponents may seek to generate negative publicity in an
effort to persuade the medical community to reject these therapies. For example, we may face media-communicated criticism directed
at our clinical development program. Adverse publicity from psilocybin misuse may adversely affect the commercial success or market
penetration achievable by our product candidates. Anti-psychedelic protests have historically occurred and may occur in the future
and generate media coverage. Political pressures and adverse publicity could lead to delays in, and increased expenses for, and
limit or restrict the introduction and marketing of any future therapeutic candidates.
Clinical drug development is a lengthy
and expensive process with uncertain timelines and uncertain outcomes. If clinical trials of any future therapeutic candidates
are prolonged or delayed, we or our current or future collaborators may be unable to obtain required regulatory approvals, and
therefore we will be unable to commercialize our future therapeutic candidates on a timely basis or at all, which will adversely
affect our business.
Clinical testing is expensive and can take
many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical trial process
and our future clinical trial results may not be successful. We may experience delays in initiating or completing our clinical
trials. We may also experience numerous unforeseen events during our clinical trials that could delay or prevent our ability to
receive marketing approval or commercialize any future therapeutic candidates
Our clinical trials may fail to demonstrate
substantial evidence of the safety and effectiveness of future product candidates that we may identify and pursue, which would
prevent, delay or limit the scope of regulatory approval and commercialization.
Before obtaining regulatory approvals for
the commercial sale of future therapeutic candidates, we must demonstrate through lengthy, complex and expensive nonclinical studies,
preclinical studies and clinical trials that the applicable therapeutic candidate is both safe and effective for use in each target
indication. A therapeutic candidate must demonstrate an adequate risk versus benefit profile in its intended patient population
and for its intended use.
Clinical testing is expensive and can take
many years to complete, and its outcome is inherently uncertain. Most product candidates that begin clinical trials are never approved
by regulatory authorities for commercialization. We have limited experience in designing clinical trials and may be unable to design
and execute a clinical trial to support marketing approval.
We cannot be certain that any clinical
trials will be successful. In some instances, there can be significant variability in safety or efficacy results between different
clinical trials of the same therapeutic candidate due to numerous factors, including changes in trial procedures set forth in protocols,
differences in the size and type of the patient populations, changes in and adherence to the clinical trial protocols and the rate
of dropout among clinical trial participants.
Even if any of our future therapeutic
candidates obtain regulatory approval, we will be subject to ongoing obligations and continued regulatory review, which may result
in significant additional expense. Additionally, any such therapeutic candidates, if approved, could be subject to labeling and
other restrictions and market withdrawal, and we may be subject to penalties if we fail to comply with regulatory requirements
or experience unanticipated problems with any of our future therapeutic candidates.
If the FDA, the EMA, the MHRA or a comparable
foreign regulatory authority approves any of our future therapeutic candidates, the manufacturing processes, labeling, packaging,
distribution, adverse event reporting, storage, advertising, promotion and recordkeeping for the therapy and underlying therapeutic
substance will be subject to extensive and ongoing regulatory requirements. These requirements include submissions of safety and
other post-marketing information and reports, registration, as well as continued compliance with current good manufacturing practices
(“cGMPs”) and with good clinical practices (“GCPs”) for any clinical trials that we conduct post-approval,
all of which may result in significant expense and limit our ability to commercialize such therapies. Later discovery of previously
unknown problems with any approved therapeutic candidate, including adverse events of unanticipated severity or frequency, or with
our third-party manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in, among
other things:
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restrictions on the labeling, distribution, marketing or manufacturing of our future therapeutic
candidates, withdrawal of the product from the market, or product recalls;
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untitled and warning letters, or holds on clinical trials;
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refusal by the FDA, the EMA, the MHRA or other foreign regulatory body to approve pending applications
or supplements to approved applications we filed or suspension or revocation of license approvals;
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requirements to conduct post-marketing studies or clinical trials;
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restrictions on coverage by third-party payors;
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fines, restitution or disgorgement of profits or revenue;
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suspension or withdrawal of marketing approvals;
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product seizure or detention, or refusal to permit the import or export of the product; and
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injunctions or the imposition of civil or criminal penalties.
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In addition, any regulatory approvals that
we receive for our future therapeutic candidates may also be subject to limitations on the approved indicated uses for which the
therapy may be marketed or to the conditions of approval, or contain requirements for potentially costly post-marketing testing,
including Phase IV clinical trials, and surveillance to monitor the safety and efficacy of such therapeutic candidates.
If there are changes in the application
of legislation, regulations or regulatory policies or if we or one of our distributors, licensees or co-marketers fails to comply
with regulatory requirements, the regulators could take various actions. These include imposing fines on us, imposing restrictions
on the therapeutic or its manufacture and requiring us to recall or remove the therapeutic from the market. The regulators could
also suspend or withdraw our marketing authorizations, requiring us to conduct additional clinical trials, change our therapeutic
labeling or submit additional applications for marketing authorization. If any of these events occurs, our ability to sell such
therapy may be impaired, and we may incur substantial additional expense to comply with regulatory requirements, which could materially
adversely affect our business, financial condition and results of operations.
Research and development of drugs
targeting the central nervous system is particularly difficult, which makes it difficult to predict and understand why the drug
has a positive effect on some patients but not others.
Discovery and development of new drugs
targeting central nervous system disorders are particularly difficult and time-consuming, evidenced by the higher failure rate
for new drugs for central nervous system disorders compared with most other areas of drug discovery. For example, in 2019, both
Rapastinel and SAGE-217, two new drugs targeting MDD, failed to meet their primary endpoints in Phase III trials. ALKS 5461, another
new drug targeting MDD, was rejected by FDA in 2019 after its Phase III trials as FDA required additional clinical data to provide
substantial evidence of effectiveness. Any such setbacks in our clinical development could have a material adverse effect on our
business and operating results. In addition, our later stage clinical trials may present challenges related to conducting adequate
and well-controlled clinical trials, including designing an appropriate comparator arm in trials given the potential difficulties
related to maintaining the blinding during the trial or placebo or nocebo effects. Due to the complexity of the human brain and
the central nervous system, it can be difficult to predict and understand why a drug may have a positive effect on some patients
but not others and why some individuals may react to the drug differently from others.
The results of preclinical studies
and early-stage clinical trials of our future therapeutic candidates may not be predictive of the results of later stage clinical
trials. Initial success in our ongoing clinical trials may not be indicative of results obtained when these trials are completed
or in later stage trials.
Therapeutic candidates in later stages
of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through preclinical studies
and initial clinical trials. Furthermore, there can be no assurance that any of our clinical trials will ultimately be successful
or support further clinical development of any of our future therapeutic candidates. There is a high failure rate for drugs proceeding
through clinical trials. A number of companies in the pharmaceutical industry have suffered significant setbacks in clinical development
even after achieving promising results in earlier studies.
We will depend on enrollment of patients
in our clinical trials for our future therapeutic candidates. If we are unable to enroll patients in our clinical trials, our research
and development efforts and business, financial condition and results of operations could be materially adversely affected.
Identifying and qualifying patients to
participate in our clinical trials will be critical to our success. Patient enrollment depends on many factors, including:
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the size of the patient population required for analysis of the trial’s primary endpoints
and the process for identifying patients;
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identifying and enrolling eligible patients, including those willing to discontinue use of their
existing medications;
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the design of the clinical protocol and the patient eligibility and exclusion criteria for the
trial;
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safety profile, to date, of the therapeutic candidate under study;
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the willingness or availability of patients to participate in our trials, including due to the
perceived risks and benefits, stigma or other side effects of use of a controlled substance;
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perceived risks and benefits of our approach to treatment of indication;
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the proximity of patients to clinical sites;
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our ability to recruit clinical trial investigators with the appropriate competencies and experience;
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the availability of competing clinical trials;
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the availability of new drugs approved for the indication the clinical trial is investigating;
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clinicians’ and patients’ perceptions of the potential advantages of the drug being
studied in relation to other available therapies, including any new therapies that may be approved for the indications we are investigating;
and
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our ability to obtain and maintain patient informed consents.
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Even once enrolled, we may be unable to retain a sufficient
number of patients to complete any of our trials.
In addition, any negative results we may
report in clinical trials may make it difficult or impossible to recruit and retain patients in other clinical trials of that same
therapeutic candidate. Delays in the enrollment for any clinical trial will likely increase our costs, slow down the approval process
and delay or potentially jeopardize our ability to commence sales of our future therapeutic candidates and generate revenue. In
addition, some of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately
lead to the denial of regulatory approval of any future therapeutic candidates.
We have never commercialized a therapeutic
candidate before and may lack the necessary expertise, personnel and resources to successfully commercialize our therapies on our
own or with suitable collaborators.
We have limited organizational experience
in the sale or marketing of therapeutic candidates. To achieve commercial success for any approved therapy, we must develop or
acquire a sales and marketing organization, outsource these functions to third parties or enter into partnerships.
If we enter into arrangements with third
parties to perform market access and commercial services for any approved therapies, the revenue or the profitability of these
revenue to us could be lower than if we were to commercialize any therapies that we develop ourselves. Such collaborative arrangements
may place the commercialization of any approved therapies outside of our control and would make us subject to a number of risks
including that we may not be able to control the amount or timing of resources that our collaborative partner devotes to our therapies
or that our collaborator’s willingness or ability to complete its obligations, and our obligations under our arrangements
may be adversely affected by business combinations or significant changes in our collaborator’s business strategy. We may
not be successful in entering into arrangements with third parties to commercialize our therapies or may be unable to do so on
terms that are favorable to us. Acceptable third parties may fail to devote the necessary resources and attention to commercialize
our therapies effectively, to set up sufficient number of treatment centers in third-party therapy sites, or to recruit, train
and retain adequate number of therapists to administer our therapies.
If we do not establish commercial capabilities
successfully, either on our own or in collaboration with third parties, we may not be successful in commercializing our therapies,
which in turn would have a material adverse effect on our business, prospects, financial condition and results of operations.
The future commercial success of
our future therapeutic candidates will depend on the degree of market access and acceptance of our potential therapies among healthcare
professionals, patients, healthcare payors, health technology assessment bodies and the medical community at large.
We may never have a therapy that is commercially
successful. To date, we have no therapy authorized for marketing. Furthermore, if approved, our future therapies may not achieve
an adequate level of acceptance by payors, health technology assessment bodies, healthcare professionals, patients and the medical
community at large, and we may not become profitable. The level of acceptance we ultimately achieve may be affected by negative
public perceptions and historic media coverage of psychedelic substances, including psilocybin. Because of this history, efforts
to educate the medical community and third-party payors and health technologies assessment bodies on the benefits of our future
therapies may require significant resources and may never be successful, which would prevent us from generating significant revenue
or becoming profitable. Market acceptance of our future therapies by healthcare professionals, patients, healthcare payors and
health technology assessment bodies will depend on a number of factors, many of which are beyond our control, including, but not
limited to, the following:
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acceptance by healthcare professionals, patients and healthcare payors of each therapy as safe,
effective and cost-effective;
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changes in the standard of care for the targeted indications for any therapeutic candidate;
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the strength of sales, marketing and distribution support;
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potential product liability claims;
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the therapeutic candidate’s relative convenience, ease of use, ease of administration and
other perceived advantages over alternative therapies;
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the prevalence and severity of adverse events or publicity;
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limitations, precautions or warnings listed in the summary of therapeutic characteristics, patient
information leaflet, package labeling or instructions for use;
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the cost of treatment with our therapy in relation to alternative treatments;
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the ability to manufacture our product in sufficient quantities and yields;
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the availability and amount of coverage and reimbursement from healthcare payors, and the willingness
of patients to pay out of pocket in the absence of healthcare payor coverage or adequate reimbursement;
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the willingness of the target patient population to try, and of healthcare professionals to prescribe,
the therapy;
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any potential unfavorable publicity, including negative publicity associated with recreational
use or abuse of psilocybin;
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the extent to which therapies are approved for inclusion and reimbursed on formularies of hospitals
and managed care organizations; and
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whether our therapies are designated under physician treatment guidelines or under reimbursement
guidelines as a first-line, second-line, third-line or last-line therapy.
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If our future therapeutic candidates fail
to gain market access and acceptance, this will have a material adverse impact on our ability to generate revenue to provide a
satisfactory, or any, return on our investments. Even if some therapies achieve market access and acceptance, the market may prove
not to be large enough to allow us to generate significant revenue.
Changes in methods of therapeutic
candidate manufacturing or formulation may result in additional costs or delay.
As therapeutic candidates
are developed through preclinical studies to late-stage clinical trials towards potential approval and commercialization, it is
common that various aspects of the development program, such as manufacturing methods and formulation, may be altered along the
way in an effort to optimize processes and results. Any of these changes could cause any of our future therapeutic candidates to
perform differently and affect the results of planned clinical trials or other future clinical trials conducted with the materials
manufactured using altered processes. Such changes may also require additional testing, FDA notification or FDA approval. This
could delay completion of clinical trials, require the conduct of bridging clinical trials or the repetition of one or more clinical
trials, increase clinical trial costs, delay approval of any of our future therapeutic candidates and jeopardize our ability to
commence product sales and generate revenue.
We may become exposed to costly and
damaging liability claims, either when testing our future therapeutic candidates in the clinic or at the commercial stage, and
our product liability insurance may not cover all damages from such claims.
We will be exposed
to potential product liability and professional indemnity risks that are inherent in the research, development, manufacturing,
marketing and use of therapeutic substances. Currently, we have no therapies that have been approved for commercial sale; however,
any future therapeutic candidates by us and our corporate collaborators in clinical trials, and the potential sale of any approved
therapies in the future, may expose us to liability claims. These claims might be made by patients who use our therapies, healthcare
providers, pharmaceutical companies, our corporate collaborators or other third parties that sell our therapies. Any claims against
us, regardless of their merit, could be difficult and costly to defend and could materially adversely affect the market for our
future therapeutic candidates or any prospects for commercialization of our future therapeutic candidates. Although the clinical
trial process is designed to identify and assess potential side effects, it is always possible that a drug, even after regulatory
approval, may exhibit unforeseen side effects. If any of our future therapeutic candidates causes adverse side effects during clinical
trials or after regulatory approval, we may be exposed to substantial liabilities.
Physicians and patients
may not comply with warnings that identify known potential adverse effects and describe which patients should not any of our future
therapeutic candidates. Regardless of the merits or eventual outcome, liability claims may cause, among other things, the following:
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decreased demand for our therapies due to negative public perception;
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injury to our reputation;
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withdrawal of clinical trial participants or difficulties in recruiting new trial participants;
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initiation of investigations by regulators;
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costs to defend or settle the related litigation;
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a diversion of management’s time and our resources;
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substantial monetary awards to trial participants or patients;
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recalls, withdrawals or labeling, marketing or promotional restrictions;
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loss of revenue from therapeutic sales; and
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the inability to commercialize any of our future therapeutic candidates, if approved.
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In addition we may
not be able to obtain or maintain insurance coverage at a reasonable cost or obtain insurance coverage that will be adequate to
satisfy any liability that may arise. If a successful product liability claim or series of claims is brought against us for uninsured
liabilities or in excess of insured liabilities, our assets may not be sufficient to cover such claims and our business, financial
condition and results of operations could be materially adversely affected. Liability claims resulting from any of the events described
above could have a material adverse effect on our business, financial condition and results of operations.
Enacted and future legislation may
increase the difficulty and cost for us to obtain marketing approval of and commercialize any of our future therapeutic candidates
and could have a material adverse effect on our business.
In the United States,
the EU and other foreign jurisdictions, there have been a number of legislative and regulatory changes to the healthcare system
that could affect our future results of operations. In particular, there have been and continue to be a number of initiatives at
the U.S. federal and state levels that seek to reduce healthcare costs and improve the quality of healthcare. For example, in March
2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively,
“ACA”), substantially changed the way healthcare is financed by both governmental and private insurers, and significantly
impacted the U.S. biopharmaceutical industry.
Among the provisions
of the ACA of importance to our potential therapeutic candidates are the following:
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an annual, nondeductible fee on any entity that manufactures
or imports specified branded prescription drugs, apportioned among these entities according to their market share in certain government
healthcare programs, although this fee would not apply to sales of certain products approved exclusively for orphan indications;
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expansion of eligibility criteria for Medicaid programs,
a Federal and state program which extends healthcare to low income individuals and other groups, by, among other things, allowing
states to offer Medicaid coverage to certain individuals and adding new eligibility categories for certain individuals with income
at or below 133% of the federal poverty level, thereby potentially increasing a manufacturer’s Medicaid rebate liability;
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expansion of manufacturers’ rebate liability
under the Medicaid Drug Rebate Program, which requires that drug manufacturers provide rebates to states in exchange for state
Medicaid coverage for most of the manufacturers’ drugs by increasing the minimum rebate for both branded and generic drugs
and revising the definition of “average manufacturer price,” for calculating and reporting Medicaid drug rebates on
outpatient prescription drug prices and extending rebate liability to prescriptions for individuals enrolled in Medicare Advantage
plans (i.e., a type of Medicare healthcare plan offered by private companies);
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a new methodology by which rebates owed by manufacturers
under the Medicaid Drug Rebate Program are calculated for products that are inhaled, infused, instilled, implanted or injected;
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expansion of the types of entities eligible for the
340B drug discount program, which requires drug manufacturers to provide outpatient drugs to eligible healthcare organizations
and covered entities at significantly reduced prices;
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establishment of the Medicare Part D coverage gap
discount program, which requires manufacturers to provide a 50% point-of-sale-discount (increased to 70% pursuant to the Bipartisan
Budget Act of 2018, or BBA, effective as of January 1, 2019) off the negotiated price of applicable products to eligible beneficiaries
during their coverage gap period as a condition for the manufacturers’ outpatient products to be covered under Medicare
Part D;
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creation of a new non-profit, nongovernmental institute,
called the Patient-Centered Outcomes Research Institute, to oversee, identify priorities in and conduct comparative clinical effectiveness
research, along with funding for such research; and
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establishment of the Center for Medicare and Medicaid
Innovation within Centers for Medicare & Medicaid to test innovative payment and service delivery models to lower Medicare
and Medicaid spending, potentially including prescription product spending.
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Since its enactment,
there have been numerous judicial, administrative, executive, and legislative challenges to certain aspects of the ACA, and we
expect there will be additional challenges and amendments to the ACA in the future. It is unclear whether the ACA will be overturned,
repealed, replaced, or further amended. We cannot predict what affect further changes to the ACA would have on our business.
In addition, new laws
and additional health reform measures may result in additional reductions in Medicare and other healthcare funding, which may adversely
affect customer demand and affordability for our future therapeutic candidates and, accordingly, the results of our financial operations.
Our business operations and current
and future relationships with investigators, health care professionals, consultants, third-party payors and customers may be subject,
directly or indirectly, to U.S. federal and state healthcare fraud and abuse laws, false claims laws, health information privacy
and security laws, other healthcare laws and regulations and other foreign privacy and security laws. If we are unable to comply,
or have not fully complied, with such laws, we could face substantial penalties.
Although we do not
currently have any therapies on the market, our current and future operations may be directly, or indirectly through our relationships
with investigators, health care professionals, customers and third-party payors, subject to various U.S. federal and state healthcare
laws and regulations, including, without limitation, the U.S. federal Anti-Kickback Statute or the federal Anti-Kickback Statute.
Healthcare providers, physicians and others play a primary role in the recommendation and prescription of any therapies for which
we obtain marketing approval. These laws impact, among other things, our research activities and proposed sales, marketing and
education programs and constrain our business and financial arrangements and relationships with third-party payors, healthcare
professionals who participate in our clinical research program, healthcare professionals and others who recommend, purchase, or
provide our approved therapies, and other parties through which we market, sell and distribute our therapies for which we obtain
marketing approval. In addition, we may be subject to patient data privacy and security regulation by both the U.S. federal government
and the states in which we conduct our business, along with foreign regulators (including European data protection authorities).
Finally, our current and future operations will be subject to additional healthcare-related statutory and regulatory requirements
and enforcement by foreign regulatory authorities in jurisdictions in which we conduct our business. These laws include, but are
not limited to, the following:
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the federal Anti-Kickback Statute, which prohibits, among other things, persons or entities from
knowingly and willfully soliciting, offering, receiving or paying any remuneration (including any kickback, bribe, or certain rebate),
directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward either the referral of an individual for,
or the purchase, lease, order or recommendation of, any good, facility, item or service, for which payment may be made, in whole
or in part, under U.S. federal and state healthcare programs such as Medicare and Medicaid. A person or entity does not need to
have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. Violations are subject
to significant civil and criminal fines and penalties for each violation, plus up to three times the remuneration involved, imprisonment,
and exclusion from government healthcare programs. In addition, the government may assert that a claim that includes items or services
resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the civil
False Claims Act (“FCA”). The definition of the “remuneration” under the federal Anti-Kickback Statute
has been interpreted to include anything of value. Further, courts have found that if “one purpose” of remuneration
is to induce referrals, the federal Anti-Kickback Statute is violated. The Anti-Kickback Statute has been interpreted to apply
to arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers, and formulary managers on the
other. There are a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution;
but the exceptions and safe harbors are drawn narrowly and require strict compliance in order to offer protection;
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the federal civil and criminal false claims laws, such as the FCA, which prohibits individuals
or entities from, among other things, knowingly presenting, or causing to be presented, false or fraudulent claims for payment
to, or approval by Medicare, Medicaid, or other federal healthcare programs, knowingly making, using or causing to be made or used
a false record or statement material to a false or fraudulent claim or an obligation to pay or transmit money to the federal government,
or knowingly concealing or knowingly and improperly avoiding or decreasing or concealing an obligation to pay money to the U.S.
federal government. Manufacturers can be held liable under the FCA even when they do not submit claims directly to government payors
if they are deemed to “cause” the submission of false or fraudulent claims. The FCA also permits a private individual
acting as a “whistleblower” to bring actions on behalf of the federal government alleging violations of the FCA and
to share in any monetary recovery. When an entity is determined to have violated the FCA, the government may impose civil fines
and penalties for each false claim, plus treble damages, and exclude the entity from participation in Medicare, Medicaid and other
federal healthcare programs;
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the federal civil monetary penalties laws, which impose civil fines for, among other things, the
offering or transfer or remuneration to a Medicare or state healthcare program beneficiary if the person knows or should know it
is likely to influence the beneficiary’s selection of a particular provider, practitioner, or supplier of services reimbursable
by Medicare or a state health care program, unless an exception applies;
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the U.S. federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”)
which imposes criminal and civil liability for, among other things, knowingly and willfully executing, or attempting to execute,
a scheme to defraud any healthcare benefit program or obtain, by means of false or fraudulent pretenses, representations, or promises,
any of the money or property owned by, or under the custody or control of, any healthcare benefit program, regardless of the payor
(i.e., public or private), and knowingly and willfully falsifying, concealing or covering up by any trick or device a material
fact or making any materially false statements, in connection with the delivery of, or payment for, healthcare benefits, items
or services relating to healthcare matters. Similar to the federal Anti-Kickback Statute, a person or entity can be found guilty
of violating HIPAA without actual knowledge of the statute or specific intent to violate it;
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HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of
2009 (“HITECH”), and their respective implementing regulations, and as amended again by the Final HIPAA Omnibus Rule,
published in January 2013, which imposes certain obligations, including mandatory contractual terms, with respect to safeguarding
the privacy, security and transmission of individually identifiable health information without appropriate authorization by covered
entities subject to the rule, such as health plans, healthcare clearinghouses and certain healthcare providers, as well as their
business associates that perform certain services involving the use or disclosure of individually identifiable health information.
HITECH also created new tiers of civil monetary penalties, amended HIPAA to make civil and criminal penalties directly applicable
to business associates, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal
courts to enforce the federal HIPAA laws and seek attorneys’ fees and costs associated with pursuing federal civil actions;
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the FDCA, which prohibits, among other things, the adulteration or misbranding of drugs, biologics
and medical devices;
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the U.S. federal legislation commonly referred to as Physician Payments Sunshine Act, and its implementing
regulations, which requires certain manufacturers of drugs, devices, biologics and medical supplies that are reimbursable under
Medicare, Medicaid, or the Children’s Health Insurance Program to report annually to the CMS information related to certain
payments and other transfers of value to physicians (defined to include doctors, dentists, optometrists, podiatrists, and chiropractors)
and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members. Effective
January 1, 2022, these reporting obligations will extend to include transfers of value made during the previous year to certain
non-physician providers such as physician assistants and nurse practitioners; and
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analogous state laws and regulations, including the following: state anti-kickback and false claims
laws, which may be broader in scope than their federal equivalents, and which may apply to our business practices, including research,
distribution, sales and marketing arrangements and claims involving healthcare items or services reimbursed by any third-party
payor, including private insurers; state laws that require pharmaceutical companies to comply with the pharmaceutical industry’s
voluntary compliance guidelines and the relevant compliance guidance promulgated by the U.S. federal government, or otherwise restrict
payments that may be made to healthcare providers and other potential referral sources; state laws and regulations that require
drug manufacturers to file reports relating to pricing and marketing information, which requires tracking gifts and other remuneration
and items of value provided to healthcare professionals and entities; state and local laws that require the registration of pharmaceutical
sales representatives and state laws governing the privacy and security of health information in certain circumstances, many of
which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.
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The distribution of
pharmaceutical products is subject to additional requirements and regulations, including licensing, extensive record-keeping, storage
and security requirements intended to prevent the unauthorized sale of pharmaceutical products.
The scope and enforcement
of each of these laws is uncertain and subject to rapid change in the current environment of healthcare reform, especially in light
of the lack of applicable precedent and regulations. Federal and state enforcement bodies have recently increased their scrutiny
of interactions between healthcare companies and healthcare providers, which has led to a number of investigations, prosecutions,
convictions and settlements in the healthcare industry. Even if precautions are taken, it is possible that governmental authorities
will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable
fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or
any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties,
damages, fines, disgorgement, imprisonment, exclusion of drugs from government funded healthcare programs, such as Medicare and
Medicaid, additional reporting requirements and oversight if we become subject to a corporate integrity agreement or similar agreement
to resolve allegations of non-compliance with these laws, reputational harm and the curtailment or restructuring of our operations.
If any of the physicians or other healthcare providers or entities with whom we expect to do business is found not to be in compliance
with applicable laws, that person or entity may be subject to significant criminal, civil or administrative sanctions, including
exclusions from government funded healthcare programs. Prohibitions or restrictions on sales or withdrawal of future marketed products
could materially affect business in an adverse way.
Efforts to ensure
that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial
costs. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant
legal expenses and divert our management’s attention from the operation of our business. The shifting compliance environment
and the need to build and maintain robust and expandable systems to comply with multiple jurisdictions with different compliance
or reporting requirements increases the possibility that a healthcare company may run afoul of one or more of the requirements.
Failure to comply with health and
data protection laws and regulations could lead to U.S. federal and state government enforcement actions, including civil or criminal
penalties, private litigation, and adverse publicity and could negatively affect our operating results and business.
We and any potential
collaborators may be subject to U.S. federal and state data protection laws and regulations, such as laws and regulations that
address privacy and data security. In the United States, numerous federal and state laws and regulations, including state data
breach notification laws, state health information privacy laws, and federal and state consumer protection laws, govern the collection,
use, disclosure, and protection of health-related and other personal information. In addition, we may obtain health information
from third parties, including research institutions from which we obtain clinical trial data, which are subject to privacy and
security requirements under HIPAA, as amended by HITECH. To the extent that we act as a business associate to a healthcare provider
engaging in electronic transactions, we may also be subject to the privacy and security provisions of HIPAA, as amended by HITECH,
which restricts the use and disclosure of patient-identifiable health information, mandates the adoption of standards relating
to the privacy and security of patient-identifiable health information, and requires the reporting of certain security breaches
to healthcare provider customers with respect to such information. Additionally, many states have enacted similar laws that may
impose more stringent requirements on entities like ours. Depending on the facts and circumstances, we could be subject to significant
civil, criminal, and administrative penalties if we obtain, use, or disclose individually identifiable health information maintained
by a HIPAA-covered entity in a manner that is not authorized or permitted by HIPAA.
Compliance with U.S.
and foreign privacy and data protection laws and regulations could require us to take on more onerous obligations in our contracts,
restrict our ability to collect, use and disclose data, or in some cases, impact our ability to operate in certain jurisdictions.
Failure to comply with these laws and regulations could result in government enforcement actions (which could include civil, criminal
and administrative penalties), private litigation, and/or adverse publicity and could negatively affect our operating results and
business. Moreover, clinical trial subjects, employees and other individuals about whom we or our potential collaborators obtain
personal information, as well as the providers who share this information with us, may limit our ability to collect, use and disclose
the information. Claims that we have violated individuals’ privacy rights, failed to comply with data protection laws, or
breached our contractual obligations, even if we are not found liable, could be expensive and time-consuming to defend and could
result in adverse publicity that could harm our business.
The successful commercialization
of any of our future therapeutic candidates will depend in part on the extent to which governmental authorities and health insurers
establish adequate reimbursement levels and pricing policies. Failure to obtain or maintain adequate coverage and reimbursement
for any of our future therapeutic candidates, if approved, could limit our ability to market those therapies and decrease our ability
to generate revenue.
The availability and
adequacy of coverage and reimbursement by governmental healthcare programs such as Medicare and Medicaid, private health insurers
and other third-party payors are essential for most patients to be able to afford therapies. As Schedule I substances under the
CSA, psilocybin and psilocin are deemed to have no accepted medical use and therapies that use psilocybin or psilocin are precluded
from reimbursement in the United States. Our products must be scheduled as a Schedule II or lower controlled substance (i.e., Schedule
III, IV or V) before they can be commercially marketed. Our ability to achieve acceptable levels of coverage and reimbursement
for therapies by governmental authorities, private health insurers and other organizations will have an effect on our ability to
successfully commercialize, and attract additional collaboration partners to invest in the development of our future therapeutic
candidates. Even if we obtain coverage for a given therapy by third-party payors, the resulting reimbursement payment rates may
not be adequate or may require patient out-of-pocket costs that patients may find unacceptably high. We cannot be sure that coverage
and reimbursement in the United States or elsewhere will be available for any therapy that we may develop, and any reimbursement
that may become available may be decreased or eliminated in the future.
Furthermore, third-party
payors are increasingly challenging prices charged for therapeutic substances and services, and many third-party payors may refuse
to provide coverage and reimbursement for particular drugs when an equivalent generic drug or a less expensive therapy is available.
It is possible that a third-party payor may consider our future therapeutic candidates as substitutable and only offer to reimburse
patients for the less expensive therapy. These payors may deny or revoke the reimbursement status of a given drug product or establish
prices for new or existing marketed therapies at levels that are too low to enable us to realize an appropriate return on our investment
in product development. If reimbursement is not available or is available only at limited levels, we may not be able to successfully
commercialize our future therapeutic candidates, and may not be able to obtain a satisfactory financial return on therapeutic candidates
that we may develop.
There is significant
uncertainty related to the insurance coverage and reimbursement of newly approved therapies. In the United States, third-party
payors, including private and governmental payors, such as the Medicare and Medicaid programs, play an important role in determining
the extent to which new drugs will be covered. The Medicare and Medicaid programs increasingly are used as models for how private
payors and other governmental payors develop their coverage and reimbursement policies for drugs. Some third-party payors may require
pre-approval of coverage for new or innovative devices or drug therapies before they will reimburse health care providers who use
such therapies. It is difficult to predict at this time what third-party payors will decide with respect to the coverage and reimbursement
for our future therapeutic candidates.
Furthermore, obtaining
and maintaining reimbursement status is time-consuming and costly. No uniform policy for coverage and reimbursement for drug therapies
exists among third-party payors in the United States. Therefore, coverage and reimbursement for drug therapies can differ significantly
from payor to payor. As a result, the coverage determination process is often a time-consuming and costly process that will require
us to provide scientific and clinical support for the use of our therapies to each payor separately, with no assurance that coverage
and adequate reimbursement will be applied consistently or obtained in the first instance. Furthermore, rules and regulations regarding
reimbursement change frequently, in some cases at short notice, and we believe that changes in these rules and regulations are
likely.
Outside the United
States, international operations are generally subject to extensive governmental price controls and other market regulations. Other
countries allow companies to fix their own prices for medical therapies, but monitor and control company profits. Additional foreign
price controls or other changes in pricing regulation could restrict the amount that we are able to charge for our future therapeutic
candidates. Accordingly, in markets outside the United States, the reimbursement for our therapies may be reduced compared with
the United States and may be insufficient to generate commercially reasonable revenue and profits.
We will be subject to environmental,
health and safety laws and regulations, and we may become exposed to liability and substantial expenses in connection with environmental
compliance or remediation activities which may adversely affect our business and financial condition.
Our operations, including
our research, development, testing and manufacturing activities, will be subject to numerous foreign, federal, state and local
environmental, health and safety laws and regulations. These laws and regulations govern, among other things, the controlled use,
manufacture, handling, release and disposal of and the maintenance of a registry for, hazardous materials, such as chemical solvents,
human cells, carcinogenic compounds, mutagenic compounds and compounds that have a toxic effect on reproduction, laboratory procedures
and exposure to blood-borne pathogens.
We may incur significant
costs to comply with these current or future environmental and health and safety laws and regulations. Furthermore, if we fail
to comply with such laws and regulations, we could be subject to fines or other sanctions.
Risks Related to our Apparel Business
If we do
not continually enhance our brand recognition, increase distribution of our products, attract new customers and introduce new products,
either on a timely basis or at all, our business may suffer.
The retail industry
is subject to intense competition as well as rapid and frequent changes in consumer demands. Because consumers in this industry
are constantly seeking new products, our success relies heavily on our ability to continue to market new products. We may not be
successful in introducing or marketing new products on a timely basis, if at all. If we are unable to commercialize new products,
our revenue may not grow as expected, which would adversely affect our business, financial condition and results of operations.
Any damage
to our brand or reputation could adversely affect our business, financial condition and results of operations.
We must protect
and grow the value of our brand to continue to be successful in the future. Any incident that erodes consumer affinity for our
brand could significantly reduce our value and damage our business. For example, negative third-party reports regarding our products,
whether accurate or not, may adversely impact consumer perceptions. This negative publicity could adversely affect our brand and
reputation which would have a material adverse effect on our business and financial condition.
If we fail
to protect our name and brand in the marketplace, there could be a negative effect on our business and limitations on our ability
to penetrate new markets.
We believe that
our “NFID” trademarks are integral to our design and our success in building consumer loyalty to our brand. We have
three trademarks registered with the U.S. Patent and Trademark Office, which we believe are important to our business. We cannot
assure you that these registrations will prevent imitation of our name or merchandising concept, or the infringement of our other
intellectual property rights by others. Imitation of our name, concept or merchandise in a manner that projects lesser quality
or carries a negative connotation of our brand image could have an adverse effect on our reputation, business, financial condition
and results of operations.
In addition, there
can be no assurance that others will not try to block the manufacture or sale of our “NFID” branded merchandise by
claiming that our merchandise violates their trademarks or other proprietary rights since other entities may have rights to trademarks
that contain the word “NFID” or may have rights in similar or competing marks for apparel and/or accessories.
If we face litigation
relating to our trademarks, it could result in substantial costs and a diversion of management’s attention and resources,
which could harm our business and result in a decline in the market price of our common stock. In addition, such litigation could
have an adverse effect on our business, financial condition and results of operations.
Our sales
could be severely impacted by decreases in consumer spending.
We depend upon
consumers feeling confident to spend discretionary income on our product offering to drive our sales. Consumer spending may be
adversely impacted by economic conditions such as consumer confidence in future economic conditions, interest and tax rates, employment
levels, salary and wage levels, general business conditions, the availability of consumer credit and the level of housing, energy
and food costs. In addition, consumer spending can be impacted by non-economic factors, including geopolitical issues, trade restrictions,
unseasonable weather, pandemics/epidemics, including the current COVID-19 pandemic, and other factors that are outside of our control.
These risks may be exacerbated for product developers and brands like us who focus on specialty apparel. We have already seen significant
decreases in consumer spending as a result of COVID-19, particularly in our industry, and such trends may continue. If periods
of decreased consumer spending persist, our sales could decrease, and our financial condition and results of operations could be
adversely affected.
We operate
in a highly competitive industry.
The retail industry
is intensely competitive and consolidation in this industry continues. In addition, we compete with independent specialty shops,
department stores, off-price retailers, online marketplaces such as Amazon, stores and direct marketers that sell similar lines
of merchandise and target customers through catalogs and e-commerce. Moreover, the internet and other new technologies facilitate
competitive entry and comparison shopping in our retail market. We face competition in the areas of brand recognition, quality,
price, advertising/promotion and service. A number of our competitors are larger than us and have substantial financial, marketing
and other resources as well as substantial international operations. In addition, reduced barriers to entry and easier access to
funding are creating new competition. Furthermore, in order to protect our existing market share or capture increased market share
in this highly competitive environment, we may be required to increase expenditures for promotions and advertising, and must continue
to introduce and establish new products. Due to inherent risks in the marketplace associated with advertising and new product introductions,
including uncertainties about trade and consumer acceptance, increased expenditures may not prove successful in maintaining or
enhancing our market share and could impact our operating results.
Our business
depends upon us identifying and responding to changing customer fashion preferences and fashion-related trends. If we cannot identify
trends in advance or we select the wrong fashion trends, our sales could be adversely affected.
Fashion trends
in the streetwear apparel market can change rapidly. We need to anticipate, identify and respond quickly to changing trends and
consumer demands in order to provide the merchandise our customers seek and maintain our brand image. If we cannot identify changing
trends in advance, fail to react to changing trends or misjudge the market for a trend, our sales could be adversely affected,
and we may be faced with a substantial amount of unsold inventory or missed opportunities. As a result, we may be forced to mark
down our merchandise in order to dispose of slow moving inventory, which may result in lower profit margins, negatively impacting
our financial condition and results of operations.
Our business operations could be
disrupted if our information technology systems fail to perform adequately.
The efficient operation of our business
depends on our information technology systems. We rely on our information technology systems to effectively manage our business
data, communications, supply chain, order entry and fulfillment and other business processes. The failure of our information technology
systems to perform as we anticipate could disrupt our business and could result in transaction errors, processing inefficiencies,
and the loss of sales and customers, causing our business and results of operations to suffer. In particular, as we grow, we need
to make sure that our information technology systems are upgraded and integrated throughout our business and able to generate reports
sufficient for management to run our business. In addition, our information technology systems may be vulnerable to damage, interruption
or security breaches from circumstances beyond our control, including fire, natural disasters, system failures, cyber-attacks,
corporate espionage and viruses. Any such damage, interruption or security breach could have a material adverse effect on our business.
A rise in the cost of raw materials,
labor and transportation could increase our cost of sales and cause our results of operations and margins to decline.
Fluctuations in the price, availability
and quality of fabrics or other raw materials used to manufacture our products, as well as the price for transportation and labor,
including the impact of federal or state minimum wage rate increases, could have adverse impacts on our cost of sales and our ability
to meet our customers’ demands. In particular, because a key component of our clothing products is cotton, increases in the
cost of cotton may significantly affect the cost of our products and could have an adverse impact on our cost of sales. We may
not be able to pass all or a portion of these higher costs on to our customers, which could have a material adverse effect on our
profitability.
Disruptions
in the worldwide economy may adversely affect our business, financial condition and results of operations.
Adverse and uncertain economic conditions
may impact distributor, retailer and consumer demand for our products. In addition, our ability to manage normal commercial relationships
with our suppliers, distributors, retailers and consumers may suffer. Consumers may shift to purchasing lower-priced products during
economic downturns, making it more difficult for us to sell our premium products. During economic downturns, it may be more difficult
to persuade existing consumers to continue to use our brand or persuade new consumers to select our brand without price promotions.
Furthermore, during economic downturns, distributors and retailers may reduce their inventories of our products. Our results of
operations depend upon, among other things, our ability to maintain and increase sales volume with our existing distributors and
retailers, to attract new consumers and to provide products that appeal to consumers at prices they are willing and able to pay.
Prolonged unfavorable economic conditions may have an adverse effect on our results of operation and financial condition.
Our business
could suffer if we fail to comply with labor laws or if one of our manufacturers fails to use acceptable labor or environmental
practices.
We are subject
to labor laws governing relationships with employees, including minimum wage requirements, overtime, working conditions and citizenship
requirements. Compliance with these laws may lead to increased costs and operational complexity and may increase our exposure to
governmental investigations or litigation.
Our business could suffer if we
need to replace third-party manufacturers and transportation providers.
We do not own or operate any manufacturing
facilities and depend exclusively on independent third parties for the manufacture of our products. We compete with other companies
for the production capacity of our manufacturers. Some of these competitors may place larger orders than we do, and thus may have
an advantage in securing production capacity. If we experience a significant increase in demand, or if an existing manufacturer
of ours must be replaced, we may have to expand our third-party manufacturing capacity. We cannot guarantee that this additional
capacity will be available when required on terms that are acceptable to us.
We also rely upon third-party transportation
providers for our product shipments. Our utilization of these shipping services is subject to various risks, including, but not
limited to, potential labor shortages (stemming from labor disputes, strikes, or otherwise), severe weather, and pandemic diseases,
which could delay the timing of shipments, and increases in wages and fuel prices, which could result in higher transportation
costs. Any delays in the timing of our product shipments or increases in transportation costs could have a material adverse effect
on our business, results of operations, and financial condition.
Risks Relating to Our Intellectual
Property Rights
The failure to obtain or maintain
patents, licensing agreements and other intellectual property could materially impact our ability to compete effectively.
In order for our business to be viable
and to compete effectively, we need to develop and maintain, and we will heavily rely on, a proprietary position with respect to
our intellectual property. However, there are significant risks associated with our actual or proposed intellectual property. The
risks and uncertainties that we face with respect to our rights principally include the following:
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pending patent applications
we have filed or will file may not result in issued patents or may take longer than we expect to result in issued patents;
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we may be subject to
interference proceedings;
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we may be subject to
reexamination proceedings;
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we may be subject to
post grant review proceedings;
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we may be subject to inter
partes review proceedings;
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we may be subject to
derivation proceedings;
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we may be subject to
opposition proceedings in the U.S. or in foreign countries;
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any patents that are
issued or licensed to us may not provide us with any competitive advantages or meaningful protection;
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we may not be able to
develop additional proprietary technologies that are patentable;
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other companies may
challenge patents licensed or issued to us;
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other companies may
have independently developed and patented (or may in the future independently develop and patent) similar or alternative technologies,
or duplicate our technologies;
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other companies may
design around technologies we have licensed or developed;
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enforcement of patents
is complex, uncertain and very expensive and we may not be able to secure, enforce and defend our patents; and
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in the event that we
were to ever seek to enforce our patents in ligation, there is some risk that they could be deemed invalid, not infringed, or
unenforceable.
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the patents of others
may have an adverse effect on our business.
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We cannot be certain that any patents will
be issued as a result of any pending or future applications, or that any patents, once issued, will provide us with adequate protection
from competing products. For example, issued patents may be circumvented or challenged, declared invalid or unenforceable, or narrowed
in scope. In addition, since publication of discoveries in scientific or patent literature often lags behind actual discoveries,
we cannot be certain that we or our licensors were the first to invent or to file patent applications covering them.
It is also possible that others may have
or may obtain issued patents that could prevent us from commercializing our products or require us to obtain licenses requiring
the payment of significant fees or royalties in order to enable us to conduct our business. There is no guarantee that such licenses
will be available based on commercially reasonable terms. As to those patents that we have licensed, our rights depend on maintaining
our obligations to the licensor under the applicable license agreement, and we may be unable to do so.
If we are unable to obtain and maintain
patent protection for our products, or if the scope of the patent protection obtained is not sufficiently broad, competitors could
develop and commercialize products similar or identical to ours, and our ability to successfully commercialize our products could
be impaired.
The patent prosecution process is expensive
and time-consuming, and we may not be able to file and prosecute all necessary or desirable patent applications at a reasonable
cost, in a timely manner, or in all jurisdictions. It is also possible that we will fail to identify patentable aspects of our
development output before it is too late to obtain patent protection.
The patent position of life science companies
generally is highly uncertain, involves complex legal and factual questions and has in past years been the subject of much litigation.
In addition, the laws of foreign countries may not protect our rights to the same extent as the laws of the United States and we
may fail to seek or obtain patent protection in all major markets. For example, unlike the U.S., European patent law restricts
the patentability of methods of treatment of the human body. Our pending and future patent applications may not result in patents
being issued which protect our technology or products, in whole or in part, or which effectively prevent others from commercializing
competitive technologies and products. Changes in either the patent laws or interpretation of the patent laws in the United States
and other countries may diminish the value of our patents or narrow the scope of our patent protection, even post-grant.
Recent patent reform legislation has increased
the uncertainties and costs surrounding the prosecution of patent applications and the enforcement or defense of issued patents.
On September 16, 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes
a number of significant changes to United States patent law. These include provisions that affect the way patent applications are
prosecuted and may also affect patent litigation. The U.S. Patent and Trademark Office (“USPTO”) recently developed
new regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law
associated with the Leahy-Smith Act, and in particular, the first to file provisions, only became effective on March 16, 2013.
Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. However, the
Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications
and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial
condition.
Moreover, we may be subject to a third-party
pre-issuance submission of prior art to the USPTO, or become involved in opposition, derivation, reexamination, inter partes review,
post-grant review or interference proceedings challenging our patent rights (whether licensed or otherwise held) or the patent
rights of others. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate,
our patent rights (whether licensed or otherwise held), allow third parties to commercialize our products and compete directly
with us, without payment to us, or result in our inability to manufacture or commercialize products without infringing third-party
patent rights. In addition, if the breadth or strength of protection provided by our patents and patent applications (whether licensed
or otherwise held) is threatened, it could dissuade companies from collaborating with us to license, develop or commercialize current
or future product candidates.
Even if our patent applications (whether
licensed or otherwise held) result in the issuance of patents, they may not issue in a form that will provide us with any meaningful
protection, prevent competitors from competing with us or otherwise provide us with any competitive advantage. Our competitors
may be able to circumvent our owned or licensed patents by developing similar or alternative technologies or products in a non-infringing
manner.
The issuance of a patent is not conclusive
as to its inventorship, scope, validity or enforceability, and our licensed or owned patents may be challenged in the courts or
patent offices in the United States and abroad. Such challenges may result in loss of exclusivity or freedom to operate or in patent
claims being narrowed, invalidated or held unenforceable, in whole or in part, which could limit our ability to stop others from
using or commercializing similar or identical products, or limit the duration of the patent protection of our products. Given the
amount of time required for the development, testing and regulatory review of new life science product candidates, patents protecting
such candidates might expire before or shortly after such candidates are commercialized. As a result, our intellectual property
rights portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical
to ours.
We may become involved in lawsuits
to protect or enforce our intellectual property rights, which could be expensive, time-consuming and ultimately unsuccessful.
Competitors may infringe our intellectual
property. To counter infringement or unauthorized use, we may be required to sue a third party, or otherwise make a claim, alleging
infringement or other violation of patents, trademarks, trade dress, copyrights, trade secrets, domain names or other intellectual
property rights that we either own or license from a third party. If we do not prevail in enforcing our intellectual property rights
in this type of litigation, we may be subject to:
|
●
|
paying monetary damages
related to the legal expenses of the third party;
|
|
●
|
facing additional competition
that may have a significant adverse effect on our product pricing, market share, business operations, financial condition, and
the commercial viability of our product; and
|
|
●
|
restructuring our Company
or delaying or terminating select business opportunities, including, but not limited to, research and development, clinical trial,
and commercialization activities, due to a potential deterioration of our financial condition or market competitiveness.
|
Any claims we assert against perceived
infringers could provoke these parties to assert counterclaims against us alleging that we infringe their intellectual property
or that our intellectual property is invalid or unenforceable. The result of these challenges may narrow the scope or claims of
or invalidate or found unenforceable patents that are integral to our product or product candidate. In addition, in a patent infringement
proceeding, a court may decide that a licensed or owned patent of ours is invalid or unenforceable, in whole or in part, construe
the patent’s claims narrowly or refuse to stop the other party from using the technology at issue on the grounds that our
patents do not cover that technology. Moreover, lawsuits to protect or enforce our intellectual property rights could be expensive,
time-consuming and ultimately unsuccessful.
Third parties may initiate legal
proceedings alleging that we are infringing their intellectual property rights, the outcome of which would be uncertain.
Our commercial success depends upon our
ability to develop, manufacture, market and sell our product candidates without infringing the proprietary rights of third parties.
There is considerable intellectual property litigation in the life sciences industry. We cannot guarantee that our product candidates
will not infringe third-party patents or other proprietary rights. We may become party to, or threatened with, future adversarial
proceedings or litigation regarding intellectual property rights with respect to our products and technology, including inter
partes review, interference, or derivation proceedings before the USPTO and similar bodies in other countries. Third parties
may assert infringement claims against us based on existing intellectual property rights and intellectual property rights that
may be granted in the future.
If we are found to infringe a third party’s
intellectual property rights, we could be required to obtain a license from such third party to continue developing and marketing
our products. However, we may not be able to obtain any required license on commercially reasonable terms or at all. Even if we
were able to obtain a license, it could be non-exclusive, thereby giving our competitors access to the same technologies licensed
to us. We could be forced, including by court order, to cease commercializing the infringing technology or product. In addition,
we could be found liable for monetary damages, including treble damages and attorneys’ fees if we are found to have willfully
infringed a patent. A finding of infringement could prevent us from commercializing our product candidates or force us to cease
some of our business operations, which could materially harm our business. Claims that we have misappropriated the confidential
information or trade secrets of third parties could have a similar negative impact on our business.
Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment
and other requirements imposed by governmental patent agencies, and our own patent protection could be reduced or eliminated for
noncompliance with these requirements.
Periodic maintenance fees and annuities
on any issued patent are due to be paid to the USPTO and foreign patent agencies in several stages over the lifetime of the patent.
The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment
and other similar provisions during the patent application process. While an inadvertent lapse can in many cases be cured by payment
of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result
in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant
jurisdiction. Noncompliance events that could result in abandonment or lapse of a patent or patent application include, but are
not limited to, failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly
legalize and submit formal documents. In such an event, our competitors might be able to enter our markets, which could have a
material adverse effect on our business.
We may be subject to claims by third
parties asserting that our employees or we have misappropriated their intellectual property or claiming ownership of what we regard
as our own intellectual property.
We may retain employees and contractors
that were previously employed at universities or other companies, including potential competitors. Although we will try to ensure
that our employees and contractors do not use the proprietary information or know-how of others in their work for us, we may be
subject to claims that these employees or we have used or disclosed intellectual property, including trade secrets or other proprietary
information, of any such employee’s former employer. Litigation may be necessary to defend against these claims, and any
such litigation could have an unfavorable outcome.
In addition, while it is our policy to
require our employees and contractors who may be involved in the development of intellectual property to execute agreements assigning
such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who in fact develops intellectual
property that we regard as our own. Our and their assignment agreements may not be self-executing or may be breached, and we may
be forced to bring claims against third parties, or defend claims they may bring against us, to determine the ownership of what
we regard as our intellectual property.
If we fail in prosecuting or defending
any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if
we are successful in prosecuting or defending against such claims, litigation could result in substantial costs and adverse results,
and be a distraction to management.
If we fail to comply with our obligations
in the agreements under which we may license intellectual property rights from third parties or otherwise experience disruptions
to our business relationships with our licensors, we could lose rights that are important to our business.
We have licensed and may be required to
enter into intellectual property license agreements that are important to our business. These license agreements may impose various
diligence, milestone payment, royalty and other obligations on us. For example, we may enter into exclusive license agreements
with various universities and research institutions, we may be required to use commercially reasonable efforts to engage in various
development and commercialization activities with respect to licensed products, and may need to satisfy specified milestone and
royalty payment obligations. If we fail to comply with any obligations under our agreements with any of these licensors, we may
be subject to termination of the license agreement in whole or in part, increased financial obligations to our licensors or loss
of exclusivity in a particular field or territory, in which case our ability to develop or commercialize products covered by the
license agreement will be impaired.
In addition, disputes may arise regarding
intellectual property subject to a license agreement, including:
|
●
|
the scope of rights
granted under the license agreement and other interpretation-related issues;
|
|
●
|
the extent to which
our processes infringe on intellectual property of the licensor that is not subject to the licensing agreement;
|
|
●
|
our diligence obligations
under the license agreement and what activities satisfy those obligations;
|
|
●
|
if a third-party expresses
interest in an area under a license that we are not pursuing, under the terms of certain of our license agreements, we may be
required to sublicense rights in that area to a third party, and that sublicense could harm our business; and
|
|
●
|
the ownership of inventions
and know-how resulting from the joint creation or use of intellectual property by our licensors and us.
|
Disputes over intellectual property that
we have licensed may prevent or impair our ability to maintain our current licensing arrangements on acceptable terms, and we may
be unable to successfully develop and commercialize our product candidate.
Intellectual property litigation
could cause us to spend substantial resources and distract our personnel from their normal responsibilities.
Even if resolved in our favor, litigation
or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses and could distract
our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of
the results of hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive
these results to be negative, it could have an adverse effect on the price of our common stock. Such litigation or proceedings
could increase our operating losses and reduce the resources available for development activities or any future sales, marketing
or distribution activities. We may not have sufficient financial or other resources to conduct such litigation or proceedings adequately.
Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because
of their greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other
proceedings could compromise our ability to compete in the marketplace.
We may spend considerable resources
developing and maintaining patents, licensing agreements and other intellectual property that may later be abandoned or may otherwise
never result in products brought to market.
Not all technologies and candidate products
that initially show potential as the basis for future products will ultimately meet the rigors of our development process and as
a result may be abandoned and/or never otherwise result in products brought to market. In some cases, prior to abandonment
we may be required to incur significant costs developing and maintaining intellectual property and/or maintaining license agreements
and our business could be harmed by such costs.
If we are not able to adequately
prevent disclosure of trade secrets and other proprietary information, the value of our technology and product could be significantly
diminished.
We rely on trade secrets to protect our
proprietary technologies, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets
are difficult to protect. We rely in part on confidentiality agreements with our employees, consultants, outside scientific collaborators,
sponsored researchers and other advisors to protect our trade secrets and other proprietary information. These agreements may not
effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized
disclosure of confidential information. In addition, others may independently discover our trade secrets and proprietary information.
For example, the FDA, as part of its transparency initiative, is currently considering whether to make additional information publicly
available on a routine basis, including information that we may consider to be trade secrets or other proprietary information,
and it is not clear at the present time how the FDA’s disclosure policies may change in the future, if at all. Costly and
time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to
obtain or maintain trade secret protection could adversely affect our competitive business position.
We rely on information technology,
and if we are unable to protect against service interruptions, data corruption, cyber-based attacks or network security breaches,
our operations could be disrupted, and our business could be negatively affected.
We rely on information technology networks
and systems to process, transmit and store electronic and financial information; to coordinate our business; and to communicate
within our Company and with customers, suppliers, partners and other third-parties. These information technology systems may be
susceptible to damage, disruptions or shutdowns, hardware or software failures, power outages, computer viruses, cyber-attacks,
telecommunication failures, user errors or catastrophic events. If our information technology systems suffer severe damage, disruption
or shutdown, and our business continuity plans do not effectively resolve the issues in a timely manner, our operations could
be disrupted, and our business could be negatively affected. In addition, cyber-attacks could lead to potential unauthorized access
and disclosure of confidential information, and data loss and corruption. There is no assurance that we will not experience these
service interruptions or cyber-attacks in the future.
Other Risks Related to Our Business
We may not be successful in hiring
and retaining key employees, including executive officers.
Our success materially depends upon the
expertise, experience and continued service of our management and other key personnel, including, but not limited to, Eric Weisblum,
our Chief Executive Officer. If we lose the services of Mr. Weisblum or any of other member of management, our business would be
materially and adversely affected.
Our future success also depends upon our
ability to attract and retain highly qualified management personnel and other employees. There can be no assurance that these professionals
will be available in the market, or that we will be able to retain existing professionals or to meet or to continue to meet their
compensation requirements. Furthermore, the cost base in relation to such compensation, which may include equity compensation,
may increase significantly, which could have a material adverse effect on us. Failure to establish and maintain an effective management
team and work force could adversely affect our ability to operate, grow and manage our business.
Unfavorable global economic, business
or political conditions could adversely affect our business, financial condition or results of operations.
Our results of operations could be adversely
affected by general conditions in the global economy and in the global financial markets, including conditions that are outside
of our control, including the impact of health and safety concerns, such as those relating to the current COVID-19 outbreak. The
most recent global financial crisis caused extreme volatility and disruptions in the capital and credit markets. A severe or prolonged
economic downturn could result in a variety of risks to our business, including weakened demand for our products and our ability
to raise additional capital when needed on acceptable terms, if at all. A weak or declining economy could strain our domestic and
international customers, possibly resulting in delays in customer payments. Any of the foregoing could harm our business and we
cannot anticipate all the ways in which the current economic climate and financial market conditions could adversely impact our
business.
Risks Relating to Our Securities
Our Certificate of Incorporation
grants our board of directors, without any action or approval by our stockholders, the power to designate and issue preferred stock
with rights, preferences and privileges that may be adverse to the rights of the holders of our common stock.
The total number of preferred stock that
we are authorized to issue is 5,000,000 shares of which 1,000,000 shares have been designated as Series A Preferred Stock, none of
which are issued and outstanding as of February 12, 2021; 2,000 shares have been designated as Series B Preferred Stock, none of
which are issued and outstanding as of February 12, 2021 and 4,280 shares have been designated as Series C Preferred Stock, of
which 4,276 shares are issued and outstanding as of February 12, 2021. Pursuant to authority granted by our Certificate of Incorporation,
our board of directors, without any action or approval by our stockholders, may issue preferred stock in one or more series,
the terms of which may be determined at the time of issuance by our board of directors without further action by stockholders.
The terms of any series of preferred stock may include voting rights (including the right to vote as a series on particular matters),
preferences as to dividend, liquidation, conversion and redemption rights and sinking fund provisions. The rights of holders
of other classes or series of capital stock, including preferred stock that may be issued could be superior to the rights of the
holders of shares of our common stock. The designation and issuance of shares of capital stock having preferential rights could
materially adversely affect the rights of the holders of our common stock. In addition, any issuances of additional
capital stock (common or preferred) will dilute the percentage of ownership interest of our stockholders.
Our common stock is subject to the
“penny stock” rules of the SEC and the trading market in the securities is limited, which makes transactions in the
stock cumbersome and may reduce the value of an investment in the stock.
Rule 15g-9 under the Exchange Act establishes
the definition of a “penny stock,” for the purposes relevant to us, as any equity security that has a market price
of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction
involving a penny stock, unless exempt, the rules require: (a) that a broker or dealer approve a person’s account for transactions
in penny stocks; and (b) the broker or dealer receive from the investor a written agreement to the transaction, setting forth the
identity and quantity of the penny stock to be purchased.
In order to approve a person’s account
for transactions in penny stocks, the broker or dealer must: (a) obtain financial information and investment experience objectives
of the person and (b) make a reasonable determination that the transactions in penny stocks are suitable for that person and the
person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny
stocks.
The broker or dealer must also deliver,
prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which,
in highlight form: (a) sets forth the basis on which the broker or dealer made the suitability determination; and (b) confirms
that the broker or dealer received a signed, written agreement from the investor prior to the transaction. Generally, brokers may
be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult
for investors to dispose of our common stock and cause a decline in the market value of our common stock.
Disclosure also has to be made about the
risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both
the broker or dealer and the registered representative, current quotations for the securities and the rights and remedies available
to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price
information for the penny stock held in the account and information on the limited market in penny stocks.
We have never paid cash dividends
and have no plans to pay cash dividends in the future.
Holders of shares of our common stock are
entitled to receive such dividends as may be declared by our board of directors. To date, we have paid no cash dividends on our
capital stock and we do not expect to pay cash dividends in the foreseeable future. We intend to retain future earnings, if any,
to provide funds for operations of our business. Therefore, any return investors in our capital stock may have will be in the form
of appreciation, if any, in the market value of their shares of common stock.
If we fail to remain current in our
reporting requirements, we could be removed from the OTCQB which would limit the ability of broker-dealers to sell our securities
and the ability of stockholders to sell their securities in the secondary market.
As a company listed
on the OTCQB and subject to the reporting requirements of the Exchange Act, we must be current with our filings pursuant to Section
13 or 15(d) of the Exchange Act in order to maintain price quotation privileges on the OTCQB. If we fail to remain current in our
reporting requirements, we could be removed from the OTCQB. As a result, the market liquidity of our securities could be severely
adversely affected by limiting the ability of broker-dealers to trade our securities and the ability of stockholders to sell their
securities in the secondary market.
Our common
stock could be subject to extreme volatility.
The trading price of our common stock may
be affected by a number of factors, including events described in the risk factors set forth herein and in our other reports filed
with the SEC from time to time, as well as our operating results, financial condition and other events or factors. In addition
to the uncertainties relating to future operating performance and the profitability of operations, factors such as variations in
interim financial results or various, and unpredictable, factors, many of which are beyond our control, may have a negative effect
on the market price of our common stock. In recent years, broad stock market indices, in general, and smaller capitalization companies,
in particular, have experienced substantial price fluctuations. In a volatile market, we may experience wide fluctuations in the
market price of our common stock and wide bid-ask spreads. These fluctuations may have a negative effect on the market price of
our common stock. In addition, the securities market has, from time to time, experienced significant price and volume fluctuations
that are not related to the operating performance of particular companies. These market fluctuations may have a material adverse
effect the market price of our common stock.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking
statements that involve risks and uncertainties. You should not place undue reliance on these forward-looking statements. All statements
other than statements of historical facts contained in this prospectus are forward-looking statements. The forward-looking statements
in this prospectus are only predictions. We have based these forward-looking statements largely on our current expectations and
projections about future events and financial trends that we believe may affect our business, financial condition and results of
operations. In some cases, you can identify these forward-looking statements by terms such as “anticipate,” “believe,”
“continue,” “could,” “depends,” “estimate,” “expects,” “intend,”
“may,” “ongoing,” “plan,” “potential,” “predict,” “project,”
“should,” “will,” “would” or the negative of those terms or other similar expressions, although
not all forward-looking statements contain those words. We have based these forward-looking statements on our current expectations
and projections about future events and trends that we believe may affect our financial condition, results of operations, strategy,
short-term and long-term business operations and objectives and financial needs.
These forward-looking statements are subject
to a number of risks, uncertainties and assumptions, including those described in “Risk Factors.” Moreover, we operate
in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management
to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination
of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In
light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this prospectus
may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking
statements.
You should not rely upon forward-looking
statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements
are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected
in the forward-looking statements will be achieved or occur. Moreover, except as required by law, neither we nor any other person
assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update
publicly any forward-looking statements for any reason after the date of this prospectus to conform these statements to actual
results or to changes in our expectations.
You should read this prospectus and the
documents that we reference in this prospectus and have filed with the SEC as exhibits to the registration statement of which this
prospectus is a part with the understanding that our actual future results, levels of activity, performance and events and circumstances
may be materially different from what we expect.
INDUSTRY AND MARKET DATA
This prospectus contains estimates and
other statistical data made by independent parties and by us relating to market size and growth and other data about our industry.
We obtained the industry and market data in this prospectus from our own research as well as from industry and general publications,
surveys and studies conducted by third parties. This data involves a number of assumptions and limitations and contains projections
and estimates of the future performance of the industries in which we operate that are subject to a high degree of uncertainty,
including those discussed in “Risk Factors.” We caution you not to give undue weight to such projections, assumptions
and estimates. Further, industry and general publications, studies and surveys generally state that they have been obtained from
sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe
that these publications, studies and surveys are reliable, we have not independently verified the data contained in them. In addition,
while we believe that the results and estimates from our internal research are reliable, such results and estimates have not been
verified by any independent source.
USE OF PROCEEDS
The selling stockholders will receive all
of the proceeds from the sale of the Resale Shares offered by them pursuant to this prospectus. We will not receive any proceeds
from the sale of the Resale Shares by the selling stockholders covered by this prospectus. If the warrants are exercised for cash,
we will use the proceeds for working capital.
MARKET FOR OUR COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Market Information
Our common stock is quoted on the OTCQB
under the symbol “SILO.”
Stockholders
As of February 12, 2021, there were 122
stockholders of record of our common stock. The actual number of holders of our common stock is greater than this number of record
holders, and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers or held by other
nominees.
Securities Authorized for Issuance Under Equity Compensation
Plans
As of December 31, 2020, we did not have any equity compensation
plans in effect.
DIVIDEND POLICY
We have never declared or paid any cash
dividends on our capital stock. We intend to retain future earnings, if any, to finance the operation and expansion of our business
and do not anticipate paying any cash dividends in the foreseeable future. Any future determination related to our dividend policy
will be made at the discretion of our board of directors after considering our financial condition, results of operations, capital
requirements, business prospects and other factors our board of directors deems relevant.
SELLING STOCKHOLDERS
On February 9, 2021, we entered into the
Purchase Agreements with the Investors for the sale of an aggregate of 4,276 shares of our newly designated Series C Preferred
Stock and Warrants to purchase up to 14,253,323 shares of our common stock for gross proceeds of approximately $4,276,000, before
deducting placement agent and other offering expenses. The Series C Preferred Stock are initially convertible into an aggregate
of 14,253,323 shares of our common stock. The closing of the offering occurred on February 12, 2021.
This prospectus relates to the resale from
time to time by the selling security holders identified herein of up to an aggregate of 28,506,646 Resale Shares consisting of
14,253,323 Warrant Shares and 14,253,323 Conversion Shares.
The transactions by which the selling stockholders
acquired their securities from us were exempt under the registration provisions of the Securities Act.
The Resale Shares are being registered
to permit public sales of such securities, and the selling stockholders may offer the Resale Shares for resale from time to time
pursuant to this prospectus. The selling stockholders may also sell, transfer or otherwise dispose of all or a portion of their
Resale Shares in transactions exempt from the registration requirements of the Securities Act or pursuant to another effective
registration statement covering the sale of such securities.
The following table sets forth, based on
information provided to us by the selling stockholders or known to us, the names of the selling stockholders, the nature of any
position, office or other material relationship, if any, which the selling stockholders have had, within the past three years,
with us or with any of our predecessors or affiliates, and the number of shares of our common stock beneficially owned by the selling
stockholders before and after this offering. The number of shares owned are those beneficially owned, as determined under the rules
of the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under these rules,
beneficial ownership includes any shares of common stock as to which a person has sole or shared voting power or investment power
and any shares of common stock that the person has the right to acquire within 60 days of February 12, 2021 through the exercise
of any option, warrant or right, through conversion of any security or pursuant to the automatic termination of a power of attorney
or revocation of a trust, discretionary account or similar arrangement. Except as otherwise set forth herein, none of the selling
stockholders are a broker-dealer or an affiliate of a broker-dealer.
Pursuant
to the terms of the Certificate of Designation of Preferences, Rights and Limitations of Series C Convertible Preferred Stock and
the Warrants, a selling stockholder may not convert the Series C Preferred Stock
or exercise the Warrants to the extent such conversion or exercise would cause such selling stockholder, together with its affiliates
and attribution parties, to beneficially own a number of shares of common stock which would exceed 4.99% (or at the election of
certain selling stockholders, 9.99%) of our then outstanding common stock following such conversion or exercise, excluding for
purposes of such determination shares of common stock issuable upon conversion of the Series C Preferred Stock or exercise of the
Warrants which have not been converted or exercised. The number of shares in the second and fourth columns do not reflect these
limitations, but the percentages in the fifth columns do give effect to these limitations.
Except as otherwise noted below, the address
for each person or entity listed in the table is c/o Silo Pharma, Inc., 560 Sylvan Avenue, Suite 3160, Englewood Cliffs, NJ 07632.
|
|
Number of Shares of
|
|
|
Common Stock
|
|
|
Beneficial Ownership
|
|
|
|
Common
|
|
|
Saleable
|
|
|
of Common Stock
|
|
|
|
Stock Prior
|
|
|
Pursuant
|
|
|
After the Offering (1)
|
|
|
|
to the
|
|
|
to This
|
|
|
Number of
|
|
|
Percent of
|
|
Name of Selling Stockholder
|
|
Offering
|
|
|
Prospectus
|
|
|
Shares
|
|
|
Class (2)
|
|
Gil Bensasson
|
|
|
166,666
|
|
|
|
166,666
|
(3)
|
|
|
0
|
|
|
|
0
|
%
|
Andrew Dits
|
|
|
133,332
|
|
|
|
133,332
|
(4)
|
|
|
0
|
|
|
|
0
|
%
|
David & Lisa Dvorin, JTWROS
|
|
|
166,666
|
|
|
|
166,666
|
(5)
|
|
|
0
|
|
|
|
0
|
%
|
FirstFire Global Opportunities Fund LLC (6)
|
|
|
800,000
|
|
|
|
800,000
|
(7)
|
|
|
0
|
|
|
|
0
|
%
|
FMO of Boca Raton Inc (8)
|
|
|
66,666
|
|
|
|
66,666
|
(9)
|
|
|
0
|
|
|
|
0
|
%
|
Craig Friou
|
|
|
166,666
|
|
|
|
166,666
|
(10)
|
|
|
0
|
|
|
|
0
|
%
|
Daniel W. and Allaire Hummel, JTWROS
|
|
|
825,000
|
(11)
|
|
|
200,000
|
(12)
|
|
|
625,000
|
|
|
|
*
|
|
Jesse Janssen (13)
|
|
|
119,416
|
(14)
|
|
|
66,666
|
(15)
|
|
|
52,750
|
|
|
|
*
|
|
Morgan Janssen (16)
|
|
|
254,166
|
(17)
|
|
|
166,666
|
(18)
|
|
|
87,500
|
|
|
|
*
|
|
Christian Olav Kirsebom
|
|
|
166,666
|
|
|
|
166,666
|
(19)
|
|
|
0
|
|
|
|
0
|
%
|
Samuel Koplowitz
|
|
|
263,332
|
(20)
|
|
|
233,332
|
(21)
|
|
|
30,000
|
|
|
|
*
|
|
Lee J. Seidler Revocable Trust dtd 4.12.1990 (22)
|
|
|
666,666
|
|
|
|
666,666
|
(23)
|
|
|
0
|
|
|
|
0
|
%
|
Matt Lopatin
|
|
|
387,520
|
(24)
|
|
|
200,000
|
(25)
|
|
|
187,520
|
|
|
|
*
|
|
Michael J. Mathieu
|
|
|
266,666
|
|
|
|
266,666
|
(26)
|
|
|
0
|
|
|
|
0
|
%
|
Robert G. Maxon
|
|
|
140,000
|
|
|
|
140,000
|
(27)
|
|
|
0
|
|
|
|
0
|
%
|
John Gregory O’Brien
|
|
|
300,000
|
|
|
|
300,000
|
(28)
|
|
|
0
|
|
|
|
0
|
%
|
Peter Ohler
|
|
|
1,137,500
|
(29)
|
|
|
200,000
|
(30)
|
|
|
937,500
|
|
|
|
1.10
|
%
|
Quick Capital, LLC (31)
|
|
|
166,666
|
|
|
|
166,666
|
(32)
|
|
|
0
|
|
|
|
0
|
%
|
Stephen A. Renaud (33)
|
|
|
718,417
|
(34)
|
|
|
400,000
|
(35)
|
|
|
318,417
|
|
|
|
*
|
|
Erick E. Richardson
|
|
|
200,000
|
|
|
|
200,000
|
(36)
|
|
|
0
|
|
|
|
0
|
%
|
Dennis Saadeh
|
|
|
166,666
|
|
|
|
166,666
|
(37)
|
|
|
0
|
|
|
|
0
|
%
|
Amedeo Dino Sgueglia
|
|
|
166,666
|
|
|
|
166,666
|
(38)
|
|
|
0
|
|
|
|
0
|
%
|
Michael A. Silverman (39)
|
|
|
1,586,666
|
(40)
|
|
|
766,666
|
(41)
|
|
|
820,000
|
|
|
|
*
|
|
Tony Sinishtaj
|
|
|
200,000
|
|
|
|
200,000
|
(42)
|
|
|
0
|
|
|
|
0
|
%
|
Casimir S. Skrypczak
|
|
|
200,000
|
|
|
|
200,000
|
(43)
|
|
|
0
|
|
|
|
0
|
%
|
James K. Sternlicht
|
|
|
133,332
|
|
|
|
133,332
|
(44)
|
|
|
0
|
|
|
|
0
|
%
|
William Sykes
|
|
|
333,332
|
|
|
|
333,332
|
(45)
|
|
|
0
|
|
|
|
0
|
%
|
The Chitayat Family Gift Trust dtd 12.19.2003 (46)
|
|
|
166,666
|
|
|
|
166,666
|
(47)
|
|
|
0
|
|
|
|
0
|
%
|
The Konfida Trust dtd 05.01.15 (48)
|
|
|
1,000,000
|
|
|
|
1,000,000
|
(49)
|
|
|
0
|
|
|
|
0
|
%
|
John V. Wagner, Jr.
|
|
|
450,000
|
(50)
|
|
|
200,000
|
(51)
|
|
|
250,000
|
|
|
|
*
|
|
Lonnie Williams
|
|
|
100,000
|
|
|
|
100,000
|
(52)
|
|
|
0
|
|
|
|
0
|
%
|
Joel Yanowitz
|
|
|
200,000
|
|
|
|
200,000
|
(53)
|
|
|
0
|
|
|
|
0
|
%
|
Thomas Zahavi
|
|
|
1,233,332
|
(54)
|
|
|
333,332
|
(55)
|
|
|
900,000
|
|
|
|
1.06
|
%
|
Linda Mackay (56)
|
|
|
200,000
|
|
|
|
200,000
|
(57)
|
|
|
0
|
|
|
|
0
|
%
|
Michael Scrobe (58)
|
|
|
200,000
|
|
|
|
200,000
|
(59)
|
|
|
0
|
|
|
|
0
|
%
|
The Special Equities Opportunity Fund, LLC (60)
|
|
|
7,000,000
|
(61)
|
|
|
4,750,000
|
(62)
|
|
|
2,250,000
|
|
|
|
2.64
|
%
|
32 Entertainment LLC (63)
|
|
|
2,666,666
|
(64)
|
|
|
1,666,666
|
(65)
|
|
|
1,000,000
|
|
|
|
1.17
|
%
|
Timothy Tyler Berry (66)
|
|
|
800,000
|
(67)
|
|
|
300,000
|
(68)
|
|
|
500,000
|
|
|
|
*
|
|
Gregory Castaldo
|
|
|
2,375,000
|
(69)
|
|
|
1,750,000
|
(70)
|
|
|
625,000
|
|
|
|
*
|
|
Richard Molinsky
|
|
|
400,000
|
|
|
|
400,000
|
(71)
|
|
|
0
|
|
|
|
0
|
%
|
Slee 3 Consulting, Inc. (72)
|
|
|
200,000
|
|
|
|
200,000
|
(73)
|
|
|
0
|
|
|
|
0
|
%
|
Iroquois Capital Investment Group LLC (74)
|
|
|
2,479,166
|
(75)
|
|
|
2,166,666
|
(76)
|
|
|
312,500
|
|
|
|
*
|
|
Iroquois Master Fund Ltd. (77)
|
|
|
2,104,166
|
(78)
|
|
|
1,166,666
|
(79)
|
|
|
937,500
|
|
|
|
*
|
|
Empery Asset Master, LTD (80)
|
|
|
4,754,070
|
(81)
|
|
|
3,946,666
|
(82)
|
|
|
807,404
|
|
|
|
*
|
|
Empery Tax Efficient, LP (83)
|
|
|
1,371,324
|
(84)
|
|
|
1,093,332
|
(85)
|
|
|
277,992
|
|
|
|
*
|
|
Empery Tax Efficient III, LP (86)
|
|
|
2,811,770
|
(87)
|
|
|
1,626,666
|
(88)
|
|
|
1,185,104
|
|
|
|
1.39
|
%
|
Pauline M. Howard Trust DTD 01/02/98 Candy D’Azevedo Trust (89)
|
|
|
512,500
|
(90)
|
|
|
200,000
|
(91)
|
|
|
312,500
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
|
|
|
|
|
28,506,646
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Assumes that all of the Resale Shares held by the selling stockholders covered by this
prospectus are sold and that the selling stockholders acquire no additional shares of common stock before the completion of
this offering. However, as the selling stockholders can offer all, some, or none of their Resale Shares, no definitive
estimate can be given as to the number of Resale Shares that the selling stockholders will ultimately offer or sell under
this prospectus or the Resale Shares that will be held by the selling stockholders upon the termination of the offering.
|
|
(2)
|
Calculated based on 85,176,956 shares of common stock issued
and outstanding as of February 12, 2021.
|
|
(3)
|
Includes (i) 83,333 Conversion Shares and (ii) 83,333 Warrant
Shares.
|
|
(4)
|
Includes (i) 66,666 Conversion Shares and (ii) 66,666 Warrant
Shares.
|
|
(5)
|
Includes (i) 83,333 Conversion Shares and (ii) 83,333 Warrant
Shares.
|
|
(6)
|
Eliezer S. Fireman is the Managing Member of FirstFire
Global Opportunities Fund LLC and in such capacity has the right to vote and dispose of the securities held by such entity. The
address of FirstFire Global Opportunities Fund LLC is 1040 1st Avenue, Suite 190, New York, NY 10022.
|
|
(7)
|
Includes (i) 400,000 Conversion Shares and (ii) 400,000
Warrant Shares.
|
|
(8)
|
Roy Weisman is the President FMO of Boca Raton Inc and
in such capacity has the right to vote and dispose of the securities held by such entity. The address of FMO of Boca Raton Inc
is 1761 W. Hillsboro Boulevard, Deerfield Beach, FL 33442.
|
|
(9)
|
Includes (i) 33,333 Conversion Shares and 33,333 Warrant
Shares.
|
|
(10)
|
Includes (i) 83,333 Conversion Shares and (ii) 83,333 Warrant
Shares.
|
|
(11)
|
Includes (i) 100,000 Conversion Shares, (ii) 100,000 Warrant
Shares and (iii) 625,000 shares of common stock.
|
|
(12)
|
Includes (i) 100,000 Conversion Shares and (ii) 100,000
Warrant Shares.
|
|
(13)
|
Katalyst Securities LLC (“Katalyst”) is a member
of FINRA and Jesse Janssen is a broker of Katalyst.
|
|
(14)
|
Includes (i) 33,333 Conversion Shares, (ii) 33,333 Warrant
Shares and (iii) 52,750 shares of common stock issuable upon exercise of warrants.
|
|
(15)
|
Includes (i) 33,333 Conversion Shares and (ii) 33,333 Warrant
Shares.
|
|
(16)
|
Katalyst is a member of FINRA and Morgan Janssen is a broker
of Katalyst.
|
|
(17)
|
Includes (i) 83,333 Conversion Shares, (ii) 83,333 Warrant
Shares and (iii) 87,500 shares of common stock issuable upon exercise of warrants.
|
|
(18)
|
Includes (i) 83,333 Conversion Shares and (ii) 83,333 Warrant
Shares.
|
|
(19)
|
Includes (i) 83,333 Conversion Shares and (ii) 83,333 Warrant
Shares.
|
|
(20)
|
Includes (i) 116,666 Conversion Shares, (ii) 116,666 Warrant
Shares and (iii) 30,000 shares of common stock.
|
|
(21)
|
Includes (i) 116,666 Conversion Shares and (ii) 116,666
Warrant Shares.
|
|
(22)
|
Lee J. Seidler is the Trustee of Lee J. Seidler Revocable
Trust dtd 4.12.1990 and in such capacity has the right to vote and dispose of the securities held by such trust.
|
|
(23)
|
Includes (i) 333,333 Conversion Shares and (ii) 333,333
Warrant Shares.
|
|
(24)
|
Includes (i) 100,000 Conversion Shares, (ii) 100,000 Warrant
Shares and (iii) 187,520 shares of common stock.
|
|
(25)
|
Includes (i) 100,000 Conversion Shares and (ii) 100,000
Warrant Shares.
|
|
(26)
|
Includes (i) 133,333 Conversion Shares and (ii) 133,333
Warrant Shares.
|
|
(27)
|
Includes (i) 70,000 Conversion Shares and (ii) 70,000 Warrant
Shares.
|
|
(28)
|
Includes (i) 150,000 Conversion Shares and (ii) 150,000
Warrant Shares.
|
|
(29)
|
Includes (i) 100,000 Conversion Shares, (ii) 100,000 Warrant
Shares and (iii) 937,500 shares of common stock.
|
|
(30)
|
Includes (i) 100,000 Conversion Shares and (ii) 100,000
Warrant Shares.
|
|
(31)
|
Eilon Natan is the President of Quick Capital, LLC and
in such capacity has the right to vote and dispose of the securities held by such entity. The address of Quick Capital, LLC is
66 Flagler Street, Suite 900 - #2292, Miami, FL 33130.
|
(32)
|
Includes (i) 83,333 Conversion Shares and (ii) 83,333 Warrant Shares.
|
(33)
|
Katalyst is a member of FINRA and Stephen A. Renaud is a broker of Katalyst.
|
|
(34)
|
Includes (i) 200,000 Conversion Shares, (ii) 200,000 Warrant
Shares and (iii) 318,417 shares of common stock issuable upon exercise of warrants.
|
|
(35)
|
Includes (i) 200,000 Conversion Shares and (ii) 200,000
Warrant Shares.
|
|
(36)
|
Includes (i) 100,000
Conversion Shares and (ii) 100,000 Warrant Shares.
|
|
(37)
|
Includes (i) 83,333
Conversion Shares and (ii) 83,333 Warrant Shares.
|
|
(38)
|
Includes (i) 83,333
Conversion Shares and (ii) 83,333 Warrant Shares.
|
|
(39)
|
Katalyst is a
member of FINRA and Michael A. Silverman is a broker of Katalyst.
|
|
(40)
|
Includes (i) 383,333
Conversion Shares, (ii) 383,333 Warrant Shares and (iii) 820,000 shares of common stock
issuable upon exercise of warrants.
|
|
(41)
|
Includes (i) 383,333
Conversion Shares and (ii) 383,333 Warrant Shares.
|
|
(42)
|
Includes (i) 100,000
Conversion Shares and (ii) 100,000 Warrant Shares.
|
|
(43)
|
Includes (i) 100,000
Conversion Shares and (ii) 100,000 Warrant Shares.
|
|
(44)
|
Includes (i) 66,666
Conversion Shares and (ii) 66,666 Warrant Shares.
|
|
(45)
|
Includes (i) 166,666
Conversion Shares and (ii) 166,666 Warrant Shares.
|
|
(46)
|
Jack Chitayat
is the Trustee of The Chitayat Family Gift Trust dtd 12.19.2003 and in such capacity
has the right to vote and dispose of the securities held by such trust.
|
|
(47)
|
Includes (i) 83,333
Conversion Shares and (ii) 83,333 Warrant Shares.
|
|
(48)
|
Melodie Durfee
is the Trustee of The Konfida Trust dtd 05.01.15 and in such capacity has the right to
vote and dispose of the securities held by such trust.
|
|
(49)
|
Includes (i) 500,000
Conversion Shares and (ii) 500,000 Warrant Shares.
|
|
(50)
|
Includes (i) 100,000
Conversion Shares, (ii) 100,000 Warrant Shares and (iii) 250,000 shares of common stock.
|
|
(51)
|
Includes (i) 100,000
Conversion Shares and (ii) 100,000 Warrant Shares.
|
|
(52)
|
Includes (i) 50,000
Conversion Shares and (ii) 50,000 Warrant Shares.
|
|
(53)
|
Includes (i) 100,000
Conversion Shares and (ii) 100,000 Warrant Shares.
|
|
(54)
|
Includes (i) 166,666
Conversion Shares, (ii) 166,666 Warrant Shares and (iii) 900,000 shares of common stock.
|
|
(55)
|
Includes (i) 166,666
Conversion Shares and (ii) 166,666 Warrant Shares.
|
|
(56)
|
Bradley Woods
& Co. Ltd. (“Bradley Woods”) is a member of FINRA and Linda Mackay is
a broker of Bradley Woods.
|
|
(57)
|
Includes (i) 100,000
Conversion Shares and (ii) 100,000 Warrant Shares.
|
|
(58)
|
Bradley Woods
is a member of FINRA and Michael Scrobe is a broker of Bradley Woods.
|
|
(59)
|
Includes (i) 100,000
Conversion Shares and (ii) 100,000 Warrant Shares.
|
|
(60)
|
The
Special Equities Opportunity Fund, LLC is an affiliate of a broker-dealer. Jonathan Schechter, Joseph Reda, and Andrew Amo are
the Principals of The Special Equities Opportunity Fund, LLC and have voting and dispositive control over the securities held
by such entity.
|
|
(61)
|
Includes (i) 2,250,000 shares of common stock and (ii) 2,375,000
Conversion Shares and (iii) 2,375,000 Warrant Shares.
|
|
(62)
|
Includes (i) 2,375,000
Conversion Shares and (ii) 2,375,000 Warrant Shares.
|
|
(63)
|
Robert Wolf is
the Chief Executive Officer of 32 Entertainment LLC and in such capacity has the right
to vote and dispose of the securities held by such entity. The address of 32 Entertainment
LLC is 9 Westerleigh Road, Purchase, NY 10577.
|
|
(64)
|
Includes (i) 833,333
Conversion Shares, (ii) 833,333 Warrant Shares and (iii) 1,000,000 shares of common stock.
|
|
(65)
|
Includes (i) 833,333
Conversion Shares and (ii) 833,333 Warrant Shares.
|
|
(66)
|
Bradley Woods
is a member of FINRA and Timothy Tyler Berry is a broker of Bradley Woods.
|
|
(67)
|
Includes (i) 150,000
Conversion Shares, (ii) 150,000 Warrant Shares and (iii) 500,000 shares of common stock.
|
|
(68)
|
Includes (i) 150,000
Conversion Shares and (ii) 150,000 Warrant Shares.
|
|
(69)
|
Includes (i) 875,000
Conversion Shares, (ii) 875,000 Warrant Shares and (iii) 625,000 shares of common stock.
|
|
(70)
|
Includes (i) 875,000
Conversion Shares and (ii) 875,000 Warrant Shares.
|
|
(71)
|
Includes (i) 200,000
Conversion Shares and (ii) 200,000 Warrant Shares.
|
|
(72)
|
Adam H. Selkin
is the Chief Executive Officer and President of Slee 3 Consulting, Inc. and in such capacity
has the right to vote and dispose of the securities held by such entity. The address
of Slee 3 Consulting, Inc is 10 Pamela Road, Cortland Manor, NY 10567.
|
|
(73)
|
Includes (i) 100,000
Conversion Shares and (ii) 100,000 Warrant Shares.
|
|
(74)
|
Richard Abbe is
the Managing Member of Iroquois Capital Investment Group LLC and in such capacity has
the right to vote and dispose of the securities held by such entity. The address of Iroquois
Capital Investment Group LLC is 125 Park Avenue, 25th Floor, New York, NY 10017.
|
|
(75)
|
Includes (i) 1,083,333
Conversion Shares, (ii) 1,083,333 Warrant Shares and (iii) 312,500 shares of common stock.
|
|
(76)
|
Includes (i) 1,083,333
Conversion Shares and (ii) 1,083,333 Warrant Shares.
|
|
(77)
|
Richard Abbe is
the Director, General Partner of Iroquois Master Fund Ltd. and in such capacity has the
right to vote and dispose of the securities held by such entity. The address of Iroquois
Master Fund Ltd. is 125 Park Avenue, 25th Floor, New York, NY 10017.
|
|
(78)
|
Includes (i) 583,333
Conversion Shares, (ii) 583,333 Warrant Shares and (iii) 937,500 shares of common stock.
|
|
(79)
|
Includes (i) 583,333
Conversion Shares and (ii) 583,333 Warrant Shares.
|
|
(80)
|
Empery Asset Management,
LP, the authorized agent of Empery Asset Master Ltd (“EAM”), has discretionary
authority to vote and dispose of the shares held by EAM and may be deemed to be the beneficial
owner of these shares. Martin Hoe and Ryan Lane, in their capacity as investment managers
of Empery Asset Management LP, may also be deemed to have investment discretion and voting
power over the shares held by EAM. EAM, Mr. Hoe and Mr. Lane each disclaim any beneficial
ownership of these shares.
|
|
(81)
|
Includes (i) 807,404 shares of common stock, (ii) 1,973,333 Conversion
Shares and (iii) 1,973,333 Warrant Shares.
|
|
(82)
|
Includes (i) 1,973,333
Conversion Shares and (ii) 1,973,333 Warrant Shares.
|
|
(83)
|
Empery Asset Management,
LP, the authorized agent of Empery Tax Efficient, LP (“ETE”), has discretionary
authority to vote and dispose of the shares held by ETE and may be deemed to be the beneficial
owner of these shares. Martin Hoe and Ryan Lane, in their capacity as investment managers
of Empery Asset Management LP, may also be deemed to have investment discretion and voting
power over the shares held by ETE. ETE, Mr. Hoe and Mr. Lane each disclaim any beneficial
ownership of these shares.
|
|
(84)
|
Includes (i) 546,666
Conversion Shares, (ii) 546,666 Warrant Shares and (iii) 277,992 shares of common stock.
|
|
(85)
|
Includes (i) 546,666
Conversion Shares and (ii) 546,666 Warrant Shares.
|
|
(86)
|
Empery Asset Management,
LP, the authorized agent of Empery Tax Efficient III, LP (“ETE III”), has
discretionary authority to vote and dispose of the shares held by ETE III and may be
deemed to be the beneficial owner of these shares. Martin Hoe and Ryan Lane, in their
capacity as investment managers of Empery Asset Management LP, may also be deemed to
have investment discretion and voting power over the shares held by ETE III. ETE III,
Mr. Hoe and Mr. Lane each disclaim any beneficial ownership of these shares.
|
|
(87)
|
Includes (i) 813,333
Conversion Shares, (ii) 813,333 Warrant Shares and (iii) 1,185,104 shares of common stock.
|
|
(88)
|
Includes (i) 813,333
Conversion Shares and (ii) 813,333 Warrant Shares.
|
|
(89)
|
Candy D’Azevedo
Bathon is the Trustee of the Pauline M. Howard Trust DTD 01/02/98 Candy D’Azevedo
Trust and in such capacity has the right to vote and dispose of the securities held by
such trust.
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(90)
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Includes (i) 100,000
Conversion Shares, (ii) 100,000 Warrant Shares and (iii) 312,500 shares of common stock.
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(91)
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Includes (i) 100,000
Conversion Shares and (ii) 100,000 Warrant Shares.
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PLAN OF DISTRIBUTION
The selling stockholders may, from time
to time, sell, transfer, or otherwise dispose of any or all of their Resale Shares on any stock exchange, market, or trading facility
on which the shares are traded, or in private transactions. These dispositions may be at fixed prices, at prevailing market prices
at the time of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale or at negotiated
prices.
The selling stockholders may use any one
or more of the following methods when disposing of shares or interests therein:
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disposition on any national securities exchange on which our common stock may be listed at the
time of the sale;
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disposition in the over-the-counter markets;
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ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
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block trades in which the broker-dealer will attempt to sell the shares as agent, but may position
and resell a portion of the block as principal to facilitate the transaction;
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purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
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an exchange distribution in accordance with the rules of the applicable exchange;
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privately negotiated transactions;
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writing or settlement of options or other hedging transactions, whether through an options exchange
or otherwise;
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disposition in one or more underwritten offerings in a best efforts basis or firm commitment basis;
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broker-dealers may agree with the selling stockholders to sell a specified number of such shares
at a stipulated price per share;
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a combination of any such methods of sale; or
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any other method permitted by applicable law.
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We do not know
of specific arrangements by the selling stockholders for the sale of their Resale Shares. The aggregate proceeds to the selling
stockholders from any sale of the Resale Shares offered by them will be the purchase price of the Resale Shares less discounts
or commissions, if any. The selling stockholders reserve the right to accept and, together with their respective agents from time
to time, to reject, in whole or in part, any proposed purchase of Resale Shares to be made directly or through agents. We will
not receive any of the proceeds from any such sale; however, we will receive the proceeds from any cash exercise of warrants.
The selling stockholders
also may resell all or a portion of the Resale Shares in reliance upon Rule 144 promulgated under the Securities Act or any other
exemption from registration under the Securities Act, provided that they meet the criteria and conform to the requirements of any
such rule.
The selling stockholders
and any broker-dealers or agents that participate in the sale of the Resale Shares may be deemed to be “underwriters”
within the meaning of Section 2(11) of the Securities Act. Any discounts, commissions, concessions or profit they earn on any resale
of the shares may be underwriting discounts and commissions under the Securities Act. The selling stockholders are subject to the
prospectus delivery requirements of the Securities Act.
The selling stockholders
will bear all commissions and discounts, if any, attributable to the sale or disposition of the Resale Shares, or interests therein.
We will bear all costs, expenses, and fees in connection with the registration of the Resale Shares. We will not be paying any
underwriting discounts or commissions in this offering.
DESCRIPTION OF SECURITIES
The following description of the Company’s
capital stock and provisions of its Certificate of Incorporation and Bylaws are summaries and are qualified by reference to the
Company’s Certificate of Incorporation and Bylaws.
General
Our Certificate of Incorporation authorizes
the issuance of 105,000,000 shares of capital stock, 100,000,000 shares of which are designated as common stock, par value $0.0001
per share, and 5,000,000 of which are designated as preferred stock, par value $0.0001 per share. As of February 12, 2021, we have
(i) 85,176,956 shares of common stock issued and outstanding and 4,276 shares of Series C Preferred Stock issued and outstanding.
Common Stock
Each stockholder of our common stock is
entitled to a pro rata share of cash distributions made to stockholders, including dividend payments. The holders of our common
stock are entitled to one vote for each share of record on all matters to be voted on by stockholders. There is no cumulative voting
with respect to the election of our directors or any other matter. Therefore, the holders of more than 50% of the shares voted
for the election of those directors can elect all of the directors. The holders of our common stock are entitled to receive dividends
when and if declared by our Board of Directors from funds legally available therefore. Cash dividends are at the sole discretion
of our Board of Directors. In the event of our liquidation, dissolution or winding up, the holders of common stock are entitled
to share ratably in all assets remaining available for distribution to them after payment of our liabilities and after provision
has been made for each class of stock, if any, having any preference in relation to our common stockholders of shares of our common
stock have no conversion, preemptive or other subscription rights, and there are no redemption provisions applicable to our common
stock.
Preferred Stock
Series C Preferred Stock
On February 9, 2021, we filed a Certificate
of Designation of Preferences, Rights and Limitations of Series C Convertible Preferred Stock (the “Certificate of Designations”)
with the Delaware Secretary of State, designating 4,280 shares of preferred stock as Series C Convertible Preferred Stock. The
following is only a summary of the Certificate of Designations and is qualified in its entirety by reference to the full text of
the Certificate of Designations which is filed as an exhibit to this registration statement.
Designation
We have designated 4,280 shares of preferred
stock as Series C Preferred Stock. Each share of Series C Preferred Stock has a par value of $0.0001 per share and a stated value
of $1,000 (the “Stated Value”).
Dividends
Holders of Series C Preferred Stock shall
be entitled to receive dividends (on an as-if-converted-to-common-stock basis) in the same form as dividends actually paid on shares
of the common stock when, as and if such dividends are paid on shares of the common stock. No other dividends shall be paid on
shares of Series C Preferred Stock.
Liquidation
Upon any liquidation, dissolution or winding-up
of the Company, whether voluntary or involuntary, the holders of Series C Preferred Stock shall be entitled to receive the same
amount that a holder of common stock would receive if the Series C Preferred Stock were fully converted into common stock (disregarding
any conversion limitations) which amounts shall be paid pari passu with all holders of common stock.
Voting Rights
Except as otherwise provided in the Certificate
of Designations or as otherwise required by law, the Series C Preferred Stock shall have no voting rights. However, as long as
any shares of Series C Preferred Stock are outstanding, we shall not, without the affirmative vote of the holders of a majority
of the then outstanding shares of the Series C Preferred Stock, (a) alter or change adversely the powers, preferences or rights
given to the Series C Preferred Stock or alter or amend the Certificate of Designations, (b) amend our Certificate of Incorporation
or other charter documents in any manner that adversely affects any rights of the holders of the Series C Preferred Stock, (c)
increase the number of authorized shares of Series C Preferred Stock, or (d) enter into any agreement with respect to any of the
foregoing.
Conversion
Each share of Series C Preferred Stock
is convertible, at any time and from time to time after the issuance date, at the option of the holder, into such number of shares
of common stock determined by dividing the Stated Value by the Conversion Price. “Conversion Price” means $0.30, subject
to adjustment.
Exercisability
A holder of Series C Preferred Stock may
not convert any portion of the Series C Preferred Stock to the extent that the holder, together with its affiliates and any other
person or entity acting as a group, would own more than 4.99% (or, upon election by a holder prior to issuance, 9.99%) of the outstanding
shares of common stock after conversion, which beneficial ownership limitation may be increased by the holder up to, but not exceeding,
9.99%.
Warrants
On February 12, 2021, we issued Warrants
to purchase up to 14,253,323 shares of our common stock in a private offering. The Warrants are exercisable for a period of five
years from the date of issuance at an exercise price of $0.30 per share. If, after a period of 180 days after the date of issuance
of the Warrants, a registration statement covering the resale of the Warrant Shares is not effective, the holders may exercise
the Warrants by means of a cashless exercise. We are prohibited from effecting an exercise of the Warrants to the extent that,
as a result of such exercise, the holder of the Warrant together with the holder’s affiliates, would beneficially own more
than 4.99% of the number of shares of common stock outstanding immediately after giving effect to the issuance of the Warrant Shares,
which beneficial ownership limitation may be increased by the holder up to, but not exceeding, 9.99%.
In connection with the private placement
of the Warrant, we issued the placement agents warrants to purchase up to an aggregate of 2,850,664 shares of our common stock.
The placement agent warrants are exercisable for a period of five years from the closing date of the offering at an exercise price
of $0.35 per share, subject to adjustment.
As of February 12, 2021, we have warrants to
purchase up to 250,000 shares of our common stock issued and outstanding at an exercise price of $0.20 per share.
Options
As of February 12, 2021, we have options to
purchase up to 300,000 shares of our common stock issued and outstanding at an exercise price of $$0.0001 per share.
Registration Rights
On February 9, 2021, in connection with
the Purchase Agreements, we entered into Registration Rights Agreements (“RRAs”) with the investors pursuant to which
we agreed to file a registration statement to register the resale of the Conversion Shares and the Warrant Shares. Pursuant to
the RRA, we shall use our best efforts to cause the registration to be declared effective no later than the 60th calendar
day following February 9, 2021, or in the event of a full review by the SEC, the 90th calendar day following February
9, 2021, and to maintain the effectiveness of the registration statement until all of the Conversion Shares and Warrant Shares
have been sold or are otherwise able to be sold pursuant to Rule 144 under the Securities Act. If we fail to file the registration
statement or have it declared effective by the dates set forth above, amongst other things, we will be obligated to pay the investors
damages in the amount of 1% of their subscription amount, per month, until such events are satisfied.
Anti-Takeover Provisions of our Certificate
of Incorporation and our Bylaws
Board of Directors Vacancies
Our Bylaws authorize only our board of
directors to fill vacant directorships. In addition, the number of directors constituting our board of directors may be set only
by resolution of the majority of the incumbent directors; provided, however, the number of directors shall not be less than three.
Special Meeting of Stockholders
Our Bylaws provide that special meetings
of our stockholders may be called by our President or our board of directors and our Secretary
at the request in writing of our stockholders owning a majority of our voting capital.
Authorized but Unissued Shares
Our authorized but unissued shares of common
stock and preferred stock are available for future issuance without stockholder approval and may be utilized for a variety of corporate
purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. The
existence of authorized but unissued and unreserved common stock and preferred stock could render more difficult or discourage
an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise.
Transfer Agent and Registrar
Our transfer agent and registrar is West Coast Stock Transfer,
Inc. whose address is 721 N. Vulcan Avenue, Suite 106, Encinitas, CA 92024.
Listing
Our common stock is quoted on the
OTCQB under the symbol “SILO.”
DESCRIPTION OF BUSINESS
Overview
We
are a developmental stage biopharmaceutical company focused on merging traditional therapeutics with psychedelic research. We
seek to acquire assets to license and fund research which we believe will be transformative to the well-being of patients and the
health care industry, and we are committed to developing innovative solutions to address a variety
of underserved conditions. In these uncertain times, the mental health of the nation and beyond is being put to the test.
More than ever, creative new therapies are needed to address the health challenges of today. Combining our resources with world-class
medical research partners, we hope to make significant advances in the medical and psychedelic space.
In
addition to our primary focus on psychedelic research, we have been engaged in
the development of the streetwear apparel brand, NFID, which stands for “No Found Identification.”
Rare Disease Therapeutics
We have been exploring opportunities to
expand our business by seeking to acquire and/or develop intellectual property or technology rights from leading universities and
researchers to treat rare diseases, including the use of psychedelic drugs, such as psilocybin, and the potential benefits they
may have in certain cases involving depression, mental health issues and neurological disorders. We intend to focus
on merging traditional therapeutics with psychedelic research for people suffering from indications such as depression, PTSD, Parkinson’s,
and other rare neurological disorders. Our mission is to identify assets to license and fund the research which we believe will
be transformative to the well-being of patients and the health care industry.
Psilocybin is considered a serotonergic
hallucinogen and is an active ingredient in some species of mushrooms. Recent industry studies using psychedelics, such as psilocybin,
have been promising, and management believes there is a large unmet need with many people suffering from depression, mental health
issues and neurological disorders. While classified as a Schedule I drug, there is an accumulating body of evidence that psilocybin
may have beneficial effects on depression and other mental health conditions. Therefore, the FDA and DEA have permitted the use
of psilocybin in clinical studies for the treatment of a range of psychiatric conditions.
The potential of psilocybin therapy in
mental health conditions has been demonstrated in a number of academic-sponsored studies over the last decade. In these early studies,
it was observed that psilocybin therapy provided rapid reductions in depression symptoms after a single high dose, with antidepressant
effects lasting for up to at least six months for a number of patients. These studies assessed symptoms related to depression and
anxiety through a number of widely used and validated scales. The data generated by these studies suggest that psilocybin is generally
well-tolerated and has the potential to treat depression when administered with psychological support.
We have recently engaged in discussions with
a number of world-renowned educational institutions and advisors regarding potential opportunities and have formed a scientific
advisory board that is intended to help advise management regarding potential acquisition and development of products. In addition,
we entered into the Option Agreement with the UMB and are seeking to enter into additional scientific research agreements and partnerships
with other universities, though we have no definitive agreements or commitments for any such arrangements in place at this time.
We plan to actively pursue the acquisition
and/or development of intellectual property or technology rights to treat rare diseases, and to ultimately expand our business
to focus on this new line of business.
Commercial Evaluation License and Option
Agreement with the University of Baltimore, Maryland
Effective as of July 15, 2020, we, through
our wholly-owned subsidiary, Silo Pharma Inc., entered into the Option Agreement with UMB pursuant to which UMB has granted us
an exclusive, non-sublicenseable, non-transferable license to with respect to the exploration of the potential use of central nervous
system-homing peptides in vivo and their use for the investigation and treatment of MS and other neuroinflammatory pathology. In
addition, UMB granted us an exclusive, option to negotiate and obtain an exclusive, sublicenseable, royalty-bearing license
to with respect to the subject technology. Pursuant to the agreement, we paid UMB an initial license fee of $10,000. The option
was extended and exercised. On February 12, 2021, we entered into the UMB License Agreement with UMB pursuant to which UMB granted
us an exclusive, worldwide, sublicensable, royalty-bearing license to certain intellectual property (i) to make, have made, use,
sell, offer to sell, and import certain licensed products and (ii) to use the invention titled, “Central nervous system-homing
peptides in vivo and their use for the investigation and treatment of multiple sclerosis and other neuroinflammatory pathology”
and UMB’s confidential information to develop and perform certain licensed processes for the therapeutic treatment of neuroinflammatory
disease. Pursuant to the UMB License Agreement, we shall pay UMB (i) a license fee in the high five-digit figures, (ii) certain
event-based milestone payments, (iii) royalty payments in the low single digits or mid single digits, depending on net revenues,
and (iv) a tiered percentage of sublicense income. The UMB License Agreement will remain in effect until the later of: (a) the
last patent covered under the UMB License Agreement expires, (b) the expiration of data protection, new chemical entity, orphan
drug exclusivity, regulatory exclusivity, or other legally enforceable market exclusivity, if applicable, or (c) ten years after
the first commercial sale of a licensed product in that country, unless earlier terminated in accordance with the provisions of
the UMB License Agreement.
Apparel
On September 29, 2018, we entered into
an Asset Purchase Agreement with Blind Faith Concepts Holdings, Inc. pursuant to which we completed the acquisition of the assets
of NFID which consisted of three trademarks related to the NFID brand, the NFID website, shoe designs and samples, and the assumption
of a one-year Brand Ambassador Agreement in exchange for 2,000,000 shares of our common stock. NFID is a recently developed unisex
clothing brand, and we plan on continuing product development to fully launch the product.
Since the completion of the acquisition of
the assets of NFID in September 2018, we have been engaged in the development of NFID, which stands for “No Found Identification.”
We have developed NFID as an exclusive brand of apparel consisting initially of sweatshirts, hoodies, t-shirts, jackets and hats.
Our clothing brand features lifestyles graphic designs. The collection is inspired towards the lifestyle and wellness culture
Recent Developments
Investigator-sponsored Study Agreement
with Maastricht University of the Netherlands
On December 1, 2020, we entered into a
entered into an investigator-sponsored study agreement with Maastricht University of the Netherlands. The research project is a
clinical study to examine the effects of repeated low doses of psilocybin and LSD
on cognitive and emotional dysfunctions in Parkinson’s disease and to understand its mechanism of action. The agreement shall
terminate on October 31, 2024, unless earlier terminated pursuant to the terms thereof.
Patent License Agreement with AIKido
Pharma Inc.
On January 5, 2021, we entered into the
Patent License Agreement with Silo Pharma, Inc., a Florida corporation, our wholly-owned subsidiary, and our and our subsidiary’s
affiliates and subsidiaries, as licensor, and AIkido pursuant to which we granted AIkido an exclusive, worldwide (“Territory”),
sublicensable, royalty-bearing license to certain intellectual property (i) to make, have made, use, provide, import, export, lease,
distribute, sell, offer for sale, develop and advertise certain licensed products and (ii) to develop and perform certain licensed
processes for the treatment of cancer and symptoms caused by cancer (the “Field of Use”). In addition, if we exercise
the option granted to us pursuant to the Option Agreement, we shall grant AIKido a non-exclusive sublicense to certain UMB patent
rights in the field of neuroinflammatory diseases occurring in patients diagnosed with cancer.
Pursuant to the Patent License Agreement, AIkido
shall pay us, among other things, (i) a one-time cash payment of $500,000 and (ii) royalty payments equal to 2% of Net Sales (as
defined in the Patent License Agreement) in the Field of Use in the Territory. In addition, AIkido issued us 500 shares of its
Series M Convertible Preferred Stock. The Patent License Agreement will remain in effect until the expiration or abandonment of
all issued patents and filed patent applications within the licensed patents set forth in the Patent License Agreement, unless
earlier terminated in accordance with the provisions of the Patent License Agreement.
Binding
Letter of Intent to Grant Sublicense with AIKido Pharma Inc.
On February 12, 2021, we entered into a binding
letter of intent (the “Letter of Intent”) with AIkido pursuant to which we agreed to grant AIkido a worldwide, exclusive
sublicense of our licensed patents under the UMB License Agreement for use in the therapeutic treatment of neuroinflammatory disease
in cancer patients. Pursuant to the Letter of Intent, AIkido shall pay us (i) a one-time license fee in the mid five-digit figures
and (ii) the same royalty payments that we are subject to under the UMB License Agreement. The parties have agreed to use their
best efforts to complete the Sublicense arrangement as soon as reasonably possible. The terms and conditions of the Sublicense
are subject to compliance with the terms and conditions of the UMB License Agreement, including, but not limited to, the provisions
regarding the granting of sublicenses set forth in the UMB License Agreement.
Investigator-sponsored Study Agreement
with UMB
On January 5, 2021, we entered into a entered
into an investigator-sponsored study agreement with UMB. The research project is a clinical study to examine a novel peptide-guided
drug delivery approach for the treatment of MS. More specifically, the study is designed to evaluate (1) whether MS-1-displaying
liposomes can effectively deliver dexamethasone to the central nervous system and (2) whether MS-1-displaying liposomes are superior
to plain liposomes, also known as free drug, in inhibiting the relapses and progression of Experimental Autoimmune Encephalomyelitis.
Pursuant to the agreement, the Project Work (as defined in the agreement) shall commence on March 1, 2021 and will continue until
substantial completion, subject to renewal upon mutual written consent of the parties.
February 2021 Private Placement
On February 9, 2021, we entered into the
Purchase Agreements with the Investors for the sale of an aggregate of 4,276 shares of our newly designated Series C Preferred
Stock and Warrants to purchase up to 14,253,323 shares of our common stock for gross proceeds of approximately $4,276,000, before
deducting placement agent and other offering expenses. The closing of the offering occurred on February 12, 2021. In connection
with the offering, we entered into a registration rights agreement with the Investors pursuant to which we agreed to file a registration,
of which this prospectus is a part, to register, under the Securities Act, the resale of
the Conversion Shares and the Warrant Shares. Accordingly, this prospectus relates to the offering by the selling stockholders
of up to 28,506,646 Resale Shares, which includes the Conversion Shares and the Warrant Shares.
In addition, pursuant to the terms of the
offering, we issued the placement agents warrants to purchase up to an aggregate of 2,850,664 shares of our common stock. The placement
agent warrants are exercisable for a period of five years from the closing date of the offering at an exercise price of $0.35 per
share, subject to adjustment.
Intellectual Property
We ensure that we own intellectual property
created for us by signing agreements with employees, independent contractors, consultants, companies, and any other third party
that create intellectual property for us or that assign any intellectual property rights to us.
We have established business procedures designed
to maintain the confidentiality of our proprietary information, including the use of confidentiality agreements with employees,
independent contractors, consultants and entities with which we conduct business.
We have filed four provisional patent applications related to
the use of the central nervous system-homing peptides covered by the UMB Option Agreement to deliver certain compounds, including
a nonsteroidal anti-inflammatory drug and/or psilocybin, for the treatment of arthritis, central nervous system diseases ,neuroinflammatory
diseases as well as cancer. In addition, pursuant to our acquisition of NFID, we acquired three trademarks related to the NFID
brand.
Competition
With respect to the rare disease therapeutics
segment of our business, our industry is characterized by many newly emerging and innovative technologies, intense competition
and a strong emphasis on proprietary product rights. We face potential competition from many different sources, including major
pharmaceutical, specialty pharmaceutical and biotechnology companies, academic institutions, governmental agencies and medical
research organizations. Any product candidates that we may successfully develop and commercialize will compete with the standard
of care and new therapies that may become available in the future.
Many of the pharmaceutical, biopharmaceutical
and biotechnology companies with whom we may compete have established markets for their therapies and have substantially greater
financial, technical, human and other resources than we do and may be better equipped to develop, manufacture and market superior
products or therapies. In addition, many of these potential competitors have significantly greater experience than we have in undertaking
non-clinical studies and human clinical trials of new therapeutic substances and in obtaining regulatory approvals of human therapeutic
products. Accordingly, our competitors may succeed in obtaining regulatory approvals for alternative or superior products. In addition,
many competitors have greater name recognition and more extensive collaborative relationships. Smaller and earlier-stage companies
may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies.
An increasing number of companies are increasing their efforts in discovery of new psychedelic compounds.
With respect to the apparel segment of
our business, the apparel industry is highly competitive and fragmented and is subject to
rapidly changing consumer demands and preferences. We compete with numerous apparel retailers, manufacturers and distributors,
both domestically and internationally, as well as several well-known designers. Many of our competitors may be significantly
larger and have substantially greater resources than us.
Government Regulation
The FDA and other regulatory authorities
at federal, state and local levels, as well as in foreign countries, extensively regulate, among other things, the research, development,
testing, manufacture, quality control, import, export, safety, effectiveness, labeling, packaging, storage, distribution, recordkeeping,
approval, advertising, promotion, marketing, post-approval monitoring and post-approval reporting of drugs. We, along with any
potential our vendors, contract research organizations and contract manufacturers, will be required to navigate the various preclinical,
clinical, manufacturing and commercial approval requirements of the governing regulatory agencies of the countries in which we
wish to conduct studies or seek approval of our product candidates. The process of obtaining regulatory approvals of drugs and
ensuring subsequent compliance with appropriate federal, state, local and foreign statutes and regulations requires the expenditure
of substantial time and financial resources
In the United States, the FDA regulates
drug products under the FDCA, its implementing regulations and other laws. If we fail to comply with applicable FDA or other requirements
at any time with respect to product development, clinical testing, approval or any other legal requirements relating to product
manufacture, processing, handling, storage, quality control, safety, marketing, advertising, promotion, packaging, labeling, export,
import, distribution, or sale, we may become subject to administrative or judicial sanctions or other legal consequences. These
sanctions or consequences could include, among other things, the FDA’s refusal to approve pending applications, issuance
of clinical holds for ongoing studies, suspension or revocation of approved applications, warning or untitled letters, product
withdrawals or recalls, product seizures, relabeling or repackaging, total or partial suspensions of manufacturing or distribution,
injunctions, fines, civil penalties or criminal prosecution.
The process required by the FDA before
any product candidates are approved as drugs for therapeutic indications and may be marketed in the United States generally involves
the following:
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Completion of extensive preclinical studies in accordance with applicable regulations, including studies conducted in accordance with good laboratory practice requirements;
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Completion of the manufacture, under cGMP condition of the drug substance and drug product that the sponsor intends to use in human clinical trials along with required analytical and stability testing;
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Submission to the FDA of an investigational new drug application (“IND”) which must become effective before clinical trials may begin;
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Approval by an institutional review board or independent ethics committee at each clinical trial site before each trial may be initiated;
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Performance of adequate and well-controlled clinical trials in accordance with applicable IND regulations, GCP requirements and other clinical trial-related regulations to establish the safety and efficacy of the investigational product for each proposed indication;
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Submission to the FDA of a New Drug Application (“NDA”);
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Payment of user fees for FDA review of the NDA;
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A determination by the FDA within 60 days of its receipt of an NDA, to accept the filing for review;
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Satisfactory completion of one or more FDA pre-approval inspections of the manufacturing facility or facilities where the drug will be produced to assess compliance with cGMP requirements to assure that the facilities, methods and controls are adequate to preserve the drug’s identity, strength, quality and purity;
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Potentially, satisfactory completion of FDA audit of the clinical trial sites that generated the data in support of the NDA; and
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FDA review and approval of the NDA, including consideration of the views of any FDA advisory committee, prior to any commercial marketing or sale of the drug in the United States.
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Controlled Substances
The federal CSA and its implementing regulations
establish a “closed system” of regulations for controlled substances. The CSA imposes registration, security, recordkeeping
and reporting, storage, manufacturing, distribution, importation and other requirements under the oversight of the DEA. The DEA
is the federal agency responsible for regulating controlled substances, and requires those individuals or entities that manufacture,
import, export, distribute, research, or dispense controlled substances to comply with the regulatory requirements in order to
prevent the diversion of controlled substances to illicit channels of commerce.
The DEA categorizes controlled substances
into one of five schedules — Schedule I, II, III, IV or V — with varying qualifications
for listing in each schedule. Schedule I substances by definition have a high potential for abuse, have no currently accepted medical
use in treatment in the United States and lack accepted safety for use under medical supervision. Pharmaceutical products having
a currently accepted medical use that are otherwise approved for marketing may be listed as Schedule II, III, IV or V substances,
with Schedule II substances presenting the highest potential for abuse and physical or psychological dependence, and Schedule V
substances presenting the lowest relative potential for abuse and dependence.
Facilities that manufacture, distribute,
import or export any controlled substance must register annually with the DEA. The DEA registration is specific to the particular
location, activity(ies) and controlled substance schedule(s).
The DEA inspects all manufacturing facilities
to review security, recordkeeping, reporting and handling prior to issuing a controlled substance registration. The specific security
requirements vary by the type of business activity and the schedule and quantity of controlled substances handled. The most stringent
requirements apply to manufacturers of Schedule I and Schedule II substances. Required security measures commonly include background
checks on employees and physical control of controlled substances through storage in approved vaults, safes and cages, and through
use of alarm systems and surveillance cameras. Once registered, manufacturing facilities must maintain records documenting the
manufacture, receipt and distribution of all controlled substances. Manufacturers must submit periodic reports to the DEA of the
distribution of Schedule I and II controlled substances, Schedule III narcotic substances, and other designated substances. Registrants
must also report any controlled substance thefts or significant losses, and must obtain authorization to destroy or dispose of
controlled substances. Imports of Schedule I and II controlled substances for commercial purposes are generally restricted to substances
not already available from a domestic supplier or where there is not adequate competition among domestic suppliers. In addition
to an importer or exporter registration, importers and exporters must obtain a permit for every import or export of a Schedule
I and II substance or Schedule III, IV and V narcotic, and submit import or export declarations for Schedule III, IV and V non-narcotics.
In some cases, Schedule III non-narcotic substances may be subject to the import/export permit requirement, if necessary, to ensure
that the United States complies with its obligations under international drug control treaties.
For drugs manufactured in the United States,
the DEA establishes annually an aggregate quota for the amount of substances within Schedules I and II that may be manufactured
or produced in the United States based on the DEA’s estimate of the quantity needed to meet legitimate medical, scientific,
research and industrial needs. The quotas apply equally to the manufacturing of the active pharmaceutical ingredient and production
of dosage forms. The DEA may adjust aggregate production quotas a few times per year, and individual manufacturing or procurement
quotas from time to time during the year, although the DEA has substantial discretion in whether or not to make such adjustments
for individual companies.
The states also maintain separate controlled
substance laws and regulations, including licensing, recordkeeping, security, distribution, and dispensing requirements. State
authorities, including boards of pharmacy, regulate use of controlled substances in each state. Failure to maintain compliance
with applicable requirements, particularly as manifested in the loss or diversion of controlled substances, can result in enforcement
action that could have a material adverse effect on our business, operations and financial condition. The DEA may seek civil penalties,
refuse to renew necessary registrations, or initiate proceedings to revoke those registrations. In certain circumstances, violations
could lead to criminal prosecution.
Employees
As of February 12, 2021, we employed a total
of one full-time employee. We are not a party to any collective bargaining agreements. We believe that we maintain good relations
with our employees.
Corporate History
We were incorporated as Gold Swap, Inc. under the laws of the
State of New York on July 13, 2010.
On December 11, 2012, stockholders approved
changing our state of incorporation from New York to Delaware via the merger of Gold Swap with and into our wholly-owned subsidiary,
Point Capital, Inc., and to change our name from “Gold Swap Inc.” to “Point Capital, Inc.” The merger was
effective on January 24, 2013.
On May 21, 2019, we amended our Certificate
of Incorporation to change our name to “Uppercut Brands, Inc,” and on September 24, 2020, we amended our Certificate
of Incorporation to change our name to “Silo Pharma, Inc.”
Through September 28, 2018, we were a closed-end,
non-diversified investment company that had elected to be regulated as a business development company under the Investment Company
Act. As a business development company, we were required to comply with certain regulatory requirements. For
instance, we generally had to invest at least 70% of our total assets in “qualifying assets,” including securities
of private U.S. companies, cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in
one year or less.
On September 29, 2018, we filed Form N-54C,
Notification of Withdrawal of election to be Subject to Section 55 through 65 of the Investment Company Act, whereas we have changed
the nature of our business so as to cease to be a business development company. Accordingly, as of December 31, 2018, our consolidated
financial statements of have been prepared in accordance with accounting principles generally accepted in the United States of
America.
As a result of this change in status, we
shall discontinue applying the guidance in Financial Accounting Standards Board ASC Topic 946 - Financial Services – Investment
Company and shall account for the change in our status prospectively by accounting for our equity investments in accordance with
ASC Topics 320 - Investments—Debt and Equity Securities as of the date of the change in status. In addition, the presentation
of the financial statements will be that of a commercial company rather than that of an investment company.
In accordance with ASC 946, we are making
this change to our financial reporting prospectively, and not restating periods prior to our change in status to a non-investment
company effective September 29, 2018, Accordingly, we may refer to both accounting in accordance with U.S. generally accepted accounting
principles applicable to corporations (Corporation Accounting), which applies commencing September 29, 2018 and to that applicable
to investment companies under the Investment Company Act (Investment Company Accounting) which applies to prior periods. We determined
that there is no cumulative effect of the change from Investment Company Accounting to Corporation Accounting on periods prior
to those presented, and that there is no effect on our financial position or results of operations as a result of this change.
In order to maintain our status as a non-investment
company, we will now operate so as to fall outside the definition of an “investment company” or within an applicable
exception. We expect to continue to operate outside the definition of an “investment company” as a developmental stage
company primarily engaged in merging traditional therapeutics with psychedelic research.
Through March 31, 2017, we elected to be
treated as an RIC under Subchapter M of the Internal Revenue Code and operated in a manner so as to qualify for the tax treatment
applicable to RICs. At March 31, 2017, we failed this diversification test since our investment in IPSIDY INC. accounted for over
25% of our total assets. We did not cure our failure to retain our status as a RIC and we will not seek to obtain RIC status again.
Accordingly, beginning in 2017, we became subject to income taxes at corporate tax rates. The loss of the our status as a RIC did
not have any impact on our financial position or results of operations.
Currently, we are not making any new equity
investments.
On September 29, 2018, we entered into
an Asset Purchase Agreement with Blind Faith Concepts Holdings, Inc. pursuant to which we completed the acquisition of 100% of
the assets of NFID from the Seller which consisted of three trademarks related to the NFID brand, the NFID website, shoe designs
and samples, and the assumption of a one-year Brand Ambassador Agreement in exchange for 2,000,000 shares of our common stock.
NFID is a recently developed unisex clothing brand. We plan on continuing product development to fully launch the product. Our
acquisition of the NFID assets gives us access to the growing market for unisex products.
On November 5, 2018, we entered into 14
separate Return to Treasury Agreements, whereby certain stockholders holding an aggregate of 28,734,901 shares of our common stock
agreed to return a portion of their respective holdings to treasury in exchange for cash payments aggregating $2,872. As a result,
the total issued and outstanding number of our common stock was reduced by 28,734,901 shares.
On April 8, 2020, we incorporated a wholly-owned
subsidiary, Silo Pharma Inc., in the State of Florida.
Our Corporate Information
We were incorporated as a Nevada corporation
on May 16, 2017. Our principal executive offices are located at 560 Sylvan Avenue, Suite 3160, Englewood Cliffs, NJ 07632 and our
telephone number is (718) 400-9031.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion
of our financial condition and results of operations in conjunction with financial statements and notes thereto, as well as the
“Risk Factors” and “Description of Business” sections included elsewhere in this prospectus. The following
discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially
from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those
discussed below and elsewhere in this prospectus, particularly in “Risk Factors.”
Overview
On September 29, 2018 (the “Closing
Date”), we entered into an Asset Purchase Agreement (“APA”) with Blind Faith Concepts Holdings, Inc. a Nevada
corporation (the “Seller”) whereby we completed the acquisition of 100% of the assets of “NFID” from the
Seller. We have developed NFID as an exclusive brand of clothing consisting initially of sweatshirts, hoodies, t-shirts, jackets,
and hats. Our clothing brand features non-binary work wear-inspired clothing for the revolutionarily-spirited person.
We have developed the streetwear apparel
brand, NFID, which stands for “No Found Identification.” The streetwear collection is inspired by music, fashion and
captures the social consciousness of popular culture. The brand unapologetically celebrates the freedom of choice and expression.
Generational political shifts have changed the way younger generations express and interpret gender, particularly in youth subculture
and countercultural movements. While today’s youth culture rebellion is gender neutral, there is no single brand providing
a uniform for the expression of that rebellion.
Strategy
The Company has developed the streetwear
apparel brand, NFID, which stands for “No Found Identification.” The streetwear collection is inspired by music, fashion
and captures the social consciousness of popular culture. The brand unapologetically celebrates the freedom of choice and expression.
Generational political shifts have changed the way younger generations express and interpret gender, particularly in youth subculture
and countercultural movements. While today’s youth culture rebellion is gender neutral, there is no single brand providing
a uniform for the expression of that rebellion.
Branded hooded sweatshirts, shirts, jackets,
and hats are our initial product launch. The business model is uses concepts of “Less is More” and utilizes
social media and the “Have to Have” market. This is achieved through limited quantities and styles released strategically
to generate maximum trending on social media platforms.
Our strategy involves developing the NFID
brand through a direct to consumer (“DTC”) sales model, fed into by parallel digital marketing strategies, including
collaboration with established brands throughout industry categories as well as seeding to celebrities/social media influencer
sponsorships and viral product placement.
Parallel to this strategy is a series of
targeted influencer events rather than mass marketing. These events are individually planned intimate cultural events in New York
City which touch on niche themes such as political dissent, free speech, gender expression, cult film screenings, and culinary
pop-ups.
We are developing plans to create a database
of each customer of consumer information of a very loyal cult like following.
Combining the right product with a branding
message around unisex, the MeToo Movement, Times Up, and various current issues, the company is investigating possible alignments
with a notable charity organization to further leverage is recognition as a socially relevant new brand.
NFID initial plan and launch is to sell
its products using the DTC model while utilizing digital marketing campaigns selected influencers, brand ambassadors, and social
media.
NFID.com started
to launch its apparel business during the third quarter on 2019 and began to generate minimal revenues.
Recent Developments
Proposed Expansion of Scope of Business
Recently, management has begun to explore
opportunities to expand its business by seeking to acquire and/or develop intellectual property or technology rights from leading
universities and researchers to treat rare diseases. To that end, the Company has engaged in discussions with a number of world-renowned
educational institutions and advisors regarding potential opportunities and will be seeking to expand its advisors to include a
scientific advisory board that can help advise management regarding potential acquisition and development of products. In July
2020, the Company, through a newly formed subsidiary, entered into a commercial evaluation license and option agreement with the
UMB pursuant to which UMB has granted us an exclusive, non-sublicenseable, non-transferable license to with respect to the exploration
of the potential use of central nervous system-homing peptides in vivo and their use for the investigation and treatment of multiple
sclerosis and other neuroinflammatory pathology. See “Commercial Evaluation License and Option Agreement with the University
of Baltimore, Maryland” below.
Formation of Subsidiary – Silo
Pharma, Inc.
On April 8, 2020, the Company incorporated
a new wholly-owned subsidiary, Silo Pharma Inc., in the State of Florida. The Company has also secured the domain name www.silopharma.com.
Commercial Evaluation License and Option
Agreement with the University of Baltimore, Maryland
Effective as of July 15, 2020, through
our subsidiary, Silo Pharma Inc., we entered into a commercial evaluation license and option agreement with the UMB pursuant to
which UMB has granted us an exclusive, non-sublicenseable, non-transferable license to with respect to the exploration of the potential
use of central nervous system-homing peptides in vivo and their use for the investigation and treatment of multiple sclerosis and
other neuroinflammatory pathology. In addition, UMB granted us an exclusive, option to negotiate and obtain an exclusive,
sublicenseable, royalty-bearing license to with respect to the subject technology. Pursuant to the agreement, we paid the initial
license fee of $10,000 to UMB in July 2020.
Appointment of Director
Effective October 1, 2020, the board of
directors of the Company appointed Dr. Kevin Muñoz as a director of the Company to fill a vacancy on the Board. Dr. Muñoz
will serve on the Board’s Audit and Compensation Committees. Dr. Kevin Muñoz, 42, is currently the Director of
Operations at Physical Medicine and Rehabilitation, an outpatient facility for the treatment of musculoskeletal issues, and has
served in various capacities with Physical Medicine and Rehabilitation since 2008. Dr. Muñoz holds an MD from Xavier University
School of Medicine and a BS from the University of Michigan.
Common Stock Financing
Between April 9, 2020 to April 18, 2020,
we entered into subscription agreements with certain accredited investors pursuant to which it issued an aggregate of 7,764,366
shares of our common stock for proceeds of $75,644, and subscription receivable of $2,000 or $0.01 per share. We collected the
subscription receivable of $2,000 on July 6, 2020.
On April 28, 2020, we entered into securities
purchase agreements with certain accredited institutions and investors for the sale of an aggregate of 29,993,750 shares of our
common stock at a price of approximately $0.08 per share for gross proceeds of $2,399,500, before deducting placement agent and
other offering expenses of $361,410.
Conversion of Series A Preferred Stock
into common shares
On August 3, 2020, we converted 4,000 Series
A Preferred Stock into 2,000,000 shares of our common stock. After such conversion, we reclassed the $400,000 redemption value
of the Series A preferred stock to additional paid in capital.
Going Concern
Our financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the
normal course of business. As reflected in the accompanying financial statements, we had a net loss and cash used in operations
of $2,247,703 and $620,673 for the nine months ended September 30, 2020, respectively. Additionally, we had an accumulated deficit
of $4,972,507 at September 30, 2020 and have generated minimal revenues under our new business plan. These factors raise substantial
doubt about our ability to continue as a going concern for a period of twelve months from the issuance date of this report. Management
cannot provide assurance that we will ultimately achieve profitable operations or become cash flow positive or raise additional
debt and/or equity capital. We are seeking to raise capital through additional debt and/or equity financings to fund our operations
in the future. If we are unable to raise additional capital or secure additional lending in the near future to fund our business
plan, management expects that we will need to curtail our operations. Our financial statements do not include any adjustments related
to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should
we be unable to continue as a going concern.
COVID-19
In March 2020, the World Health Organization
declared COVID-19 a global pandemic and recommended containment and mitigation measures worldwide. We are monitoring this closely,
and although operations have not been materially affected by the COVID-19 outbreak to date, the ultimate duration and severity
of the outbreak and its impact on the economic environment and our business is uncertain. As of August 14, 2020, our business remains
open. At this time, we do not foresee any material changes to our operations from COVID-19. While we do not anticipate an impact
on our operations, we cannot estimate the duration of the pandemic and potential impact on our business if our business must close.
In addition, a severe or prolonged economic downturn could result in a variety of risks to our business, including weakened demand
for our products and a decreased ability to raise additional capital when needed on acceptable terms, if at all. At this time,
the Company is unable to estimate the impact of this event on its operations.
Results of Operations – September
30, 2020 Compared to September 30, 2019
The following table summarizes the results
of operations for the three and nine months ended September 30, 2020 and 2019 and were based primarily on the comparative unaudited
condensed financial statements, footnotes and related information for the periods identified and should be read in conjunction
with the financial statements and the notes to those statements that are included elsewhere in this report.
|
|
For the Three Months
|
|
|
For the Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Revenues
|
|
$
|
16,285
|
|
|
$
|
268
|
|
|
$
|
18,795
|
|
|
$
|
268
|
|
Cost of sales
|
|
|
29,449
|
|
|
|
82
|
|
|
|
30,866
|
|
|
|
82
|
|
Gross (loss) profit
|
|
|
(13,164
|
)
|
|
|
186
|
|
|
|
(12,071
|
)
|
|
|
186
|
|
Operating expenses
|
|
|
(623,056
|
)
|
|
|
(242,693
|
)
|
|
|
(1,780,200
|
)
|
|
|
(607,132
|
)
|
Loss from operations
|
|
|
(636,220
|
)
|
|
|
(242,507
|
)
|
|
|
(1,792,271
|
)
|
|
|
(606,946
|
)
|
Other income (expense), net
|
|
|
2,425
|
|
|
|
(22,974
|
)
|
|
|
(455,432
|
)
|
|
|
(24,269
|
)
|
Net loss
|
|
$
|
(633,795
|
)
|
|
$
|
(265,481
|
)
|
|
$
|
(2,247,703
|
)
|
|
$
|
(631,215
|
)
|
Revenues and Cost of Sales:
During the three and nine months ended
September 30, 2020, we generated minimal revenues from operations. We also generated minimal revenues during the three and nine
months ended September 30, 2019. For the three and nine months ended September 30, 2020, revenues consisted of revenues generated
from the sale of NFID products of $16,285 and $18,795, respectively.
During the three and nine months ended
September 30, 2020, cost of sales amounted to $29,449 and $30,866, respectively, as compared to $82 for the three and nine months
ended September 30, 2019. The primary components of cost of sales include the cost of the product, production costs, warehouse
storage costs and shipping fees. Additionally, we recorded an inventory write-down on raw materials for $19,879 for the three and
nine months ended September 30, 2020 which resulted in a negative gross margins for those periods.
Operating Expenses:
For the three and nine months ended September
30, 2020 and 2019, total operating expenses consisted of the following:
|
|
For the Three Months
|
|
|
For the Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Compensation expense
|
|
$
|
37,308
|
|
|
$
|
87,845
|
|
|
$
|
717,198
|
|
|
$
|
203,722
|
|
Professional fees
|
|
|
441,409
|
|
|
|
108,481
|
|
|
|
831,665
|
|
|
|
314,702
|
|
Produce development
|
|
|
17,364
|
|
|
|
-
|
|
|
|
53,689
|
|
|
|
-
|
|
Insurance expense
|
|
|
13,578
|
|
|
|
8,174
|
|
|
|
17,560
|
|
|
|
24,521
|
|
Bad debt expense (recovery)
|
|
|
85,000
|
|
|
|
(6,000
|
)
|
|
|
84,000
|
|
|
|
(11,500
|
)
|
General and administrative expenses
|
|
|
28,397
|
|
|
|
44,553
|
|
|
|
76,088
|
|
|
|
75,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
623,056
|
|
|
$
|
242,693
|
|
|
$
|
1,780,200
|
|
|
$
|
607,132
|
|
For the nine months ended September
30, 2020, compensation expense increased by $513,476, or 252%, as compared to the nine months ended September 30, 2019. This increase
was primarily attributable to increase stock-based compensation of $514,253 related to the issuance of stock to our chief executive
officer for his employment agreement of which is approximately $610,000 in 2020 and increase in his compensation and related benefits
expense of $46,723, offset by a decrease in compensation expense for directors of $47,500.
For the three months ended September
30, 2020, compensation expense decreased by $50,177, or 57%, as compared to the three months ended September 30, 2019. This decrease
was primarily attributable to decrease stock-based compensation of $52,485.
For the nine months ended September
30, 2020, professional fees increased by $516,963, or 164%, as compared to the nine months ended September 30, 2019. The increase
was primarily attributable to an increase in stock-based consulting fees of $434,039 related to the issuance of shares to consultants
for business advisory and strategic planning services, increase legal fees of $72,500, increase investor relation fees of $14,000
offset by decrease in other consulting fees of $2,660 and accounting fees of $916.
For the three months ended September
30, 2020, professional fees increased by $332,928, or 307%, as compared to the three months ended September 30, 2019. The increase
was primarily attributable to an increase in stock-based consulting fees of $234,233 related to the issuance of shares to consultants
for business advisory and strategic planning services, increase legal fees of $61,173, increase investor relation fees of $10,500,
and increase in other consulting fees of $27,021.
|
●
|
Product development costs:
|
For the three and nine months
ended September 30, 2020, in connection with the development of our NFID product line, we incurred product development costs of
$17,364 and $53,689, respectively. We did not incur these costs during the nine months ended September 30, 2019.
For the nine months ended September
30, 2020, insurance expense decreased by $6,961, or 28%, as compared to the nine months ended September 30, 2019. These decreases
were a result of non-renewal of certain insurance policies.
For the three months ended September
30, 2020, insurance expense increased by $5,404, or 66%, as compared to the three months ended September 30, 2019. The increase
was primarily related to increase health insurance paid for our CEO.
|
●
|
Bad debt expense (recovery):
|
For the nine months ended September
30, 2020 and 2019, we recorded bad debt expense of $84,000 and bad debt recovery from the receipt of proceeds of $11,500, respectively.
For the three months ended September 30, 2020 and 2019, we recorded bad debt expense of $85,000 and bad debt recovery from the
receipt of proceeds of $6,000 from the collection of a previously written off note receivable deemed uncollectible. The Company
recorded an allowance on bad debt of $90,000 on its note receivable during the three and nine months ended September 30, 2020 due
to slow collection of the installment payments pursuant to the agreement.
|
●
|
Selling, general and administrative expenses:
|
Selling, general and administrative
expenses consist of advertising and promotion, transfer agent fees, custodian fees, bank service charges, travel, and other fees
and expenses. For the nine months ended September 30, 2020, general and administrative expenses increased by $401, or 1%, as compared
to the nine months ended September 30, 2019.
For the three months ended September
30, 2020, general and administrative expenses decreased by $16,156, or 36%, as compared to the three months ended September 30,
2019. The increase in selling, general and administrative expenses was primarily attributed to an increase in advertising and promotion
expense, EDGAR filing fees, and other expenses related to our new business operations.
Loss from Operations:
For the nine months ended September 30,
2020 and 2019, loss from operations amounted to $1,792,271 and $606,946, respectively, an increase of $1,185,325, or 195%.
For the three months ended September 30, 2020 and 2019, loss from operations amounted to $636,220 and $242,507, respectively,
an increase of $393,713, or 162%.
The increase was primarily a result of
the decrease in operating expenses discussed above.
Other (Expenses) Income:
For the nine months ended September 30,
2020, total other expenses, net amounted to $455,432, as compared to $24,269, a change of $431,163, or 1,777%. For the three months
ended September 30, 2020, total other income (expenses), net amounted to $2,425, as compared to $(22,974), a change of $25,399,
or 111%.
For the nine months ended September
30, 2020 and 2019, we earned interest income of $8,788 and $9,129, respectively, and for the three months ended September 30, 2020
and 2019, we earned interest income of $2,818 and $3,083, respectively, primarily resulting from interest earned on notes receivable.
The decrease was attributable to the decrease in income-earning notes receivable as a result of principal collections.
During the nine months ended
September 30, 2020, we incurred interest expense of $268,996 primarily related to borrowings under convertible debt agreements
and included amortization of debt discount to interest expense of $268,125. All convertible notes were exchanged into common stock
during the second quarter of year 2020.
During the three months ended
September 30, 2020, we incurred interest expense of $393 primarily related to borrowings under a note payable. During the three
months ended September 30, 2019, we incurred interest expense of $469. The decrease in interest expense is due to the exchange
of all convertible notes into common stock during the second quarter of year 2020.
|
●
|
Net change in realized gain on investments:
|
During the three and nine months
ended September 30, 2019, we recorded a realized gain on equity investments of $92,264 and $138,032, respectively, primarily attributed
to a gain from the sale of our remaining equity investment in Ipsidy, Inc. and other equity investments. We did not have such realized
gain or loss during the 2020 period.
|
●
|
Net change in unrealized loss on investments:
|
During the three and nine months
ended September 30, 2019, we recorded an unrealized loss on equity investments of $117,852 and $170,191, respectively, attributable
to our analysis of the fair value of our investment in Ipsidy, Inc. and other equity investments. We did not have such unrealized
gain or loss during the 2020 period.
|
●
|
Loss on debt extinguishment:
|
During the three and nine months
ended September 30, 2020, we recorded loss on debt extinguishment of $0 and $198,000, respectively, due to the exchange of the
convertible notes into common stock pursuant to Exchange Agreements. We did not have such loss during the 2019 period.
Net Loss:
For the nine months ended September 30,
2020 and 2019, net loss amounted to $2,247,703 and $631,215, respectively, an increase of $1,616,488, or 256%. For the three months
ended September 30, 2020 and 2019, net loss amounted to $633,795 and $265,481, respectively, an increase of $368,314, or 139%.
The increase was primarily a result of the increase in operating expenses, and other expenses, net discussed above.
Net Loss Available to Common Stockholders:
For the nine months ended September 30,
2020 and 2019, net loss available to common stockholders amounted to $2,316,703 or $(0.04) per common share (basic and diluted),
and $631,215 or $(0.03) per common share (basic and diluted), respectively, an increase of $1,685,488, or 267%. For the three
months ended September 30, 2020 and 2019, net loss available to common stockholders amounted to $633,795 or $(0.01) per common
share (basic and diluted), and $265,481 or $(0.01) per common share (basic and diluted), respectively, an increase of $368,314,
or 139%. The increase was primarily a result of the increase in operating expenses, and other expenses, net discussed above.
Results of Operations – Year Ended
December 31, 2019 Compared to December 30, 2018
The following table summarizes the results
of operations for the years ending December 31, 2019 and 2018 and were based primarily on the comparative audited financial statements,
footnotes and related information for the periods identified and should be read in conjunction with the financial statements and
the notes to those statements that are included elsewhere in this report.
|
|
Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Revenues
|
|
$
|
40,569
|
|
|
$
|
-
|
|
Cost of sales
|
|
|
(27,387
|
)
|
|
|
-
|
|
Operating expenses
|
|
|
(943,585
|
)
|
|
|
594,242
|
|
Loss from operations
|
|
|
(930,403
|
)
|
|
|
(594,242
|
)
|
Other (expense) income, net
|
|
|
(82,891
|
)
|
|
|
(375,221
|
)
|
Net loss
|
|
$
|
(1,013,294
|
)
|
|
$
|
(969,463
|
)
|
Revenues and Cost of Sales:
During the year ended December 31, 2019,
we generated minimal revenues from operations. We did not generate revenues during the year ended December 31, 2018. For the year
ended December 31, 2019, revenues consisted of revenues generated from the sale of shoes of $40,000 and revenues generated from
the sale of NFID products of $569.
During the year ended December 31, 2019,
cost of sales amounted to $27,387 as compared to $0 for the year ended December 31, 2018. For the year ended December 31, 2019,
revenues consisted of cost of sales incurred from the sale of shoes of $26,973 and cost of sales incurred from the sale of NFID
products of $414.
Operating Expenses:
For the years ended December 31, 2019 and
2018, total operating expenses consisted of the following:
|
|
For the Years Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Compensation expense
|
|
$
|
319,587
|
|
|
$
|
145,000
|
|
Professional fees
|
|
|
431,015
|
|
|
|
203,559
|
|
Product development
|
|
|
63,465
|
|
|
|
-
|
|
Insurance expense
|
|
|
26,565
|
|
|
|
35,195
|
|
Bad debt (recovery) expense
|
|
|
(13,500
|
)
|
|
|
35,000
|
|
Selling, general and administrative expenses
|
|
|
87,013
|
|
|
|
76,076
|
|
Impairment loss
|
|
|
29,440
|
|
|
|
99,412
|
|
Total operating expenses
|
|
$
|
943,585
|
|
|
$
|
594,242
|
|
For the year ended December 31,
2019, compensation expense increased by $174,587, or 120.4%, as compared to the year ended December 31, 2018. This increase was
attributable to an increase in stock-based compensation of $142,960 and an increase in compensation expense of $31,627.
For the year ended December 31,
2019, professional fees increased by $227,456, or 111.7%, as compared to the year ended December 31, 2018. The increase was attributable
to an increase in consulting fee of $238,862, of which $35,000 was stock based compensation, related to marketing and advisory
services related to our new NFID clothing product line.
|
●
|
Product development costs:
|
For the year ended December 31,
2019, in connection with the development of our NFID product line, we incurred product development costs of $63,465. We did not
incur these costs during the year ended December 31, 2018.
For the year ended December 31,
2018, insurance expense decreased by $8,630, or 24.5%, as compared to the year ended December 31, 2018.
|
●
|
Bad debt (recovery) expense:
|
For the year ended December 31,
2019, we recorded bad debt recovery from the receipt of proceeds of $13,500 from the collection of a previously written off note
receivable deemed uncollectible. For the year ended December 31, 2018, we recorded bad debt of $50,000 related to the recording
of an allowance for doubtful accounts related to a note receivable deemed uncollectible offset by the receipt of proceeds of $15,000
from the collection of previously written off a convertible debt investment.
|
●
|
Selling, general and administrative expenses:
|
Selling, general and administrative
expenses consist of non-cash amortization expense of intangible assets, advertising and promotion, transfer agent fees, custodian
fees, bank service charges, travel, and other fees and expenses. For the year ended December 31, 2019, general and administrative
expenses increased by $10,937, or 14.4%, as compared to the year ended December 31, 2018. The increase in selling, general and
administrative expenses was primarily attributed to an increase in advertising and promotion expense, computer and internet expenses,
and other expenses related to our new business operations offset be a decrease in custody fees and a decrease in amortization of
intangible assets.
At December 31, 2018, based on
management’s impairment analysis, we recorded an impairment loss of $99,412 due to the write off the remaining unamortized
carrying value of our intangible asset of $87,745 and the remaining prepaid expense of $11,667 related to the Brand Ambassador
Agreements. We determined that there was a significant adverse change in the extent or manner in which this long-lived asset was
being used. Additionally, at December 31, 2019, based on management’s impairment analysis, we recorded an impairment loss
of $29,440 due to the impairment of trademarks. We determined that there was a significant adverse change in the extent or manner
in which we use our trademarks.
Loss from Operations:
For the years ended December 31, 2019 and
2018, loss from operations amounted to $930,403 and $594,242, respectively, an increase of $349,343, or 58.8%. The increase
was primarily a result of the changes in operating expenses discussed above.
Other (Expenses) Income:
For the year ended December 31, 2019 and
2018, other expenses, net amounted to $82,891 and $375,221, respectively, a decrease of $292,330, or 77.9%.
For the years ended December
31, 2019 and 2018, we earned interest income of $12,196 and $4,218, primarily resulting from interest earned on notes receivable,
convertible notes receivable and other notes receivable, and on bank deposits. The increase was attributable to an increase in
income-earning notes receivable.
During the year ended December
31, 2019, we incurred interest expense of $62,928 primarily related to the increase in borrowings under convertible debt agreements
and included amortization of debt discount to interest expense of $61,875. We did not incur interest expense during the year ended
December 31, 2018.
|
●
|
Net realized gain (loss) on investments:
|
For the year ended December 31,
2019, we recorded a net realized gain of $138,032 primarily attributed to a gain from the sale of our remaining equity investment
in Ipsidy, Inc.
For the year ended December 31,
2018, we disposed of or permanently impaired certain equity investments recognizing a net realized loss of $100,759. For the year
ended December 31, 2018, net realized loss of equity investments was attributed to a net realized gain of $616,941 from sale of
two investments offset by net realized loss of $717,700 due to the expiration of warrants and permanent impairment of certain debentures,
warrants and non-marketable equity securities.
|
●
|
Net change in unrealized (loss) gain on investments:
|
During the year ended December
31, 2019, we recorded an unrealized loss on equity investments of $(170,191) attributable to our analysis of the fair value of
our investment in Ipsidy, Inc. and attributable to the reversal of previously recorded unrealized gains upon sales of Ipsidy.
For the year ended December 31,
2018, we recognized a net change in unrealized (loss) gain on investments of $(278,680). The change was attributed to our analysis
of the fair value of our investment in Ipsidy, Inc. coupled with the reversal of previously recorded unrealized gains upon sales
of Ipsidy common shares for which we recorded an unrealized loss on investments of ($991,380), offset by the permanent write down
of nonmarketable securities resulting in the reversal of previously recorded unrealized losses for which we recorded an unrealized
gain of $712,700.
Net Loss:
For the years ended December 31, 2019 and
2018, net loss amounted to $1,013,294 or $(0.04) per common share (basic and diluted), and $969,463 or $(0.02) per common share
(basic and diluted), respectively, a change of $43,831, or 4.5%. The change was primarily a result of the changes in revenue. Cost
of sales, operating expenses, and other expenses, net discussed above.
Liquidity and Capital Resources
Liquidity is the ability of an enterprise
to generate adequate amounts of cash to meet its needs for cash requirements. We had a working capital of $1,964,804 and $1,645,712
in cash and cash equivalents as of September 30, 2020 and working capital of $377,108 and $111,752 in cash and cash equivalents
as of December 31, 2019.
|
|
|
|
|
|
|
|
Nine months ended
September 30, 2020
|
|
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
|
Working
Capital
Change
|
|
|
Percentage
Change
|
|
Working capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
$
|
2,086,834
|
|
|
$
|
493,845
|
|
|
$
|
1,592,989
|
|
|
|
323
|
%
|
Total current liabilities
|
|
|
(122,030
|
)
|
|
|
(116,737
|
)
|
|
|
5,293
|
|
|
|
5
|
%
|
Working capital:
|
|
$
|
1,964,804
|
|
|
$
|
377,108
|
|
|
$
|
1,587,696
|
|
|
|
421
|
%
|
The increase in working capital of $1,587,696
was primarily attributable to an increase in current assets of $1,592,989 which was primarily attributable to an increase in cash
of $1,533,960, increase in prepaid and other current assets of $294,651 offset by decreases in notes receivable of $110,000 and
inventory – current of $125,622.
In October 2019, we entered into Securities
Purchase Agreements (the “Purchase Agreements”) with accredited investors. Pursuant to the terms of the Purchase Agreements,
we issued and sold to investors a convertible promissory note in the aggregate principal amount of $330,000 (the “Notes”),
and a warrant to purchase up to 1,650,000 shares of the Company’s common stock (the “Warrants”). We received
net proceeds of $295,000, net of origination issue discount of $30,000 and fees of $5,000. The Notes are due and payable in October
2020. Prior to an Event of Default, no interest shall accrue on these Notes. On April 15, 2020, the Company entered into Exchange
Agreements with the holders of these convertible promissory notes, which notes were originally issued in October 2019. Pursuant
to these Exchange Agreements, the holders agreed to exchange their convertible promissory notes and 1,650,000 warrants issued in
connection with this debt for an aggregate of 4,125,000 shares of our common stock at a price of $0.08 per share.
On April 1, 2020, we entered into a Promissory
Note Agreement (the “Note”) with a company owned by the Company’s chief executive officer in the amount of $20,000.
The Note bearing at 6% per annum, was unsecured, and all principal and interest amounts outstanding was due on June 30, 2020. On
April 30, 2020, we repaid this note payable – related party and all interest due.
On March 11, 2020, we entered into a Promissory
Note Agreement (the “Note”) with our chief executive officer in the amount of $15,000. The Note bearing at 6% per annum,
was unsecured, and all principal and interest amounts outstanding was due on April 10, 2020. On April 30, 2020, we repaid the note
payable – related party of $15,000 and all interest due.
On April 17, 2020, we entered into subscription
agreements with certain accredited investors pursuant to which we issued an aggregate of 7,764,366 shares of the Company’s
common stock for proceeds of $77,644, or $0.01 per share.
On April 28, 2020 (the “Closing Date”),
we entered into securities purchase agreements (collectively, the “Purchase Agreement”) with certain institutions and
accredited investors (each an “Investor” and collectively, the “Investors”) for the sale of an aggregate
29,993,750 shares of the Company’s common stock at a price of $0.08 per share for gross proceeds of $2,399,500, before deducting
placement agent of $242,950 and other offering expenses of $118,460 (the “Private Placement”). The Purchase Agreement
contains customary representations, warranties and covenants of the parties, and the closing was subject to customary closing conditions.
The Purchase Agreement also provides that until the six (6) month anniversary of the date of the Purchase Agreement, in the event
of a subsequent financing (except for certain exempt issuances as provided in the Purchase Agreement) by the Company, each Investor
that invested over $100,000 pursuant to the Purchase Agreement will have the right to participate in such subsequent financing
up to an amount equal to 50% of the subsequent financing on the same terms, conditions and price provided for in the subsequent
financing. The net proceeds of the Private Placement are expected to be used for working capital purposes and to further execute
on the Company’s existing business.
Cash Flows
A summary of cash flow activities is summarized
as follows:
|
|
Nine months ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Cash used in operating activities
|
|
$
|
(620,673
|
)
|
|
$
|
(501,520
|
)
|
Cash provided by investing activities
|
|
|
20,000
|
|
|
|
186,741
|
|
Cash provided by (used in) financing activities
|
|
|
2,134,633
|
|
|
|
2,656
|
|
Net increase (decrease) in cash
|
|
$
|
1,533,960
|
|
|
$
|
(312,123
|
)
|
Net Cash Used in Operating Activities:
Net cash flow used in operating activities
was $620,673 for the nine months ended September 30, 2020 as compared to $501,520 for the nine months ended September 30, 2019,
an increase of $119,153.
|
●
|
Net cash flow used in operating activities for the nine months ended September 30, 2020 primarily reflected a net loss of $2,247,703 adjusted for the add-back of non-cash items such as amortization of debt discount of $268,125, bad debt of $90,000, total stock-based compensation of $1,070,765, loss from debt extinguishment of $198,000, inventory write-down of $19,879, and changes in operating asset and liabilities primarily consisting of an increase in prepaid expenses and other current assets of $68,045, and an increase in accounts payable and accrued expenses of $59,910.
|
|
|
|
|
●
|
Net cash flow used in operating activities for the nine months ended September 30, 2019 primarily reflected a net loss of $631,215 adjusted for the add-back on non-cash items such as stock-based compensation of $122,472, net realized gain on equity investments of $138,032, and a net unrealized loss on equity investments of $170,191, and changes in operating asset and liabilities consisting of an increase in inventory of $72,607, a decrease in prepaid expenses and other current assets of $10,471 and an increase in accounts payable and accrued expenses of $36,825.
|
Cash Provided by Investing Activities
Net cash provided by investing activities
was $20,000 for the nine months ended September 30, 2020 and consisted of proceeds from collection on note receivable. Net cash
provided by investing activities was $186,741 for the nine months ended September 30, 2019 and consisted of proceeds from the sale
of equity securities of $191,938 offset by the purchase of equity investment, at fair value of $5,197.
Cash Provided by Financing Activities
Net cash provided by financing activities
was $2,134,633 for the nine months ended September 30, 2020 as compared to cashed provided in financing activities of $2,656 for
the nine months ended September 30, 2019. During the nine months ended September 30, 2020, we received net proceeds from sale of
common stock of $2,115,733, related party loans of $35,000, proceeds from a note payable of $18,900 offset by repayment on notes
payable- related party of $35,000. During the nine months ended September 30, 2019, we received proceeds from note payable –
related party of $25,000 and repaid $22,344 of an insurance finance loan.
Cash Requirements
We believe that our existing available
cash will not be enough to enable us to meet the working capital requirements for at least 12 months from the date of this report.
Our primary uses of cash have been for salaries, fees paid to third parties for professional services, and general and administrative
expenses. The following trends are reasonably likely to result in changes in our liquidity over the near to long term:
|
●
|
An increase in working capital requirements to finance our current business,
|
|
|
|
|
●
|
An increase in product development and marketing fees related to recently acquired NFID product line and other lines of business;
|
|
|
|
|
●
|
Addition of administrative and sales personnel as the business grows, and
|
|
|
|
|
●
|
The cost of being a public company.
|
Since we believe that our existing available
cash will not enable us to meet our working capital requirements for at least 12 months from the date of this report, we will need
to raise additional funds to for the development and marketing of our recently acquitted NFID product line. If we are unable to
raise capital, we may be required to reduce the scope of our product development and marketing activities, which could harm our
business plans, financial condition and operating results, cease our operations entirely, in which case, you will lose all of your
investment.
Management cannot provide assurance that
we will ultimately achieve profitable operations or become cash flow positive or raise additional debt and/or equity capital. We
will seek to raise capital through additional debt and/or equity financings to fund operations, for product development and for
marketing in the future. If we are unable to raise capital or secure lending in the near future, management expects that the Company
may need to curtail its operations.
Until such time as we generate substantial
product revenue to offset operational expenses, we expect to finance our cash needs through a combination of public and private
equity offerings and debt financing. We may be unable to raise capital or enter into such other arrangements when needed or
on favorable terms or at all. Our failure to raise capital or enter into such other arrangements as and when needed would
have a negative impact on our financial condition. We have no agreements or arrangements to raise capital.
We currently have no material commitments
for any capital expenditures.
Liquidity is the ability of an enterprise
to generate adequate amounts of cash to meet its needs for cash requirements. We had a working capital of $377,108 and $111,752
in cash and cash equivalents as of December 31, 2019 and working capital of $578,002 and $336,679 in cash and cash equivalents
as of December 31, 2018.
|
|
|
|
|
|
|
|
Year Ended
December 31, 2019
|
|
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
|
Working
Capital
Change
|
|
|
Percentage
Change
|
|
Working capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
$
|
493,845
|
|
|
$
|
625,977
|
|
|
$
|
(132,132
|
)
|
|
|
(23.1
|
)%
|
Total current liabilities
|
|
|
(116,737
|
)
|
|
|
(47,975
|
)
|
|
|
(68,762
|
)
|
|
|
(143.3
|
)%
|
Working capital:
|
|
$
|
377,108
|
|
|
$
|
578,002
|
|
|
$
|
(200,894
|
)
|
|
|
(34.8
|
)%
|
The decrease in working capital of $200,894
was primarily attributable to a decrease in current assets of $132,132 which was primarily attributable to a decrease in cash of
$224,927 and a decrease in equity investments, at fair value of $215,528, offset by an increase in note receivable of $200,000
and an increase in inventory of $129,393, and an increase in current liabilities of $68,762.
In October 2019, we entered into Securities
Purchase Agreements (the “Purchase Agreements”) with accredited investors. Pursuant to the terms of the Purchase Agreements,
we issued and sold to investors a convertible promissory note in the aggregate principal amount of $330,000 (the “Notes”),
and a warrant to purchase up to 1,650,000 shares of the Company’s common stock (the “Warrants”). We received
net proceeds of $295,000, net of origination issue discount of $30,000 and fees of $5,000. The Notes are due and payable in October
2020. Prior to an Event of Default, no interest shall accrue on these Notes.
At any time after the Original Issue Date
until the respective Note is no longer outstanding, the Notes shall be convertible, in whole or in part, into shares of our common
stock at the option of the Holder, at any time and from time to time. In accordance with the Purchase Agreements and the Notes,
subject to the adjustments as defined in the Purchase Agreements and Notes. The conversion price (the “Conversion Price”)
shall be equal to $0.20. We may prepay the Notes at any time prior to its six-month anniversary, subject to pre-payment charges
as detailed in the Note. Upon every conversion, we shall deliver an additional $1,250 worth of shares (as calculated by the Conversion
Price in effect on the conversion notice being honored) to cover the Holder’s expenses and deposit fees associated with each
notice of conversion.
Cash Flows
A summary of cash flow activities is summarized as follows:
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Cash (used in) provided by operating activities
|
|
$
|
(794,324
|
)
|
|
$
|
272,637
|
|
Cash provided by (used in) investing activities
|
|
|
186,741
|
|
|
|
(250,000
|
)
|
Cash provided by financing activities
|
|
|
382,656
|
|
|
|
19,451
|
|
Net (decrease) increase in cash
|
|
$
|
(224,927
|
)
|
|
$
|
42,088
|
|
Net Cash (Used in) Provided by Operating Activities:
Net cash flow (used in) provided by operating
activities was $(794,324) for the year ended December 31, 2019 as compared to $272,637 for the year ended December 31, 2018, a
negative change of $1,066,961.
|
●
|
Net cash flow used in operating activities for the year ended December 31, 2019 primarily reflected a net loss of $1,013,294 adjusted for the add-back of non-cash items such as impairment loss of $29,440, stock-based compensation of $177,960, amortization of debt discount of $61,875, net realized gain on equity investments of $138,032, and a net unrealized loss on equity investments of $170,191, and changes in operating asset and liabilities consisting of an increase in inventory of $129,393, a decrease in prepaid expenses and other current assets of $17,698, and an increase in accounts payable and accrued expenses of $29,231.
|
|
|
|
|
●
|
Net cash flow provided by operating activities for the year ended December 31, 2018 primarily reflected our net loss of $969,463 adjusted for the add-back on non-cash items such as amortization expense of $17,550, impairment loss of $99,412, bad debt expense, net of recovery of $15,000, of $35,000, net realized loss on equity investments of $100,759, and net unrealized loss on equity investments of $278,680, and changes in operating asset and liabilities consisting of cash proceeds from sale of equity investments of $727,496, a decrease in prepaid expenses of $22,888, an increase in inventory of $26,973, and a decrease in accounts payable and accrued expenses of $12,712.
|
Net Cash Used in Investing Activities
Net cash flow provided by (used in) investing
activities was $186,741 for the year ended December 31, 2019 as compared to $(250,000) for the year ended December 31, 2018.
For the year ended December 31, 2019, we
received proceeds from the sale of equity investments of $191,938 offset by the purchase of equity investments of $5,197.
During the year ended December 31, 2018,
we used cash of $250,000 to fund a) a two-year promissory note receivable agreement with a principal balance of $200,000 of which
$100,000 was funded to the Seller in September 2018 and the remaining $100,000 was funded in October 2018, and b) a Promissory
Note Agreement with a principal balance of $50,000.
Cash Provided by Financing Activities
Net cash provided by financing activities
was $382,656 for the year ended December 31, 2019 as compared to $19,451 for the year ended December 31, 2018. During the year
ended December 31, 2019, we received net proceeds from the sale of series B preferred stock of $110,000, net proceeds from the
convertible debt of $295,000, and proceeds from related party loan of $25,000 offset by the repayment of insurance finance loan
of $22,344 and the repayment of related party loan $25,000. During the year ended December 31, 2018, we received net proceeds from
the sale of common stock of $24,500 offset by payments made for the redemption of common stock of $2,872 and repayment of an insurance
finance loan of $2,177.
Off-Balance Sheet Arrangements; Commitments
and Contractual Obligations
As of September 30, 2020, we did not have
any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K and did not have any commitments or
contractual obligations.
Critical Accounting Policies
Basis of Presentation
The accompanying consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America, (“U.S.
GAAP”).
Cash and Cash Equivalents
We consider all highly liquid instruments
purchased with an original maturity of three months or less and money market accounts to be cash equivalents.
Inventory
Inventory, consisting of raw materials
and finished goods, are stated at the lower of cost and net realizable value utilizing the first-in, first-out (FIFO) method. A
reserve is established when management determines that certain inventories may not be saleable. If inventory costs exceed expected
net realizable value due to obsolescence or quantities in excess of expected demand, the Company will record reserves for the difference
between the cost and the net realizable value. These reserves shall be recorded based on estimates and included in cost of sales.
Additionally, the Company shall make an analysis of its inventory for any slow-moving inventory. Accordingly, the Company shall
reclass sellable inventories that may not be sold in one year to non-current assets.
Intangible Assets
Intangible assets are carried at cost less
accumulated amortization, computed using the straight-line method over the estimated useful lives. Intangible assets consist of
a brand ambassador agreement which was being amortized over a period of one year and trademarks which are recorded at cost and
have an indefinite useful life and are not amortized.
Impairment of Long-lived Assets
In accordance with ASC Topic 360, we review
long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may
not be fully recoverable, or at least annually. We recognize an impairment loss when the sum of expected undiscounted future cash
flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s
estimated fair value and its book value.
Equity Investments
Equity investments comprised mainly of
nonmarketable common stock and membership interests, are recorded at cost, as adjusted for other than temporary impairment write-downs
and are evaluated for impairment periodically.
Net Realized Gains or Losses and
Net Change in Unrealized Gains or Losses on Investments
Realized gain or loss is recognized when
an investment is disposed of and is computed as the difference between the Company’s cost basis and the net proceeds received
from such disposition. Realized gains and losses on investment transactions are determined by specific identification.
Net change in unrealized appreciation or depreciation is computed as the difference between the fair value of the investment and
the cost basis of such investment, including any reversal of previously recorded unrealized appreciation/depreciation when gains
or losses are realized.
Fair Value of Financial Instruments
and Fair Value Measurements
The Company uses the guidance of ASC Topic
820 for fair value measurements which clarifies the definition of fair value, prescribes methods for measuring fair value, and
establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:
Level 1-Inputs are unadjusted quoted prices
in active markets for identical assets or liabilities available at the measurement date.
Level 2-Inputs are unadjusted quoted prices
for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets
that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable
market data.
Level 3-Inputs are unobservable inputs
which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the
asset or liability based on the best available information.
The carrying amounts reported in the balance
sheets for cash, notes receivable, prepaid expenses and other current assets, inventory, accounts payable and accrued expenses,
note payable – related party, and convertible notes payable approximate their fair market value based on the short-term maturity
of these instruments.
Revenue Recognition
The Company applies ASC Topic 606, Revenue
from Contracts with Customers (“ASC 606”). ASC 606 establishes a single comprehensive model for entities to
use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance.
This standard requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount
that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also requires
certain additional disclosures. The Company adopted this standard using the modified retrospective approach, which requires applying
the new standard to all existing contracts not yet completed as of the effective date and recording a cumulative-effect adjustment
to retained earnings as of the beginning of the fiscal year of adoption. The adoption of ASC 606 on January 1, 2018 did not have
any impact on the process for, timing of, and presentation and disclosure of revenue recognition from contracts and there was no
cumulative effect adjustment.
We record interest and dividend income
on an accrual basis to the extent that we expect to collect such amounts.
Product sales are recognized when the product
is shipped to the customer and title is transferred and are recorded net of any discounts or allowances.
Stock-based Compensation
Stock-based compensation is accounted for
based on the requirements of ASC 718 – “Compensation –Stock Compensation”, which requires recognition
in the financial statements of the cost of employee, director, and non-employee services received in exchange for an award of equity
instruments over the period the employee, director , or non-employee is required to perform the services in exchange for the award
(presumptively, the vesting period). The ASC also requires measurement of the cost of employee, director, and non-employee services
received in exchange for an award based on the grant-date fair value of the award. The Company has elected to recognize forfeitures
as they occur as permitted under ASU 2016-09 Improvements to Employee Share-Based Payment.
Income Taxes
Deferred income tax assets and liabilities
arise from temporary differences between the financial statements and tax basis of assets and liabilities, as measured by the enacted
tax rates, which are expected to be in effect when these differences reverse. Deferred tax assets and liabilities are classified
as current or non-current, depending upon the classification of the asset or liabilities to which they relate. Deferred tax assets
and liabilities not related to an asset or liability are classified as current or non-current depending on the periods in which
the temporary differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets
to the amount expected to be realized.
The Company follows the provisions of FASB
ASC 740-10, “Uncertainty in Income Taxes”. Certain recognition thresholds must be met before a tax position is recognized
in the financial statements. An entity may only recognize or continue to recognize tax positions that meet a “more-likely-than-not”
threshold. The Company does not believe it has any uncertain tax positions as of December 31, 2019 and 2018 that would require
either recognition or disclosure in the accompanying financial statements.
MANAGEMENT
The following table sets forth the name, age and positions of
our executive officers and directors. Each director of the Company serves for a term of one year or until the successor is elected
at the Company’s annual shareholders’ meeting and is qualified, subject to removal by the Company’s shareholders. Each
officer serves, at the pleasure of the board of directors, for a term of one year and until the successor is elected at the annual
meeting of the board of directors and is qualified.
Name and Business Address
|
|
Age
|
|
Position
|
Eric Weisblum
|
|
50
|
|
Chairman, Chief Executive Officer, Chief Financial Officer and President
|
Wayne D. Linsley (1)
|
|
63
|
|
Director
|
Dr. Kevin Muñoz
|
|
43
|
|
Director
|
The following is a brief account of the
education and business experience of each director and executive officer of our Company, indicating the person’s principal
occupation during that period, and the name and principal business of the organization in which such occupation and employment
were carried out.
Eric Weisblum. Mr. Weisblum has
been our Chief Executive Officer and Chairman of the Board since November 2015, and our President and a member of the Board since
January 2013. Mr. Weisblum co-founded Whalehaven Capital in 2003. Mr. Weisblum is currently a Partner of Whalehaven Capital’s
General Partner and Managing Member of JAWS Capital Partners, LLC. From 2002 to 2003, Mr. Weisblum was a registered
representative with Domestic Securities, a New Jersey-based broker dealer. While with Domestic Securities, Mr. Weisblum held the
Series 7 - General Securities Representative, the Series 63 – Uniform Securities Agent State Law Examination, and the Series
55 – Registered Equity Trader securities registrations. From 1993 to 2002, Mr. Weisblum originated, structured,
traded, and placed structured financing transactions at M.H. Meyerson & Co. Inc., a publicly traded registered investment bank.
Mr. Weisblum holds a Bachelor of Arts degree from the University of Hartford’s Barney Business School. Mr. Weisblum’s
significant experience with private investment funds was instrumental in his selection as a member of the Board.
Wayne D. Linsley. Wayne
Linsley has served as our director since January 2020. Since 2011, Mr. Linsley has served as the Vice President of Operations of
CFO Oncall, Inc., a company that provides financial management and CFO services, and since 2010 he has served as the Managing Member
of Flagship Advisory & Management Group, LLC, a management consulting firm. In addition, since 2019, Mr. Linsley has served
as the Chief Executive Officer and sole owner of Executive Outsource Group, Inc., a company that provides financial reporting services.
Mr. Linsley has served in various other capacities including Alternate Channels Manager of Mettel; Director of Channel Sales of
Impsat, USA; National Accounts Manager of Venali, Inc; and Director of Sales of Broadview Networks. Since April 2020, Mr. Linsley
has served as a member of the board of directors of Hoth Therapeutics, Inc. Mr. Linsley received his bachelor of business administration
degree in accounting/business administration from Siena College. Mr. Linsley is qualified to serve as a member of the Board because
of his financial reporting and general business knowledge.
Dr. Kevin Muñoz. Dr. Muñoz
has served as our director since October 1, 2020. Dr. Muñoz is currently the Director of Operations at Physical Medicine
and Rehabilitation, an outpatient facility for the treatment of musculoskeletal issues, and has served in various capacities with
Physical Medicine and Rehabilitation since 2008. Dr. Muñoz holds an MD from Xavier University School of Medicine and a BS
from the University of Michigan. Mr. Muñoz is qualified to serve as a member of the Board because of his medical qualifications and his general business knowledge.
Family Relationships
There are no family relationships among
any of our executive officers or directors.
Arrangements between Officers and Directors
Except as set forth herein, to our knowledge,
there is no arrangement or understanding between any of our officers or directors and any other person pursuant to which the officer
or director was selected to serve as an officer or director.
Involvement in Certain Legal Proceedings
We are not aware of any of our directors
or officers being involved in any legal proceedings in the past ten years relating to any matters in bankruptcy, insolvency, criminal
proceedings (other than traffic and other minor offenses), or being subject to any of the items set forth under Item 401(f) of
Regulation S-K.
Board Independence and Committees
We are not required to have any independent
members of the Board of Directors. The board of directors has determined that (i) Eric Weisblum has a relationship with the company
which, in the opinion of the board of directors, would not allow him to be considered as an “independent director”
as defined in the Marketplace Rules of The NASDAQ Stock Market and (ii) Wayne D. Linsley and Dr. Kevin Muñoz are independent
directors as defined in the Marketplace Rules of The NASDAQ Stock Market.
As the Company was formerly a BDC as defined
by the Investment Company Act, the Board of Directors was required to establish an Audit Committee. Although the Company is no
longer defined as a BDC, the Company maintained an Audit Committee through December 2019. The Company no longer maintains an Audit
Committee.
The Board as a whole carries out the functions
of nominating and corporate governance and compensation committees.
Scientific Advisory Board
We have formed a scientific advisory board that is intended
to help advise management regarding potential acquisition and development of products. The members of such board are as follows:
Matthew W. Johnson, Ph.D.; Dr. Josh Woolley MD/Ph.D.; Dr. Peter Hendricks; and Dr. Charles Nemeroff.
Matthew W. Johnson, Ph.D., Professor at
Johns Hopkins, is an expert on psychedelics, other drugs, and addiction. Working with psychedelics since 2004, he has published
over 50 scientific papers on psychedelics. Mr. Johnson published psychedelic safety guidelines in 2008, helping to resurrect psychedelic
research. He published the first research on psychedelic treatment of tobacco addiction in 2014, and the largest study of psilocybin
in cancer distress in 2016. His 2018 psilocybin review recommended Schedule IV upon medical approval. He has guided over 100 psychedelic
sessions. Mr. Johnson also conducts behavioral economic research on both addiction and sexual risk. He conducts research with most
psychoactive drug classes, was 2018 President of the Psychopharmacology Division of the American Psychological Association, and
is the 2020-2021 President of the International Society for Research on Psychedelics.
Dr. Josh Woolley MD/Ph.D. is an Associate
Professor in the Department of Psychiatry and Behavioral Sciences at the University of California, San Francisco (“UCSF”).
He is also a licensed psychiatrist on staff at the San Francisco Veterans Affairs Medical Center. He received both his MD and his
Ph.D. in Neuroscience from UCSF and completed his psychiatry residency training at UCSF. Dr. Woolley is the director and founder
of the Bonding and Attunement in Neuropsychiatric Disorders (“BAND”) Laboratory. The mission of the BAND Lab is to
understand why people with mental illnesses, including schizophrenia, posttraumatic stress disorder, mood disorders, and substance
use disorders, have trouble with social connection, and to develop and test novel treatments for these deficits. His laboratory
is actively investigating psilocybin therapy for multiple disorders including major depressive disorder, bipolar depression, chronic
pain, and mood symptoms associated with Parkinson's Disease.
Dr. Peter Hendricks, Professor in the Department
of Health Behavior, University of Alabama at Birmingham is currently researching the use of psilocybin to see if it will help individuals
addicted to cocaine stop using the harmful drug. He theorizes that psilocybin, which is the active compound found in Psilocybe
mushrooms, also known as "magic mushrooms," can be understood as working from multiple angles, including neurobiological
and psychological, with an emphasis on subjective transcendent experiences of awe. Dr. Hendricks is able to speak about his research
as well as novel and more effective treatments for substance abuse dependence, with specific areas of focus on tobacco, cocaine
and polysubstance abuse in vulnerable populations.
Dr. Charles Nemeroff is chair and professor
with the Department of Psychiatry and Behavioral Sciences. He also directs the Institute for Early Life Adversity Research within
the Department of Psychiatry and Behavioral Sciences as part of the Mulva Clinic for the Neurosciences. Prior to joining Dell Med,
Dr. Nemeroff was chair of the Department of Psychiatry and Behavioral Sciences and clinical director of the Center on Aging at
the University of Miami Miller School of Medicine in Miami, Florida. He received his medical degree and doctorate degrees in neurobiology
from the University of North Carolina (“UNC”) School of Medicine. After psychiatry residency training at UNC and Duke
University, he held faculty positions at Duke University Medical Center and at Emory University School of Medicine before relocating
to the University of Miami in 2009. He has served as president of the American College of Psychiatrists and the American College
of Neuropsychopharmacology, and sits on the Scientific Advisory Board of the Brain and Behavior Research Foundation. He is President-elect
of the Anxiety and Depression Association of America and a member of the National Academy of Medicine.
EXECUTIVE COMPENSATION
Our principal executive officer during
our fiscal year ended December 31, 2020 (whom we also refer to as our “named executive officer”) was Eric Weisblum.
Summary Compensation Table
Name and
Principal Position
|
|
Fiscal
Years
Ended
12/31
|
|
|
Salary
Paid
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards
($)
|
|
|
Non-Equity
Incentive Plan
Compensation
($)
|
|
|
Non- Qualified Deferred
Compensation
Earnings
($)
|
|
|
Other
Compensation
($)
|
|
|
Total
($)
|
|
Eric Weisblum,
|
|
|
2020
|
|
|
$
|
115,000
|
|
|
|
-
|
|
|
$
|
610,476
|
(3)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
725,476
|
|
Chief Executive Officer and Chief Financial Officer (1)
|
|
|
2019
|
|
|
|
90,989
|
|
|
|
-
|
|
|
|
-
|
|
|
|
107,970
|
(2)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
198,959
|
|
(1)
|
Represents fees paid to Eric Weisblum as an independent contractor.
|
|
|
(2)
|
On April 15, 2019, pursuant to an employment agreement, we
granted Mr. Weisblum an option pursuant to purchase 200,000 of the Company’s common stock at an exercise price of
$0.0001 per share. The Options expire through July 15, 2024. This option fully vested on July 15, 2019. Additionally, on
October 15, 2019, we granted to Mr. Weisblum an option to purchase 100,000 shares of the Company’s common stock at an
exercise price equal to par value of the Company’s common stock of $0.0001 per share. Should the Company terminate this
employment agreement, the right to purchase shares shall cease as of the date of termination. The options were valued at the
grant date using a Black-Scholes option pricing model with the following assumptions; risk-free interest rates ranging from
1.59% to 2.37%, expected dividend yield of 0%, expected option term of 5 years using the simplified method and expected
volatility ranging from 74% to 158.6% based on comparable and calculated volatility. On the grant dates, the fair value of
the options aggregated $107,970.
|
|
|
(3)
|
On April 17, 2020, the Company entered into an Employment Agreement with Mr. Weisblum, the Company’s Chief Executive Officer, pursuant to which Mr. Weisblum will continue to serve as Chief Executive Officer and Chief Financial Officer of the Company. Mr. Weisblum’s base salary was $120,000, and he shall be eligible to earn a bonus in an amount of up to $120,000, subject to the sole discretion of the Company’s board of directors. In addition, Mr. Weisblum was granted 7,630,949 shares of the Company’s common stock. These shares were valued at $610,476, or $0.08 per common share, based on contemporaneous common share sales. Such employment agreement was amended in January 2021.
|
Option/SAR Grants in Fiscal Year Ended December 31, 2020
Pursuant to a six month employment agreement
with the Company’s chief executive officer (the “Executive”) dated April 15, 2019 (the “Effective Date”),
the Company agreed to grant to Executive an option (the “Option’’) to purchase up to 200,000 shares of the Company’s
common stock at an exercise price equal to par value of the Company’s common stock of $0.0001 per share, of which 100,000
vested on April 15, 2019 and 100,000 vested on July 15, 2019. On October 15, 2019, the Company granted to Executive an option to
purchase 100,000 shares of the Company’s common stock at an exercise price equal to par value of the Company’s common
stock of $0.0001 per share. Should the Company terminate this employment agreement, the right to purchase shares shall cease as
of the date of termination.
Pursuant to a six month employment agreement
dated April 15, 2019 (the “Effective Date”), the Company agreed that an executive officer of the Company will be granted
an option (the “Option’’) to purchase up to 100,000 shares of the Company’s common stock at an exercise
price equal to par value of the Company’s common stock of $0.0001 per share, of which 50,000 vested on April 15, 2019 and
50,000 vested on July 15, 2019. Should the Company terminate this agreement, the right to purchase shares shall cease as of the
date of termination.
Outstanding Equity Awards at Fiscal Year-End
The following table provides information
regarding option and restricted stock unit awards held by each of our named executive officers that were outstanding as of December
31, 2020. There were no stock awards or other equity awards outstanding as of December 31, 2020.
|
|
Option Awards
|
|
|
Stock Awards
|
|
Name
|
|
Number of
Securities
Underlying
Unexercised
Options (#)
(Exercisable)
|
|
|
Number of
Securities
Underlying
Unexercised
Options (#)
(Unexercisable)
|
|
|
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
|
|
|
Option
Exercise
Price
($)
|
|
|
Option
Expiration
Date
|
|
|
Number of
Shares or
Units of
Stock That
Have Not
Vested
(#)
|
|
|
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested (#)
|
|
|
Equity
Incentive
Plan Awards:
Number of
Unearned
Shares, Units
or Other
Rights that
Have Not
Vested
(#)
|
|
|
Equity
Incentive
Plan Awards:
Market or
Payout Value
of Unearned
Shares, Units
or Other
Rights that
Have Not
Vested
($)
|
|
Eric Weisblum
|
|
|
300,000
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
0.0001
|
|
|
|
|
(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Chief Executive Officer and Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The options expire between April 2024 and October 2024.
|
Securities Authorized for Issuance under Equity Compensation
Plans
None.
Employment Agreements
On April 17, 2020 (the “Weisblum Effective Date”),
the Company entered into an employment agreement with Eric Weisblum, as amended on January 18, 2021 (as amended, “Employment
Agreement”), pursuant to which Mr. Weisblum serves as Chief Executive Officer and Chief Financial Officer of the Company.
The term of the Employment Agreement will continue for a period of one year from the Weisblum Effective Date and automatically
renews for successive one year periods at the end of each term until either party delivers written notice of their intent not to
review at least six months prior to the expiration of the then effective term. Pursuant to the terms of the Employment Agreement,
Mr. Weisblum shall receive a base salary of $180,000 and shall be eligible to earn a bonus in an amount of up to $120,000, subject
to the sole discretion of the Company’s board of directors. In addition, Mr. Weisblum was granted 7,630,949 shares of the
Company’s common stock in April 2020.
The Employment Agreement may be terminated
by either the Company or Mr. Weisblum at any time and for any reason upon sixty days’ prior written notice. Upon termination
of the Employment Agreement, Mr. Weisblum shall (i) receive his then base salary up to and including the date of termination, (ii)
payment of unreimbursed expenses and (iii) any accrued benefits under the Company’s benefit plan, paid pursuant to the terms
of such plan (collectively, the “Accrued Obligations”). In the event Mr. Weisblum’s employment is terminated
by Cause (as defined in the Employment Agreement), Disability (as defined in the Employment Agreement) or death, Mr. Weisblum shall
receive the Accrued Obligations.
Non-Employee Director Compensation
The following table presents the total
compensation for each person who served as a non-employee member of our board of directors and received compensation for such service
during the fiscal year ended December 31, 2020. Other than as set forth in the table and described more fully below, we did
not pay any compensation, make any equity awards or non-equity awards to, or pay any other compensation to any of the non-employee
members of our board of directors in 2020.
Name
|
|
Fees earned or paid in cash
($)
|
|
|
Stock
awards
($)
|
|
|
Option awards
($)
|
|
|
Non-equity incentive plan compensation
($)
|
|
|
Nonqualified deferred compensation earnings
($)
|
|
|
All other compensation
($)
|
|
|
Total
($)
|
|
Wayne Linsley
|
|
$
|
20,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
20,000
|
|
Kevin Muñoz
|
|
$
|
1,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
1,500
|
|
SECURITY OWNERSHIP OF BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain
information regarding the beneficial ownership of our capital stock outstanding as of February 12, 2021 by:
|
●
|
each person, or group of affiliated persons, known by us to beneficially own more than 5% of our
shares of common stock;
|
|
●
|
each of our named executive officers; and
|
|
●
|
all of our directors and named executive officers as a group.
|
The percentage ownership information is
based on 85,176,956 shares of common stock outstanding as of February 12, 2021. Information with respect to beneficial ownership
has been furnished by each director, officer or beneficial owner of more than 5% of our common stock. We have determined beneficial
ownership in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities to persons
who possess sole or shared voting power or investment power with respect to those securities. In addition, the rules attribute
beneficial ownership of securities as of a particular date to persons who hold options or warrants to purchase shares of common
stock and that are exercisable within 60 days of such date. These shares are deemed to be outstanding and beneficially owned by
the person holding those options or warrants for the purpose of computing the percentage ownership of that person, but they are
not treated as outstanding for the purpose of computing the percentage ownership of any other person. Unless otherwise indicated,
the persons or entities identified in this table have sole voting and investment power with respect to all shares shown as beneficially
owned by them, subject to applicable community property laws.
Except as otherwise noted below, the address
for each person or entity listed in the table is c/o Silo Pharma, Inc., 560 Sylvan Avenue, Suite 3160, Englewood Cliffs, NJ 07632.
Name and Address of Beneficial Owner
|
|
Number of
shares
beneficially
owned
|
|
|
Percentage of
shares
beneficially
owned
|
|
5% or greater shareholders:
|
|
|
|
|
|
|
Scott Wilfong (1)
|
|
|
5,393,787
|
|
|
|
6.33
|
%
|
|
|
|
|
|
|
|
|
|
Directors and Named Executive Officers:
|
|
|
|
|
|
|
|
|
Eric Weisblum (2)
|
|
|
7,989,063
|
|
|
|
9.35
|
%
|
Wayne D. Linsley
|
|
|
0
|
|
|
|
0
|
%
|
Kevin Muñoz
|
|
|
0
|
|
|
|
0
|
%
|
All executive officers and directors as a group (3 persons)
|
|
|
7,989,063
|
|
|
|
9.35
|
%
|
|
(1)
|
Pursuant to Scott Wilfong’s Schedule 13G filed with
the SEC on May 21, 2020, Scott Wilfong is the beneficial owner of 5,393,787 shares of the Company’s common stock, and his
address is 6427 Lake Washington Blvd. NE, Kirkland, WA 98033.
|
|
(2)
|
Consists of (i) 7,689,063 shares of common stock and (ii)
300,000 shares of common stock issuable upon exercise of options.
|
CERTAIN RELATIONSHIPS AND RELATED PARTY
TRANSACTIONS
There were no transactions during our fiscal
years ended December 31, 2019 and December 31, 2018 to which we were a party, including transactions in which the amount involved
in the transaction exceeds the lesser of $120,000 or 1% of the average of our total assets at year-end for the last two completed
fiscal years, and in which any of our directors, executive officers or, to our knowledge, beneficial owners of more than 5% of
our capital stock or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material
interest, other than equity and other compensation, termination, change in control and other arrangements, which are described
elsewhere in this registration statement. We are not otherwise a party to a current related party transaction, and no transaction
is currently proposed, in which the amount of the transaction exceeds the lesser of $120,000 or 1% of the average of our total
assets at year-end for the last two completed fiscal years and in which a related person had or will have a direct or indirect
material interest.
LEGAL MATTERS
Unless otherwise indicated, Sheppard, Mullin,
Richter & Hampton LLP, New York, New York, will pass upon the validity of the shares of our common stock to be sold in this
offering.
EXPERTS
The financial statements of Uppercut Brands,
Inc. for the years ended December 31, 2019 and December 31, 2018 have been included herein in reliance upon the reports of Salberg
& Company, P.A., independent registered public accounting firm, upon the authority of said firm as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration
statement on Form S-1 under the Securities Act with respect to the Resale Shares being offered by this prospectus. This prospectus
does not contain all of the information in the registration statement of which this prospectus is a part and the exhibits to such
registration statement. For further information with respect to us the Resale Shares by this prospectus, we refer you to the registration
statement of which this prospectus is a part and the exhibits to such registration statement. Statements contained in this prospectus
as to the contents of any contract or any other document are not necessarily complete, and in each instance, we refer you to the
copy of the contract or other document incorporated by reference or filed as an exhibit to the registration statement of which
this prospectus is a part. Each of these statements is qualified in all respects by this reference.
You may read and copy the registration
statement of which this prospectus is a part, as well as our reports, proxy statements and other information, at the SEC’s
Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for more information
about the operation of the Public Reference Room. The SEC maintains an Internet site that contains reports, proxy and information
statements, and other information regarding issuers that file electronically with the SEC, including Silo Pharma, Inc.. The SEC’s
Internet site can be found at http://www.sec.gov. You may also request a copy of these filings, at no cost, by writing us at Silo
Pharma, Inc., 560 Sylvan Avenue, Suite 3160, Englewood Cliffs, NJ 07632 or telephoning us at (718) 400-9031.
We are subject to the information and reporting
requirements of the Exchange Act, and, in accordance with this law, file periodic reports, proxy statements and other information
with the SEC. These periodic reports, proxy statements and other information are available for inspection and copying at the SEC’s
public reference facilities and the website of the SEC referred to above. We also maintain a website at https://silopharma.com.
You may access these materials free of charge as soon as reasonably practicable after they are electronically filed with, or furnished
to, the SEC. Information contained on our website is not a part of this prospectus and the inclusion of our website address in
this prospectus is an inactive textual reference only.
28,506,646 Shares of Common Stock
PROSPECTUS
,
2021
SILO
PHARMA, INC.
FINANCIAL
STATEMENTS
TABLE
OF CONTENTS
Report of Independent Registered Public
Accounting Firm
To the Shareholders and the Board of Directors
of:
Uppercut Brands, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance
sheets of Uppercut Brands, Inc. (the “Company”) as of December 31, 2019 and 2018, the related statements of operations,
changes in stockholders’ equity (deficit), and cash flows for each of the two years in the period ended December 31, 2019,
and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements
present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results
of its operations and its cash flows for each of the two years in the period ended December 31, 2019 in conformity with accounting
principles generally accepted in the United States of America.
Going Concern
The accompanying financial statements have
been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the
Company has a net loss and cash used in operations of $1,013,294 and $794,324 for the year ended December 31, 2019, respectively,
and has minimal revenues in 2019. Additionally, the Company has an accumulated deficit and stockholders’ deficit of $2,655,804
and $22,892 at December 31, 2019, respectively. These matters raise substantial doubt about the Company’s ability
to continue as a going concern. Management’s Plans in regard to these matters, is also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based
on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with
the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have,
nor were we engaged to perform, an audit of internal control over financial reporting. As part of our audits we are required to
obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness
of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures
to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures
in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.
/S/ Salberg & Company, P.A.
SALBERG & COMPANY, P.A.
We have served as the Company’s auditor
since 2019.
Boca Raton, Florida
March 20, 2020
2295 NW Corporate Blvd., Suite 240 •
Boca Raton, FL 33431-7328
Phone: (561) 995-8270 • Toll Free:
(866) CPA-8500 • Fax: (561) 995-1920
www.salbergco.com • info@salbergco.com
Member National Association of Certified
Valuation Analysts • Registered with the PCAOB
Member CPAConnect with Affiliated Offices
Worldwide • Member AICPA Center for Audit Quality
UPPERCUT BRANDS, INC.
BALANCE SHEETS
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
111,752
|
|
|
$
|
336,679
|
|
Equity investments, at fair value (cost of $0 and $45,336 at December 31, 2019 and 2018, respectively)
|
|
|
-
|
|
|
|
215,528
|
|
Equity investments, at cost
|
|
|
9,394
|
|
|
|
12,766
|
|
Notes receivable, net
|
|
|
200,000
|
|
|
|
-
|
|
Prepaid expenses and other current assets
|
|
|
16,333
|
|
|
|
34,031
|
|
Inventory
|
|
|
156,366
|
|
|
|
26,973
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
493,845
|
|
|
|
625,977
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS:
|
|
|
|
|
|
|
|
|
Notes receivable, net
|
|
|
-
|
|
|
|
200,000
|
|
Intangible asset
|
|
|
-
|
|
|
|
29,440
|
|
|
|
|
|
|
|
|
|
|
Total Other Assets
|
|
|
-
|
|
|
|
229,440
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
493,845
|
|
|
$
|
855,417
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Convertible note payable, net of discount
|
|
$
|
61,875
|
|
|
$
|
-
|
|
Accounts payable and accrued expenses
|
|
|
54,862
|
|
|
|
25,631
|
|
Insurance finance loan
|
|
|
-
|
|
|
|
22,344
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
116,737
|
|
|
|
47,975
|
|
|
|
|
|
|
|
|
|
|
Concentrations (see Note 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable Series A, convertible preferred stock,
$0.0001 par value, 1,000,000 shares designated; 4,000 shares issued and outstanding at December 31, 2019 and 2018 ($100 per
share redemption and liquidation value)
|
|
|
400,000
|
|
|
|
400,000
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY (DEFICIT):
|
|
|
|
|
|
|
|
|
Preferred stock, $0.0001 par value, 5,000,000 shares authorized
|
|
|
-
|
|
|
|
-
|
|
Series B convertible preferred stock, $0.0001 par value, 2,000 shares designated; 115 and 0 shares issued and outstanding at
|
|
|
|
|
|
|
|
|
December 31, 2019 and 2018, respectively ($1,000 per share liquidation value)
|
|
|
-
|
|
|
|
-
|
|
Common stock, $0.0001 par value, 100,000,000 shares authorized; 23,604,207 and 23,417,450 shares issued and outstanding at
|
|
|
|
|
|
|
|
|
December 31, 2019 and 2018, respectively
|
|
|
2,361
|
|
|
|
2,342
|
|
Additional paid-in capital
|
|
|
2,630,551
|
|
|
|
2,047,610
|
|
Accumulated deficit
|
|
|
(2,655,804
|
)
|
|
|
(1,642,510
|
)
|
|
|
|
|
|
|
|
|
|
Total Stockholders' Equity (Deficit)
|
|
|
(22,892
|
)
|
|
|
407,442
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity (Deficit)
|
|
$
|
493,845
|
|
|
$
|
855,417
|
|
See accompanying notes to financial statements.
UPPERCUT BRANDS, INC.
STATEMENTS OF OPERATIONS
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
REVENUES
|
|
$
|
40,569
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
COST OF SALES
|
|
|
27,387
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
13,182
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
Compensation expense
|
|
|
319,587
|
|
|
|
145,000
|
|
Professional fees
|
|
|
431,015
|
|
|
|
203,559
|
|
Product development
|
|
|
63,465
|
|
|
|
-
|
|
Insurance expense
|
|
|
26,565
|
|
|
|
35,195
|
|
Bad debt (recovery) expense
|
|
|
(13,500
|
)
|
|
|
35,000
|
|
Selling, general and administrative expenses
|
|
|
87,013
|
|
|
|
76,076
|
|
Impairment loss
|
|
|
29,440
|
|
|
|
99,412
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
943,585
|
|
|
|
594,242
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(930,403
|
)
|
|
|
(594,242
|
)
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
12,196
|
|
|
|
4,218
|
|
Interest expense
|
|
|
(62,739
|
)
|
|
|
-
|
|
Interest expense - related party
|
|
|
(189
|
)
|
|
|
-
|
|
Net realized gain (loss) on equity investments (non-controlled/non-affiliated investments)
|
|
|
138,032
|
|
|
|
(100,759
|
)
|
Net unrealized loss on equity investments (non-controlled/non-affiliated investments)
|
|
|
(170,191
|
)
|
|
|
(278,680
|
)
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
|
(82,891
|
)
|
|
|
(375,221
|
)
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(1,013,294
|
)
|
|
$
|
(969,463
|
)
|
|
|
|
|
|
|
|
|
|
NET LOSS PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.04
|
)
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
23,468,522
|
|
|
|
49,101,419
|
|
See accompanying notes to financial statements.
UPPERCUT BRANDS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 31, 2019 and 2018
|
|
Series
B Preferred Stock
|
|
|
Common
Stock
|
|
|
Additional
Paid In
|
|
|
Accumulated
Net
Investment
|
|
|
Accumulated
Undistributed
Net Realized
Gain (Loss)
|
|
|
Unrealized
Appreciation
(Depreciation)
|
|
|
Accumulated
|
|
|
Total
Stockholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Loss
|
|
|
on Investments
|
|
|
on
Investments
|
|
|
Deficit
|
|
|
Equity
(Deficit)
|
|
Balance,
December 31, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
50,082,441
|
|
|
$
|
5,009
|
|
|
$
|
1,871,080
|
|
|
$
|
(470,388
|
)
|
|
$
|
(651,530
|
)
|
|
$
|
448,871
|
|
|
$
|
-
|
|
|
$
|
1,203,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for asset acquisition
|
|
|
-
|
|
|
|
-
|
|
|
|
2,000,000
|
|
|
|
200
|
|
|
|
152,035
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
152,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for cash
|
|
|
-
|
|
|
|
-
|
|
|
|
70,000
|
|
|
|
7
|
|
|
|
24,493
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock repurchased for cash and cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
(28,734,901
|
)
|
|
|
(2,874
|
)
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,872
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption
of corporation accounting
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
470,388
|
|
|
|
651,530
|
|
|
|
(448,871
|
)
|
|
|
(673,047
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(969,463
|
)
|
|
|
(969,463
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2018
|
|
|
-
|
|
|
|
-
|
|
|
|
23,417,540
|
|
|
|
2,342
|
|
|
|
2,047,610
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,642,510
|
)
|
|
|
407,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
B preferred stock issued for cash, net of costs
|
|
|
115
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
110,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
110,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for services
|
|
|
-
|
|
|
|
-
|
|
|
|
100,000
|
|
|
|
10
|
|
|
|
34,990
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
35,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for due diligence fee
|
|
|
-
|
|
|
|
-
|
|
|
|
86,667
|
|
|
|
9
|
|
|
|
41,991
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
42,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion
of stock options for services
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
142,960
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
142,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
issued in connection with convertible debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
253,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
253,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,013,294
|
)
|
|
|
(1,013,294
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2019
|
|
|
115
|
|
|
$
|
-
|
|
|
|
23,604,207
|
|
|
$
|
2,361
|
|
|
$
|
2,630,551
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(2,655,804
|
)
|
|
$
|
(22,892
|
)
|
See accompanying notes to financial statements.
UPPERCUT BRANDS, INC.
STATEMENTS OF CASH FLOWS
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,013,294
|
)
|
|
$
|
(969,463
|
)
|
Adjustments to reconcile net loss to net cash (used in) provided by operating activities
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
-
|
|
|
|
17,550
|
|
Impairment loss
|
|
|
29,440
|
|
|
|
99,412
|
|
Stock-based compensation
|
|
|
177,960
|
|
|
|
-
|
|
Amortization of debt discount to interest expense
|
|
|
61,875
|
|
|
|
-
|
|
Net realized (gain) loss on equity investments
|
|
|
(138,032
|
)
|
|
|
100,759
|
|
Net unrealized loss on equity investments
|
|
|
170,191
|
|
|
|
278,680
|
|
Proceeds from sale of equity investments
|
|
|
-
|
|
|
|
727,496
|
|
Bad debt expense
|
|
|
-
|
|
|
|
35,000
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Increase in inventory
|
|
|
(129,393
|
)
|
|
|
(26,973
|
)
|
Decrease in prepaid expenses and other current assets
|
|
|
17,698
|
|
|
|
22,888
|
|
Increase (decrease) in accounts payable and accrued expenses
|
|
|
29,231
|
|
|
|
(12,712
|
)
|
|
|
|
|
|
|
|
|
|
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
|
|
|
(794,324
|
)
|
|
|
272,637
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Cash disbursements related to notes receivable
|
|
|
-
|
|
|
|
(250,000
|
)
|
Purchase of equity investment
|
|
|
(5,197
|
)
|
|
|
-
|
|
Proceeds from sale of equity investments
|
|
|
191,938
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
|
|
|
186,741
|
|
|
|
(250,000
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from sale of common stock
|
|
|
-
|
|
|
|
24,500
|
|
Redemption of common stock
|
|
|
-
|
|
|
|
(2,872
|
)
|
Proceeds from sale of series B preferred stock, net
|
|
|
110,000
|
|
|
|
-
|
|
Net proceeds from convertible debt
|
|
|
295,000
|
|
|
|
-
|
|
Proceeds from note payable - related party
|
|
|
25,000
|
|
|
|
-
|
|
Repayment of note payable - related party
|
|
|
(25,000
|
)
|
|
|
|
|
Repayment of insurance finance loan
|
|
|
(22,344
|
)
|
|
|
(2,177
|
)
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
382,656
|
|
|
|
19,451
|
|
|
|
|
|
|
|
|
|
|
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS:
|
|
|
(224,927
|
)
|
|
|
42,088
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS - beginning of year
|
|
|
336,679
|
|
|
|
294,591
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS - end of year
|
|
$
|
111,752
|
|
|
$
|
336,679
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
-
|
|
|
$
|
-
|
|
Income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Common stock issued for acquisition of intangible assets and prepaid expenses
|
|
$
|
300,000
|
|
|
$
|
152,235
|
|
Increase in prepaid expenses and accrued expenses for insurance finance loan
|
|
$
|
-
|
|
|
$
|
24,521
|
|
Common stock issued for due diligence fee and related increase in debt discount
|
|
$
|
42,000
|
|
|
$
|
-
|
|
Warrants issued in connection with convertible debt and related increase in debt discount
|
|
$
|
253,000
|
|
|
$
|
-
|
|
See accompanying notes to financial statements.
UPPERCUT BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2019 and 2018
NOTE 1 – ORGANIZATION AND BUSINESS
Uppercut Brands, Inc. (formerly Point Capital,
Inc.) (the “Company”) was incorporated in the State of New York on July 13, 2010. On January 24, 2013, the Company
changed its state of incorporation from New York to Delaware. On September 29, 2018, the Company entered into an Asset Purchase
Agreement (“APA”) with Blind Faith Concepts Holdings, Inc. a Nevada corporation (the “Seller”) whereby
the Company completed the acquisition of 100% of the assets of “NFID” from the Seller. The Company is developing
NFID as an exclusive brand of apparel consisting initially of sweatshirts, hoodies, pants, t-shirts, jackets and hats.
On October 4, 2013, the Company filed a
Form N-54A and elected to become a business development company (“BDC”) under the Investment Company Act of 1940, as
amended (the “1940 Act”). In addition, the Company previously elected to be treated for federal income tax purpose
as a regulated investment company, or (“RIC”), under Subchapter M of the Internal Revenue Code of 1986, as amended,
(the “Code”). At March 31, 2017, the Company determined that it failed the RIC diversification test since one of the
Company’s investments accounted for approximately 78% of the Company’s total assets. The Company did not cure its failure
to retain its status as a RIC and the Company will not seek to obtain RIC status again. Accordingly, the Company is subject to
income taxes at corporate tax rates.
Through September 29, 2018, the Company
met the definition of an investment company in accordance with the guidance under Accounting Standards Codification Topic 946 “Financial
Services – Investment Companies”. On September 29, 2018, the Company filed Form N-54C, Notification of Withdrawal
of election to be Subject to Section 55 through 65 of the Investment Company Act of 1940, whereas the Company has changed the nature
of its business so as to cease to be a business development company (See Note 2 – Basis of Presentation). As a BDC, the Company’s
investment activities were managed by Eric Weisblum, the Company’s Chief Executive Officer.
On May 21, 2019, the Company amended its
articles of incorporation with the State of Delaware to change the Company’s name to Uppercut Brands, Inc.
NOTE 2 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Basis of presentation and principles
of consolidation
Effective September 29, 2018, following
authorization by its shareholders, the Company withdrew its previous election to be regulated as a BDC under the Investment Company
Act of 1940, as amended, or the 1940 Act. Prior to such time, the Company was a closed-end, non-diversified management
investment company that had elected to be treated as a BDC under the 1940 Act.
The Company discontinued applying the guidance
in FASB Accounting Standards Codification (ASC) Topic 946 - Financial Services – Investment Company and shall account for
the change in its status prospectively by accounting for its equity investments in accordance with ASC Topics 320 - Investments—Debt
and Equity Securities as of the date of the change in status. Additionally, the presentation of the financial statements will be
that of a commercial company rather than that of an investment company.
In accordance with ASC 946, the Company
is making this change to it financial reporting prospectively, and not restating periods prior to the Company’s change in
status to a non-investment company effective September 29, 2018. Accordingly, in this report, the Company refers to both accounting
in accordance with U.S. generally accepted accounting principles (GAAP) applicable to corporations (Corporation Accounting), which
applies commencing September 29, 2018 and to that applicable to investment companies under the 1940 Act (Investment Company Accounting)
which applies to prior periods. However, pursuant to ASC 205 – Presentation of Financial Statements, Section 205-10-50-1,
“Changes Affecting Comparability”, certain amounts in the 2018 financial statements have been reclassified to conform
to the 2019 presentation. These reclassifications primarily effect the presentation of revenues and expenses in the statements
of operations. The schedules of investments are not presented for the year ended December 31, 2018. The Company determined that
there is no cumulative effect of the change from Investment Company Accounting to Corporation Accounting on periods prior to those
presented and that there is no effect on the Company’s financial position or results of operations as a result of this change.
In order to maintain its status as a non-investment
company, the Company will now operate so as to fall outside the definition of an “Investment Company” or within an
applicable exception. The Company expects to continue to operate outside the definition of an “Investment Company”
as a company primarily engaged in the business of developing and selling apparel products.
UPPERCUT BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2019 and 2018
Going Concern
These financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the
normal course of business. As reflected in the accompanying financial statements, the Company had a net loss and cash used in operations
of $1,013,294 and $794,324 for the year ended December 31, 2019. Additionally, the Company had an accumulated deficit and
a stockholders’ deficit of $2,655,804 and $22,892 at December 31, 2019, and has generated minimal revenues under its new
business plan. These factors raise substantial doubt about the Company’s ability to continue as a going concern for a period
of twelve months from the issuance date of this report. Management cannot provide assurance that the Company will ultimately achieve
profitable operations or become cash flow positive, or raise additional debt and/or equity capital. The Company is seeking to raise
capital through additional debt and/or equity financings to fund its operations in the future. If the Company is unable to raise
additional capital or secure additional lending in the near future to fund its business plan, management expects that the Company
will need to curtail its operations. These financial statements do not include any adjustments related to the recoverability and
classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable
to continue as a going concern.
Use of Estimates
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States of America 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Making estimates
requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition,
situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating
its estimate could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ
significantly from estimates. Significant estimates during the years ended December 31, 2019 and 2018 include the collectability
of notes receivable, the valuation of the Company’s equity investments, amortization period and valuation of intangibles,
estimates for obsolete inventory, assumptions used in assessing impairment of long-term assets, valuation allowances for deferred
tax assets, the fair value of warrants issued with debt, and the fair value of shares issued for services.
Cash and Cash Equivalents
The Company considers all highly liquid
investments with a maturity of three months or less when acquired to be cash equivalents. The Company places its cash with high
credit quality financial institutions. The Company’s accounts at these institutions are insured by the Federal Deposit Insurance
Corporation (“FDIC”) up to $250,000 or by the Securities Investor Protection Corporation (“SIPC”) up to
$250,000. During 2019 and 2018, the Company had cash balances exceeding the FDIC and SIPC insurance limit on interest bearing accounts.
To reduce its risk associated with the failure of such financial institutions, the Company evaluates at least annually the rating
of the financial institutions in which it holds deposits. At December 31, 2019 and 2018, the Company had approximately $0 and $86,700
cash in excess of FDIC limits, respectively.
Notes Receivable
The Company recognizes an allowance for
losses on notes receivable in an amount equal to the estimated probable losses net of recoveries. The allowance is based on an
analysis of historical bad debt experience, current note receivable aging, and expected future write-offs, as well as an assessment
of specific identifiable accounts considered at risk or uncollectible. The expense associated with the allowance for doubtful accounts
is recognized as general and administrative expense. No allowance was required for 2019 and 2018.
Inventory
Inventory, consisting of raw materials
and finished goods, are stated at the lower of cost and net realizable value utilizing the first-in, first-out (FIFO) method. A
reserve is established when management determines that certain inventories may not be saleable. If inventory costs exceed expected
net realizable value due to obsolescence or quantities in excess of expected demand, the Company will record reserves for the difference
between the cost and the net realizable value. These reserves shall be recorded based on estimates and included in cost of sales.
No allowance was required for 2019 and 2018.
UPPERCUT BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2019 and 2018
Securities Transactions
Securities transactions
are recorded on a trade date basis. Securities transactions outside conventional channels, such as private transactions, are
recorded as of the date the Company obtains the right to demand the securities purchased or to collect the proceeds from a sale
and incurs an obligation to pay for securities purchased or to deliver securities sold, respectively. The Company records
interest and dividend income on an accrual basis to the extent that the Company expects to collect such amounts. Commissions and
other costs associated with transactions involving securities, including legal costs, are included in the cost basis of purchases
and deducted from the proceeds of sales.
Equity Investments, at Cost
Equity investments,
at cost comprised mainly of non-marketable capital stock and stock warrants, are recorded at cost, as adjusted for other than temporary
impairment write-downs and are evaluated for impairment periodically. Prior to September 29, 2018, equity investments, at cost
were recorded at fair value, represented as cost, plus or minus unrealized appreciation or depreciation. The fair value of equity
investments, at cost that had no ready market were determined in good faith by the Board of Directors, based upon the financial
condition and operating performance of the underlying investee companies as well as general market trends for businesses in the
same industry.
Equity Investments, at Fair Value
Through September
29, 2018, on a quarterly basis, the Board of Directors of the Company (the “Board”), in good faith, determined the
fair value of equity investments, at fair value in the following manner:
Equity securities
which are listed on a recognized stock exchange were valued at the adjusted closing trade price on the last trading day of the
valuation period. For equity securities that carry a restriction inherent to the security, a restriction discount was applied,
as appropriate. Investments in warrants were valued at fair value using the Black-Scholes option pricing model. Investments in
securities, which were convertible at a date in the future, were valued assuming a full conversion into common shares and valued
based on the methodology for equity securities described above, or at the respective investment’s face value, whichever is
a better indicator of fair value. Investments in unlisted securities were valued using a market approach net of the appropriate
discount for lack of marketability.
Investments without a readily determined
market value were primarily valued using a market approach, an income approach, or both approaches, as appropriate. The market
approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or
liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash
flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations
about those future amounts. In following these approaches, the types of factors that the Company took into account in fair value
pricing the Company’s investments included, as relevant: available current market data, including relevant and applicable
market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions,
information rights, the nature and realizable value of any collateral, the portfolio company’s ability to make payments,
its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios
of peer companies that are public, M&A comparables, and enterprise values, among other factors.
Because there was not a readily available
market value for some of the investments in its portfolio, the Company valued certain of its portfolio investments at fair value
as determined in good faith by the Board, as described herein. Due to the inherent uncertainty of determining the fair value of
investments that do not have a readily available market value, the fair value of the Company’s investments fluctuated from
period to period. Additionally, the fair value of the Company’s investments differed significantly from the values that would
have been used had a readily available market existed for such investments and may differ materially from the values that the Company
may ultimately realize. Further, such investments are generally subject to legal and other restrictions on resale or otherwise
are less liquid than publicly traded securities. If the Company was required to liquidate a portfolio investment in a forced or
liquidation sale, the Company could realize significantly less than the value at which the Company has recorded it.
Subsequent to September 29, 2018, pursuant
to ASC 320 – Investments – Debt and Equity Securities, the Company categorizes its equity investments, fair value as
an available for sale security since there is an active market in such equity investments. Available for sale securities are carried
at fair value with unrealized gains or losses included in income (expense). Realized gains and losses are determined on a
specific identification basis and are included in other income (expense). The Company reviews equity investments for impairment
whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recovered.
UPPERCUT BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2019 and 2018
Intangible Assets
Intangible assets
are carried at cost less accumulated amortization, computed using the straight-line method over the estimated useful lives. Intangible
assets consisted of a brand ambassador agreement which were being amortized over a period of one year and trademarks which were
recorded at cost and have an indefinite useful life and were not amortized.
For the year ended
December 31, 2018, the Company recorded an impairment loss of $87,745 related to the impairment of the brand ambassador agreement.
For the year ended December 31, 2019, the Company recorded an impairment loss of $29,440 related to the impairment of trademarks.
Management determined that there was a significant adverse change in the extent or manner in which these long-lived assets were
being used.
Impairment of Long-lived Assets
In accordance
with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss
when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment
is measured as the difference between the asset’s estimated fair value and its book value.
Net Realized
Gain or Loss and Net Change in Unrealized Appreciation or Depreciation of Equity Investments, at Fair Value
Realized gain
or loss is recognized when an investment is disposed of and is computed as the difference between the Company’s cost basis
and the net proceeds received from such disposition. Realized gains and losses on investment transactions are determined
by specific identification. Net change in unrealized appreciation or depreciation is computed as the difference between the fair
value of the investment and the cost basis of such investment, including any reversal of previously recorded unrealized appreciation/depreciation
when gains or losses are realized.
Revenue Recognition
The Company applies ASC Topic 606, Revenue
from Contracts with Customers (“ASC 606”). ASC 606 establishes a single comprehensive model for entities to use
in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance.
This standard requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount
that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also requires
certain additional disclosures. The Company adopted this standard using the modified retrospective approach, which requires applying
the new standard to all existing contracts not yet completed as of the effective date and recording a cumulative-effect adjustment
to retained earnings as of the date of adoption. The adoption of ASC 606 on January 1, 2018 did not have any impact on the process
for, timing of, and presentation and disclosure of revenue recognition from contracts and there was no cumulative effect adjustment.
The Company records interest and dividend
income on an accrual basis to the extent that the Company expects to collect such amounts.
Product sales are recognized when the product
is shipped to the customer and title is transferred and are recorded net of any discounts or allowances.
Stock-based compensation
Stock-based compensation is accounted for
based on the requirements of ASC 718 – “Compensation–Stock Compensation”, which requires recognition
in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments
over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting
period). The ASC also requires measurement of the cost of employee and director services received in exchange for an award based
on the grant-date fair value of the award. The Company utilizes the Black-Sholes option pricing model and uses the simplified method
to determine expected term because of lack of sufficient exercise history.
UPPERCUT BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2019 and 2018
Effective January 1, 2017, the Company
adopted Accounting Standards Update No. 2016-09 (“ASU 2016-09”), Improvements to Employee Share-Based Payment Accounting.
ASU 2016-09 permits the election of an accounting policy for forfeitures of share-based payment awards, either to recognize forfeitures
as they occur or estimate forfeitures over the vesting period of the award. The Company has elected to recognize forfeitures as
they occur, and the cumulative impact of this change did not have any effect on the Company’s financial statements and related
disclosures.
In June 2018, the FASB issued ASU No. 2018-07,
Improvements to Nonemployee Share-Based Payment Accounting, which simplifies several aspects of the accounting for nonemployee
share-based payment transactions by expanding the scope of the stock-based compensation guidance in ASC 718 to include share-based
payment transactions for acquiring goods and services from non-employees. ASU No. 2018-07 is effective for annual periods beginning
after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted, but entities may not
adopt prior to adopting the new revenue recognition guidance in ASC 606. The Company adopted ASU No. 2018-07 on January 1, 2019
and there was no cumulative effect of adoption.
Upon exercise of the stock options by the
holder using the exercise methods delineated in the option contract, the Company issues new shares from its unissued authorized
shares.
Income Taxes
Deferred income tax assets and liabilities
arise from temporary differences between the financial statements and tax basis of assets and liabilities, as measured by the enacted
tax rates, which are expected to be in effect when these differences reverse. Deferred tax assets and liabilities are classified
as current or non-current, depending upon the classification of the asset or liabilities to which they relate. Deferred tax assets
and liabilities not related to an asset or liability are classified as current or non-current depending on the periods in which
the temporary differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets
to the amount expected to be realized.
The Company follows the provisions of FASB
ASC 740-10, “Uncertainty in Income Taxes”. Certain recognition thresholds must be met before a tax position is recognized
in the financial statements. An entity may only recognize or continue to recognize tax positions that meet a “more-likely-than-not”
threshold. The Company does not believe it has any uncertain tax positions as of December 31, 2019 and 2018 that would require
either recognition or disclosure in the accompanying financial statements.
Net Loss per Common Share
Basic loss per share is computed by dividing
net loss allocable to common shareholders by the weighted average number of shares of common stock outstanding during each period.
Diluted earnings per share is computed by dividing net income available to common shareholders by the weighted average number of
shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period using the as-if
converted method. Potentially dilutive securities which included convertible preferred shares and stock options are excluded from
the computation of diluted shares outstanding if they would have an anti-dilutive impact on the Company’s net losses. The
following potentially dilutive shares have been excluded from the calculation of diluted net loss per share as their effect would
be anti-dilutive for the years ended December 31, 2019 and 2018:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Series A convertible preferred stock
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
Series B convertible preferred stock
|
|
|
575,000
|
|
|
|
-
|
|
Convertible notes
|
|
|
1,650,000
|
|
|
|
-
|
|
Stock options
|
|
|
300,000
|
|
|
|
-
|
|
Warrants
|
|
|
2,225,000
|
|
|
|
-
|
|
New Accounting Pronouncements
Accounting standards that have been issued
or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the financial
statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are
unrelated to its financial condition, results of operations, cash flows or disclosures.
UPPERCUT BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2019 and 2018
NOTE 3 – ACQUISITION
On September 29, 2018 (the “Closing
Date”), the Company entered into an Asset Purchase Agreement (“APA”) with Blind Faith Concepts Holdings, Inc.
a Nevada Corporation (the “Seller”) whereby the Company completed the acquisition of 100% of the assets of “NFID”
from the Seller which consisted of three trademarks related to the NFID brand, the NFID website, shoe designs and samples, and
the assumption of a one-year Brand Ambassador Agreement in exchange for 2,000,000 shares of common capital stock of the Company.
NFID is a recently developed unisex apparel brand. The Company plans on continuing product development to fully launch the product.
The Company’s acquisition of the NFID assets gives the Company access to the growing market for unisex products.
As a result of the APA, the Company has
elected to no longer be deemed a “Business Development Company” as defined by the Investment Company Act of 1940, as
amended from time to time (the “Act”). The withdrawal was generally approved by the shareholders of the Company on
April 11, 2017, as evidenced on the Definitive Information Statement pursuant to Section 14(c) of the Securities Exchange Act of
1934 filed on June 5, 2017. The Board, under authority granted by the shareholders, approved the withdrawal on September 27, 2018.
On September 28, 2018, the Company filed Form N-54C, officially withdrawing its election to be subject to sections 55 through 65
of the Act.
Pursuant to ASU 2017-01 and ASC 805, the
Company analyzed the ASA to determine if the Company acquired a business or acquired assets. Based on this analysis, it was determined
that the Company acquired assets. Pursuant to the terms of the APA, the Company issued 2,000,000 shares of common capital stock
of the Company in exchange for 100% of the NFID assets. The shares were valued at $152,235, or $0.08 per share, the fair value
of the Company’s common stock based on the fair value of assets acquired. No goodwill should be recorded since the APA was
accounted for as an asset purchase.
The relative fair value of the assets acquired
were based on management’s estimates of the fair values on September 29, 2018. Based upon the purchase price allocation,
the following table summarizes the estimated relative fair value of the assets acquired at the date of acquisition:
Prepaid expenses
|
|
$
|
17,500
|
|
Intangible assets
|
|
|
134,735
|
|
Total assets acquired at fair value
|
|
|
152,235
|
|
Total purchase consideration
|
|
$
|
152,235
|
|
The Company valued the three trademarks
acquired at their historical cost of $29,440 which approximates fair market value. The Company valued the Brand Ambassador Agreement
at $105,295 using the estimated fair value of required social media posts by the artist/singer Max Schneider, known as Max (“MAX”).
MAX is considered a social media influencer with over 600,000 Instagram followers and over 1.5 million YouTube subscribers.
Pursuant to the Brand Ambassador Agreement,
the Company was to incur a minimum cash payment of $35,000 related to a minimum royalty payment of which $17,500 was paid prior
to the Closing Date. The remaining $17,500 was due on January 27, 2019 and was not paid due to cancellation of the agreement.
At December 31, 2018, based on management’s
impairment analysis, the Company recorded an impairment loss of $99,412 due to the write off the remaining unamortized carrying
value of its intangible asset of $87,745 and the remaining prepaid expense of $11,667 related to the brand ambassador agreements.
NOTE 4 – FAIR VALUE OF FINANCIAL
INSTRUMENTS AND FAIR VALUE MEASUREMENTS
The Company uses the guidance of ASC Topic
820 for fair value measurements which clarifies the definition of fair value, prescribes methods for measuring fair value, and
establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:
Level 1- Inputs are unadjusted
quoted prices in active markets for identical assets or liabilities available at the measurement date.
Level 2- Inputs are unadjusted
quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities
in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by
observable market data.
Level 3- Inputs are unobservable
inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing
the asset or liability based on the best available information.
UPPERCUT BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2019 and 2018
The carrying amounts reported in the balance
sheets for cash, inventory, prepaid expenses and other current assets, accounts payable and accrued expenses, and insurance finance
loan approximate their fair market value based on the short-term maturity of these instruments.
Equity investments, at fair value
The Company accounted for certain equity
investments at fair value using level 1, level 2 and level 3 valuations. Assets and liabilities measured at fair value on a recurring
basis are as follows at December 31, 2019 and 2018:
|
|
At December 31, 2019
|
|
|
At December 31, 2018
|
|
Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Equity investments, at fair value
|
|
$
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
215,528
|
|
|
|
—
|
|
|
|
—
|
|
ASC 825-10 “Financial Instruments”,
allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The
fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If
the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings
at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.
At December 31, 2018, equity investments,
at fair value consisted of common equity securities of one entity.
Equity investments, at fair value are treated
as available for sale securities and are carried at fair value with unrealized gains or losses included in income (expense). Realized
gains and losses are determined on a specific identification basis and are included in other income (expense). The Company reviews
equity investments, at fair value for impairment whenever circumstances and situations change such that there is an indication
that the carrying amounts may not be recovered.
The following are the Company’s equity
investments, at fair value owned by levels within the fair value hierarchy at December 31, 2018:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Common Stock
|
|
$
|
215,528
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
215,528
|
|
Total Investments
|
|
$
|
215,528
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
215,528
|
|
At December 31, 2019 and 2018, equity investments,
at fair value consisted of the following components:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Equity investments, at original cost
|
|
$
|
-
|
|
|
$
|
45,336
|
|
Gross unrealized appreciation
|
|
|
-
|
|
|
|
170,192
|
|
Equity investments, at fair market value
|
|
$
|
-
|
|
|
$
|
215,528
|
|
The following additional disclosures relate
to the changes in fair value of the Company’s Level 3 investments during the years ended December 31, 2019 and 2018:
|
|
Years Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Balance at beginning of year
|
|
$
|
-
|
|
|
$
|
464,466
|
|
Net change in unrealized depreciation on investments
|
|
|
-
|
|
|
|
(414,730
|
)
|
Net transfers out of Level 3
|
|
|
-
|
|
|
|
(49,736
|
)
|
Balance at end of year
|
|
$
|
-
|
|
|
$
|
-
|
|
UPPERCUT BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2019 and 2018
Equity investments, at cost
At December 31, 2019 and 2018, equity investments,
at cost of $9,394 and $12,766, respectively, comprised mainly of non-marketable capital stock, are recorded at cost, as adjusted
for other than temporary impairment write-downs and are evaluated for impairment periodically.
NOTE 5 – INVENTORY
At December 31, 2019 and 2018, inventory,
including leather footwear finished goods, fabric, jackets. t-shirts and hats and fabric, consisted of the following:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Raw materials
|
|
$
|
41,231
|
|
|
$
|
-
|
|
Finished goods
|
|
|
115,135
|
|
|
|
26,973
|
|
Inventory
|
|
$
|
156,366
|
|
|
$
|
26,973
|
|
NOTE 6 – NOTES RECEIVABLE
On September 28, 2018, the Company and
the Seller executed a two-year promissory note receivable agreement with a principal balance of $200,000 of which $100,000 was
funded to the Seller in September 2018 and the remaining $100,000 was funded in October 2018. The terms of the promissory note
include an interest rate of 6% and the Company shall be repaid in interest only payments on a quarterly basis, until the maturity
date of September 27, 2020, at which time the full principal and any interest payments will be due to the Company. At the time
the promissory note receivable agreement was executed, the Company also executed a Security Interest and Pledge Agreement with
the borrower. Pursuant to the Security Interest and Pledge Agreement, the borrower has pledged all of the assets of its company
as security for the performance of the note obligations.
On November 2, 2018, the Company and Seller
entered into a Promissory Note Agreement with a principal balance of $50,000. Pursuant to the Promissory Note, the $50,000 note
was a deposit and credit towards the acquisition of the assets of Lust for Life Group such as inventory, trademarks and logos.
Pursuant to this promissory note agreement, since the purchase did not close within 30 days from the note date, the note receivable
became immediately due. Through the date of default, the outstanding principal balance bore interest at an annual interest rate
of 10% payable on a monthly basis. Upon default, the interest rate increased to 18% per annum. As of December 31, 2018, the Company
determined that this note receivable was doubtful and accordingly, recorded an allowance for doubtful account and bad debt expense
of $50,000.
In December
2019, pursuant to Claim Purchase Agreements, the Company sold its notes receivable and related interest receivable balances in
the aggregate amount of $277,305 to an investor. Pursuant to the Claim Purchase Agreements, the investor shall pay the Company
the purchase price of $277,305 on the earlier of the payment of six-monthly installments or upon the liquidation of settlement
securities of the Seller pursuant to Section 3(a)(10) of the Securities Act, whichever occurs
first. The first installment shall be made following entry and full effectuation of a court order approving the settlement of the
claim which occurred on March 6, 2020 in the United States district court for the District of Maryland Northern Division. Additionally,
effective January 6, 2020, the Company entered into a settlement agreement with the Seller (see Note 12 – Subsequent Events).
At December 31, 2019 and 2018, notes receivable,
net consisted of the following:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Principal amounts of notes receivable
|
|
$
|
250,000
|
|
|
$
|
250,000
|
|
Less: allowance for doubtful accounts
|
|
|
(50,000
|
)
|
|
|
(50,000
|
)
|
Notes receivable, net
|
|
$
|
200,000
|
|
|
$
|
200,000
|
|
UPPERCUT BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2019 and 2018
NOTE 7 – INTANGIBLE ASSETS
In connection with an APA (See Note 3),
the Company valued the three trademarks acquired at their historical cost of $29,440 which approximated fair market value. The
Company valued the Brand Ambassador Agreement at $105,295 using the estimated fair value of required social media posts by the
artist/singer Max Schneider, known as Max (“MAX”).
At December 31,
2018, based on management’s impairment analysis, the Company wrote off the remaining unamortized carrying value of its intangible
asset related to the brand ambassador agreement and recorded an impairment loss of $87,745. Management determined that there was
a significant adverse change in the extent or manner in which this long-lived asset was being used. For the year ended December
31, 2019, the Company recorded an impairment loss of $29,440 related to the impairment of its trademarks. Management determined
that there was a significant adverse change in the extent or manner in which its trademarks were being used. Trademarks were treated
as indefinite long-lived assets and therefore were not amortized.
At December 31,
2019 and 2018, intangible assets consisted of the following:
|
|
Useful life
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Trademarks
|
|
N/A
|
|
$
|
-
|
|
|
$
|
29,440
|
|
For the years ended December 31, 2019 and
2018, amortization of intangible assets amounted to $0 and $17,550, respectively.
NOTE 8 – CONVERTIBLE NOTES
PAYABLE
In October 2019, the Company entered into
Securities Purchase Agreements (the “Purchase Agreements”) with accredited investors. Pursuant to the terms of the
Purchase Agreements, the Company issued and sold to investors convertible promissory notes in the aggregate principal amount of
$330,000 (the “Notes”) and warrants to purchase up to 1,650,000 shares of the Company’s common stock (the “Warrants”).
The Company received net proceeds of $295,000, net of origination issue discount of $30,000 and fees of $5,000. The Notes are due
and payable in October 2020. Prior to an Event of Default, no interest shall accrue on these Notes.
At any time after the Original Issue Date,
until the respective Note is no longer outstanding, the Notes shall be convertible, in whole or in part, into shares of the Company’s
common stock at the option of the Holder, at any time and from time to time. In accordance with the Purchase Agreements and the
Notes, subject to adjustments as defined in the Purchase Agreements and Notes. The conversion price (the “Conversion Price”)
shall be equal to $0.20. The Company may prepay the Notes at any time prior to its six-month anniversary, subject to pre-payment
charges as detailed in the Note. Upon every conversion, the Company shall deliver an additional $1,250 worth of shares (as calculated
by the Conversion Price in effect on the conversion notice being honored) to cover the Holder’s expenses and deposit fees
associated with each notice of conversion.
The Purchase Agreements and Notes contain
customary representations, warranties and covenants, including certain restrictions on the Company’s ability to sell, lease
or otherwise dispose of any significant portion of its assets. The Investor also will be entitled to acquire, upon the terms applicable
to such purchase rights, the aggregate purchase rights that the Holder could have acquired if the Holder had held the number of
shares of common stock acquirable upon complete conversion of the Note. The Investor’s also has the right of first refusal
with respect to any future equity (or debt with an equity component) offerings conducted by the Company until the 12-month anniversary
of the Closing. The Purchase Agreements and the Notes also provide for certain events of default, including, among other things,
payment defaults, breaches of representations and warranties, bankruptcy or insolvency proceedings, and delinquency in periodic
report filings with the Securities and Exchange Commission. Upon the occurrence of an event of default, the Investor’s may
declare the outstanding obligations due and payable at significant applicable default rates and take such other actions as set
forth in the Note.
The Company shall issue to each investor
at the closing, that number of shares of its common stock equal to 14% of the aggregate amount paid by the Investor for the Notes
purchased, priced at the closing price of the Company’s common stock on the day prior to the closing, as a due diligence
fee. In connection with due diligence fee, the Company shall issue 86,667 shares of its common stock to the investors. These shares
were valued at $42,000 using the closing price of the Company’s common stock on the day prior to the closing which ranged
from $0.35 to $0.60 per share, and the amount was recorded as a debt discount and an increase in equity.
UPPERCUT BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2019 and 2018
The Warrants are exercisable at any time
on or after the date of the issuance and entitles the investors to purchase shares of the Company’s common stock for a period
of five years from the initial date the warrants become exercisable. Under the terms of the Warrant, the holders are entitled to
exercise the Warrant to purchase up to 1,650,000 shares of the Company’s common stock at an exercise price of $0.20, subject
to customary adjustments as detailed in the Warrant.
This Note and related Warrants include
a down-round provision under which the Note conversion price and warrant exercise price could be affected on a full-ratchet basis
by future equity offerings undertaken by the Company.
In connection with the issuance of the
Note and Warrants, the Company determined that the terms of the Notes and Warrants contain terms that are fixed monetary amounts
at inception and accordingly, were not considered derivatives. The fair value of the warrants was determined using the Binomial
valuation model. In connection with the issuance of the warrants, on the measurement date, the relative fair value of the warrants
and the beneficial conversion feature of $253,000 was recorded as a debt discount and an increase in paid-in capital.
During the year ended December 31, 2019,
the fair value of the warrants was estimated using the Binomial valuation model with the following assumptions:
|
|
2019
|
|
Dividend rate
|
|
|
—
|
%
|
Term (in years)
|
|
|
5.00 years
|
|
Volatility
|
|
|
158.6
|
%
|
Risk—free interest rate
|
|
|
1.48% to 1.66
|
%
|
For the year ended December 31, 2019 and
2018, interest expense related to convertible notes and warrants amounted to $61,875 and $0, which consisted of amortization of
debt discount.
At December 31, 2019 and 2018, convertible
notes payable consisted of the following:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Principal amount
|
|
$
|
330,000
|
|
|
$
|
-
|
|
Less: unamortized debt discount
|
|
|
(268,125
|
)
|
|
|
-
|
|
Convertible notes payable, net
|
|
$
|
61,875
|
|
|
$
|
-
|
|
NOTE 9 - NOTE PAYABLE – RELATED
PARTY
On September 16, 2019, the Company entered
into a Promissory Note Agreement (the “Note”) with the Company’s chief executive officer in the amount of $25,000.
The Note bearing at 6% per annum, was unsecured, and all principal and interest amounts outstanding was repaid in November 2019.
For the year ended December 31, 2019 and 2018, interest expense related to this Note amounted to $189 and $0, respectively.
NOTE 10 – STOCKHOLDERS’
EQUITY (DEFICIT)
Preferred stock
The Company has authorized the issuance
of 5,000,000 shares of preferred stock, $0.0001 par value. The Company’s board of directors is authorized at any time, and
from time to time, to provide for the issuance of shares of Preferred Stock in one or more series, and to determine the designations,
preferences, limitations and relative or other rights of the Preferred Stock or any series thereof. In April 2013, 1,000,000 shares
were designated as Series A Convertible Preferred Stock and in November 2019, 2,000 shares were designated as Series B Convertible
Preferred Stock.
UPPERCUT BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2019 and 2018
Series A redeemable convertible preferred stock
In April 2013, pursuant to a Series A Preferred
Stock Purchase Agreement (the “Preferred Stock Agreement”), the Company issued 4,000 shares of Series A Convertible
Preferred Stock (the “Series A Preferred Stock”) for $400,000. Holders of Series A Preferred Stock vote together with
holders of Common Stock on an as-converted basis. Each share of Series A Preferred Stock is currently convertible into 500 shares
of common stock at the option of the holder (subject to a 9.99% beneficial ownership limitation) based on a conversion formula
(the Stated Value, currently $100, divided by the Conversion Rate, currently $0.20). The Conversion Rate may be adjusted upon the
occurrence of stock dividends or stock splits or subsequent equity sales at a price lower than the current conversion rate. Each
share has a $100 liquidation value. The holders of Series A Preferred Stock are entitled to receive dividends on an as-converted
basis if paid on Common Stock.
The Series A Convertible Preferred Stock
is redeemable at the option of the holder upon the occurrence of certain “triggering events.” In case of a triggering
event, the holder has the right to redeem each share held for cash (currently $100/share) or impose a dividend rate on all of the
outstanding Preferred Stock at 6% per annum thereafter. A triggering event occurs if the Company fails to deliver certificates
representing conversion shares, fails to pay the amount due pursuant to a Buy-In, fails to have available a sufficient number of
authorized shares, fails to observe any covenant in the Certificate of Designation unless cured within 30 calendar days, shall
be party to a Change in Control Transaction, sustains a bankruptcy event, fails to list or quote its common stock for more than
20 trading days in a twelve-month period, sustains any monetary judgment, writ or similar final process filed against the Company
for more than $100,000 and such judgment writ or similar final process shall remain unvacated, unbonded or unstayed for a period
of 45 calendar days, or fails to comply with the Asset Coverage requirement.
Because certain of these “triggering
events” are outside the control of the Company, the Preferred Stock is classified within the temporary equity section of
the accompanying balance sheets.
The Series A Preferred Stock has forced
conversion rights where the Company may force the conversion of the Series A Preferred Stock if certain conditions are met. Additionally,
the Company may elect to redeem some or all of the outstanding Series A Preferred Stock for the Stated Value (currently $100/share)
provided that proper notice is provided to the holders and that a number of conditions (the “Equity Conditions”) have
been met.
The Company believes the carrying amount
reported in the balance sheets for the Series A Preferred Stock of $400,000 approximates the fair market value of such Preferred
Stock based on the short-term maturity of these instruments which also equals the redemption value reflected as on the balance
sheets.
On March 31, 2017, the Board approved the
amendment and restatement of the original Certificate of Designation in order to expressly ensure that holders of the Company’s
Series A Preferred Stock have the right to elect at least two directors at all times, have complete priority over any other class
as to distribution of assets and payments of dividends, and have equal voting rights with every other outstanding voting stock.
On May 11, 2017, the Company filed the amendment and restatement with the State of Delaware.
Series B convertible preferred stock
In November 2019, the Company filed an
Amendment to its Articles of Incorporation to designate a series of preferred stock, the Series B Convertible Preferred Stock,
with the Secretary of State of the State of Delaware.
The Certificate of Designations established
2,000 shares of the Series B Preferred Stock, par value $0.0001, having such designations, preferences, and rights as determined
by the Company’s Board of Directors in its sole discretion, in accordance with the Company’s Articles of Incorporation
and Amended and Restated Bylaws. The Certificate of Designations, Preferences, Rights, and Limitations of Series B Convertible
Preferred Stock (“Certificate of Designations”) provides that the Series B Convertible Preferred Stock shall have no
right to vote on any matters on which the common shareholders are permitted to vote. However, as long as any shares of Series B
Preferred Stock are outstanding, the Company shall not, without the affirmative vote of the Holders of a majority of the then outstanding
shares of the Series B Preferred Stock, (a) alter or change adversely the powers, preferences or rights given to the Series B Preferred
Stock or alter or amend this Certificate of Designation, (b) authorize or create any class of stock ranking as to dividends, redemption
or distribution of assets upon a liquidation senior to, or otherwise pari passu with, the Series B Preferred Stock, (c) amend its
certificate of incorporation or other charter documents in any manner that adversely affects any rights of the Holders, (d) increase
the number of authorized shares of Series B Preferred Stock, or (e) enter into any agreement with respect to any of the foregoing.
The Series B Convertible Preferred Stock ranks senior with respect to dividends and right of liquidation to the Company’s
common stock and junior with respect to dividends and right of liquidation to all existing and future indebtedness of the Company
and existing and outstanding preferred stock of the Company. Each share of Series B Preferred Stock shall have a stated value of
$1,000 (the “Stated Value”).
UPPERCUT BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2019 and 2018
Except for stock dividends or distributions
for which adjustments are to be made pursuant to the certificate of designation, Holders shall be entitled to receive, and the
Company shall pay, dividends on shares of Series B Preferred Stock equal (on an as-if-converted-to-Common-Stock basis) to and in
the same form as dividends actually paid on shares of the Company’s common stock when, as and if such dividends are paid
on shares of the common stock. No other dividends shall be paid on shares of Series B Preferred Stock.
The Holder of Series B Preferred stock
shall have the right from time to time, and at any time after the original issue date, to convert all or any part of the outstanding
Series B Preferred Stock into the Company’s common stock. The conversion price (the “Conversion Price”) shall
equal $0.20 per share (subject to equitable adjustments by the Company relating to the Company’s securities or the securities
of any subsidiary of the Company, combinations, recapitalization, reclassifications, extraordinary distributions and similar events).
If, at any time while the Series B Preferred
Stock is outstanding, the Company sells or grants any option to purchase or sells or grants any right to reprice, or otherwise
disposes of or issues (or announces any sale, grant or any option to purchase or other disposition), any common stock or common
stock equivalents entitling any Person to acquire shares of common stock at an effective price per share that is lower than the
then Conversion Price (such lower price, the "Base Conversion Price" and such issuances, collectively, a "Dilutive
Issuance"), then simultaneously with the consummation (or, if earlier, the announcement) of each Dilutive Issuance the Conversion
Price shall be reduced to equal the Base Conversion Price. In addition, if at any time the Company grants, issues or sells any
common stock equivalents or rights to purchase stock, warrants, securities or other property pro rata to the record holders of
any class of shares of common stock (the "Purchase Rights"), then the Holder will be entitled to acquire, upon the terms
applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the
number of shares of common stock acquirable upon complete conversion of such Holder's Series A Preferred Stock.
On November 29, 2019, the Company entered
into Series B Preferred Stock Purchase Agreements with accredited investors whereby the investors agreed to purchase an aggregate
of 115 unregistered shares of the Company’s Series B Preferred stock for $115,000, or $1,000 per share. In November 2019,
the Company received the cash proceeds of $110,000, net of fees of $5,000 which was charged to additional paid in capital. In connection
with the sale of Series B preferred shares, the Company issued 575,000 warrants to purchase 575,000 common shares at $0.20 per
share. subject to adjustment on terms similar to the Series B preferred shares.
In connection with the issuance of these
Series B preferred shares and Warrants, the Company determined that the terms of the Series B preferred shares and related warrants
contain terms that are fixed monetary amounts at inception and accordingly, were not considered derivatives.
Common stock
Common stock issued for asset acquisition
On September 29, 2018 (the “Closing
Date”), pursuant to an APA (See Note 3), the Company issued 2,000,000 shares of common stock of the Company.
Common stock issued for cash
On December 4, 2018, the Company issued
70,000 shares of its common stock for cash proceeds of $24,500, or $0.35 per share.
Common stock redemption
In December 2018, the Company executed
14 separate Return to Treasury Agreements, whereby certain shareholders holding an aggregate of 28,734,901 shares of common stock
of the Company agreed to return a portion of their respective holdings to treasury in exchange for cash payments aggregating $2,872.
As a result, the total issued and outstanding number of shares of common stock of the Company was reduced by 28,734,901.
UPPERCUT BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2019 and 2018
Common stock issued for services
On January 22, 2019, the Company entered
into a consulting agreement with a consultant in connection with the Company’s marketing and branding of its NFID products.
The agreement ended on December 31, 2019. For services rendered, the Company paid the consultant an initial payment of $25,000
and, beginning on April 1, 2019, the Company paid the consultant $5,000 per month through December 2019. Additionally, the Company
issued 100,000 shares of common stock of the Company to the consultant on a quarterly basis in tranches of 25,000 shares per quarter,
commencing on March 31, 2019, and continuing on to the last day of each subsequent quarter in the year 2019. These shares were
valued on the January 22, 2019 grant date at $35,000, or $0.35 per common share, based on recent common share sales which shall
be amortized over the vesting period. For the year ended December 31, 2019, the Company recorded stock-based professional fees
of $35,000. Through December 31, 2019, the Company issued 100,000 shares of its common stock to the consultant.
Stock options
Pursuant to a six month employment agreement
with the Company’s chief executive officer (the “Executive”) dated April 15, 2019 (the “Effective Date”),
the Company agreed to grant to Executive an option (the “Option’’) to purchase up to 200,000 shares of the Company’s
common stock at an exercise price equal to par value of the Company’s common stock of $0.0001 per share, of which 100,000
vested on April 15, 2019 and 100,000 vested on July 15, 2019. On October 15, 2019, the Company granted to this same Executive an
option to purchase 100,000 shares of the Company’s common stock at an exercise price equal to par value of the Company’s
common stock of $0.0001 per share. Should the Company terminate this employment agreement, the right to purchase shares shall cease
as of the date of termination.
Pursuant to a six month employment agreement
dated April 15, 2019 (the “Effective Date”), the Company agreed that an executive officer of the Company will be granted
an option (the “Option’’) to purchase up to 100,000 shares of the Company’s common stock at an exercise
price equal to par value of the Company’s common stock of $0.0001 per share, of which 50,000 vested on April 15, 2019 and
50,000 vested on July 15, 2019. Should the Company terminate this agreement, the right to purchase shares shall cease as of the
date of termination. This employment was terminated in October 2019 and accordingly, the 100,000 stock options were forfeited.
The options were valued at the grant date
using a Black-Scholes option pricing model with the following assumptions; risk-free interest rate of 2.37%, expected dividend
yield of 0%, expected option term of 5 years using the simplified method and expected volatility ranging from 74% to 158.6% based
on comparable and calculated volatility. The aggregate grant date fair value of these awards amounted to $142,960 as of December
31, 2019.
For the year ended December 31, 2019, the
Company recorded $142,960 of compensation expense related these stock options. Total unrecognized compensation expense related
to stock options at December 31, 2019 amounted to $0.
The Company did not have any outstanding
options during the year ended December 31, 2018. Stock option activities for the year ended December 31, 2019 are summarized as
follows:
|
|
Number of Options
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Term (Years)
|
|
|
Aggregate Intrinsic Value
|
|
Balance Outstanding, December 31, 2018
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
400,000
|
|
|
|
0.0001
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(100,000
|
)
|
|
|
(0.0001
|
)
|
|
|
|
|
|
|
|
|
Balance Outstanding, December 31, 2019
|
|
|
300,000
|
|
|
$
|
0.0001
|
|
|
|
4.5
|
|
|
$
|
104,970
|
|
Exercisable, December 31, 2019
|
|
|
300,000
|
|
|
$
|
0.0001
|
|
|
|
4.5
|
|
|
$
|
104,970
|
|
UPPERCUT BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2019 and 2018
Warrants
In October 2019, in connection with the
convertible notes Securities Purchase Agreements with accredited investors (see Note 8), the Company issued five-year warrants
to purchase up to 1,650,000 shares of the Company’s common stock at $0.20 per share.
In connection with the sale of Series B
preferred shares as discussed above, the Company issued 575,000 warrants to purchase 575,000 common shares at $0.20 per share.
subject to adjustment on terms similar to the Series B preferred shares.
Warrant activities for the year ended December
31, 2019 are summarized as follows:
|
|
Number of Options
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Term (Years)
|
|
|
Aggregate Intrinsic Value
|
|
Balance Outstanding, December 31, 2018
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,225,000
|
|
|
|
0.20
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Balance Outstanding, December 31, 2019
|
|
|
2,225,000
|
|
|
$
|
0.20
|
|
|
|
4.8
|
|
|
$
|
333,750
|
|
Exercisable, December 31, 2019
|
|
|
2,225,000
|
|
|
$
|
0.20
|
|
|
|
4.8
|
|
|
$
|
333,750
|
|
NOTE 11 - INCOME TAXES
Through March 31, 2017, the Company elected
to be treated as a RIC under Subchapter M of the Code and operated in a manner so as to qualify for the tax treatment applicable
to RICs. Since March 31, 2017, the Company failed a diversification test since the Company’s investment in one stock accounted
for over 25% of the Company’s total assets. This discrepancy was not caused by the acquisition of any security. The failure
was not a result of willful neglect. As of December 31, 2017, the Company had not cured its failure to retain its status as a RIC
and the Company does not intend to retain its RIC status. Accordingly, since 2017, the Company did not qualify as a RIC and is
subject to income taxes at corporate tax rates. The loss of the Company’s status as a RIC did not have any impact on the
Company’s financial position or results of operations.
The Company evaluates tax positions taken
or expected to be taken in the course of preparing its tax returns to determine whether the tax positions are “more-likely-than-not”
to be sustained by the applicable tax authority. Tax positions not deemed to meet the “more-likely-than-not” threshold
are reversed and recorded as a tax benefit or expense in the current year. All penalties and interest associated with income taxes
are included in income tax expense. Conclusions regarding tax positions are subject to review and may be adjusted at a later date
based on factors including, but not limited to, on-going analyses of tax laws, regulations and interpretations thereof. As of December
31, 2019 and 2018, the Company had not recorded a liability for any unrecognized tax positions.
Taxable income (loss) generally differs
from the change in net income (loss) for financial reporting purposes due to temporary and permanent differences in the recognition
of income and expenses, and generally excludes net unrealized appreciation or depreciation, as unrealized gains or losses are not
included in taxable income (loss) until they are realized.
Effective in 2017,
the Company accounts for income taxes pursuant to ASC 740 “Accounting for Income Taxes” that requires the recognition
of deferred tax assets and liabilities for the differences between the financial statements and the tax basis of assets and liabilities,
and for the expected future tax benefit to be derived from tax losses and tax credit carry forwards. Additionally, the accounting
standards require the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Realization
of deferred tax assets, including those related to the net operating loss carry forwards for income tax purposes as compared to
financial statement purposes, are dependent upon future taxable income and timing of reversals of future taxable differences along
with any other positive and negative evidence during the periods in which those temporary differences become deductible or are
utilized. The deferred tax assets at December 31, 2019 and 2018 consist of net operating and capital loss carryforwards. The net
deferred tax asset has been fully offset by a valuation allowance because of the uncertainty of the attainment of future taxable
income and capital gains.
UPPERCUT BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2019 and 2018
The items accounting for the difference
between income taxes at the effective statutory rate and the provision for income taxes for the years ended December 31, 2019 and
2018 was as follows:
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Income tax benefit at U.S. statutory rate
|
|
$
|
(212,792
|
)
|
|
$
|
(203,587
|
)
|
Income tax benefit – state
|
|
|
(65,864
|
)
|
|
|
(63,015
|
)
|
Permanent differences
|
|
|
103,132
|
|
|
|
76,637
|
|
True up
|
|
|
59,266
|
|
|
|
-
|
|
Change in valuation allowance
|
|
|
116,258
|
|
|
|
189,965
|
|
Total provision for income tax
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company’s approximate net deferred
tax asset as of December 31, 2019 and 2018 was as follows:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Deferred Tax Asset:
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
490,819
|
|
|
$
|
291,614
|
|
Net capital loss carryforward
|
|
|
123,932
|
|
|
|
206,879
|
|
Total deferred tax asset before valuation allowance
|
|
|
614,751
|
|
|
|
498,493
|
|
Valuation allowance
|
|
|
(614,751
|
)
|
|
|
(498,493
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
At December 31,
2019, the Company had a net capital loss carryforward of approximately $450,663, which can be used to offset future capital gains
for a period of four years.
Due to the loss
of its RIC status in 2017, any net tax operating losses generated as a RIC cannot be used to offset any future taxable income.
As of December 31, 2019, the Company incurred an aggregate estimated net operating loss of approximately $1,785,000 for income
taxes, respectively. These net operating loss carries forwards may be available to reduce future years’ taxable income. The
2017 carryforward will expire, if not utilized, through 2037. The 2019 and 2018 carryforwards shall be carried over indefinitely,
subject to annual usage limits.
Management believes
that it appears more likely than not that the Company will not realize these tax benefits due to the Company’s continuing
losses for income taxes purposes. Accordingly, the Company has provided a 100% valuation allowance on the deferred tax asset benefit
related to the U.S. net operating loss and capital loss carry forwards to reduce the asset to zero. Management will review this
valuation allowance periodically and make adjustments as necessary.
NOTE 12 – CONCENTRATIONS
Customer concentration
For the year ended December 31, 2019, one customer
accounted for approximately 98.6% of total sales and consisted of the sales of its inventory of shoes. The Company does not expect
any sales from this customer in the future and is no longer selling shoes. A reduction in future sales from this customer will
have a material adverse effect on the Company’s results of operations and financial condition.
Vendor concentrations
Generally, the Company purchases substantially
all of its raw materials and inventory from two suppliers. The loss of these suppliers may have a material adverse effect on the
Company’s results of operations and financial condition. However, the Company believes that, if necessary, alternate vendors
could supply similar products in adequate quantities to avoid material disruptions to operations.
NOTE 13 – SUBSEQUENT EVENTS
On January 6, 2020, the Company and the Seller entered into
a Settlement Agreement related to notes receivable (See Note 6). In lieu of the Company seeking default and foreclosure against
the Seller pursuant to the Note agreements, the Company received 10,420 shares of the Seller’s convertible Series B preferred
stock.
SILO Pharma, INC.
(FORMERLY KNOWN AS UPPERCUT BRANDS,
INC.)
CONDENSED BALANCE SHEETS
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,645,712
|
|
|
$
|
111,752
|
|
Equity investments, at cost
|
|
|
9,394
|
|
|
|
9,394
|
|
Notes receivable, net
|
|
|
90,000
|
|
|
|
200,000
|
|
Prepaid expenses and other current assets
|
|
|
310,984
|
|
|
|
16,333
|
|
Inventory - current
|
|
|
30,744
|
|
|
|
156,366
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
2,086,834
|
|
|
|
493,845
|
|
|
|
|
|
|
|
|
|
|
Inventory - non-current
|
|
|
117,347
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
2,204,181
|
|
|
$
|
493,845
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Convertible note payable, net of discount
|
|
$
|
-
|
|
|
$
|
61,875
|
|
Accounts payable and accrued expenses
|
|
|
114,772
|
|
|
|
54,862
|
|
Note payable - current portion
|
|
|
7,258
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
122,030
|
|
|
|
116,737
|
|
|
|
|
|
|
|
|
|
|
LONG TERM LIABILITIES:
|
|
|
|
|
|
|
|
|
Note payable - long-term portion
|
|
|
11,642
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total Long Term Liabilities
|
|
|
11,642
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
133,672
|
|
|
|
116,737
|
|
|
|
|
|
|
|
|
|
|
Commitment and Contingencies (see Note 9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable Series A, Convertible Preferred stock,
$0.0001 par value, 1,000,000 shares designated;
|
|
|
|
|
|
|
|
|
None and 4,000 shares
issued and outstanding at September 30, 2020 and December 31, 2019, respectively ($100 per share redemption value)
|
|
|
-
|
|
|
|
400,000
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY (DEFICIT):
|
|
|
|
|
|
|
|
|
Preferred stock, $0.0001 par value, 5,000,000 shares authorized
|
|
|
|
|
|
|
|
|
Series B convertible preferred stock, $0.0001 par
value, 2,000 shares designated; none and 115 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively
($1,000 per share liquidation value)
|
|
|
-
|
|
|
|
-
|
|
Common stock, $0.0001 par value, 100,000,000 shares
authorized; 85,141,956 and 23,604,207 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively
|
|
|
8,514
|
|
|
|
2,361
|
|
Additional paid-in capital
|
|
|
7,034,502
|
|
|
|
2,630,551
|
|
Accumulated deficit
|
|
|
(4,972,507
|
)
|
|
|
(2,655,804
|
)
|
|
|
|
|
|
|
|
|
|
Total Stockholders’ Equity (Deficit)
|
|
|
2,070,509
|
|
|
|
(22,892
|
)
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Equity (Deficit)
|
|
$
|
2,204,181
|
|
|
$
|
493,845
|
|
See accompanying unaudited notes to condensed
financial statements.
SILO Pharma, INC.
(FORMERLY KNOWN AS UPPERCUT BRANDS,
INC.)
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SALES
|
|
$
|
16,285
|
|
|
$
|
268
|
|
|
$
|
18,795
|
|
|
$
|
268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF SALES
|
|
|
29,449
|
|
|
|
82
|
|
|
|
30,866
|
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT (LOSS)
|
|
|
(13,164
|
)
|
|
|
186
|
|
|
|
(12,071
|
)
|
|
|
186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense
|
|
|
37,308
|
|
|
|
87,485
|
|
|
|
717,198
|
|
|
|
203,722
|
|
Professional fees
|
|
|
441,409
|
|
|
|
108,481
|
|
|
|
831,665
|
|
|
|
314,702
|
|
Product development
|
|
|
17,364
|
|
|
|
-
|
|
|
|
53,689
|
|
|
|
-
|
|
Insurance expense
|
|
|
13,578
|
|
|
|
8,174
|
|
|
|
17,560
|
|
|
|
24,521
|
|
Bad debt (recovery)
|
|
|
85,000
|
|
|
|
(6,000
|
)
|
|
|
84,000
|
|
|
|
(11,500
|
)
|
Selling, general and administrative expenses
|
|
|
28,397
|
|
|
|
44,553
|
|
|
|
76,088
|
|
|
|
75,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
623,056
|
|
|
|
242,693
|
|
|
|
1,780,200
|
|
|
|
607,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(636,220
|
)
|
|
|
(242,507
|
)
|
|
|
(1,792,271
|
)
|
|
|
(606,946
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
2,818
|
|
|
|
3,083
|
|
|
|
8,788
|
|
|
|
9,129
|
|
Other income
|
|
|
-
|
|
|
|
-
|
|
|
|
3,000
|
|
|
|
-
|
|
Interest expense
|
|
|
(393
|
)
|
|
|
(94
|
)
|
|
|
(268,996
|
)
|
|
|
(864
|
)
|
Interest expense - related party
|
|
|
-
|
|
|
|
(375
|
)
|
|
|
(224
|
)
|
|
|
(375
|
)
|
Loss on debt extinguishment
|
|
|
-
|
|
|
|
-
|
|
|
|
(198,000
|
)
|
|
|
-
|
|
Net realized gain on equity investments (non-controlled/non-affiliated
investments)
|
|
|
-
|
|
|
|
92,264
|
|
|
|
-
|
|
|
|
138,032
|
|
Net unrealized loss on equity
investments (non-controlled/non-affiliated investments)
|
|
|
-
|
|
|
|
(117,852
|
)
|
|
|
-
|
|
|
|
(170,191
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
|
2,425
|
|
|
|
(22,974
|
)
|
|
|
(455,432
|
)
|
|
|
(24,269
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
|
(633,795
|
)
|
|
|
(265,481
|
)
|
|
|
(2,247,703
|
)
|
|
|
(631,215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed dividend
|
|
|
-
|
|
|
|
-
|
|
|
|
(69,000
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS
|
|
$
|
(633,795
|
)
|
|
$
|
(265,481
|
)
|
|
$
|
(2,316,703
|
)
|
|
$
|
(631,215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
84,416,681
|
|
|
|
23,467,632
|
|
|
|
59,512,252
|
|
|
|
23,442,998
|
|
See accompanying unaudited notes to condensed
financial statements.
SILO Pharma, INC.
(FORMERLY KNOWN AS UPPERCUT BRANDS,
INC.)
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY (DEFICIT)
For the Nine Months Ended September
30, 2020 and 2019
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
Stockholders’
|
|
|
|
Series
B Preferred Stock
|
|
|
Common
Stock
|
|
|
Paid
In
|
|
|
Accumulated
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
(Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2019
|
|
|
115
|
|
|
$
|
-
|
|
|
|
23,604,207
|
|
|
$
|
2,361
|
|
|
$
|
2,630,551
|
|
|
$
|
(2,655,804
|
)
|
|
$
|
(22,892
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(238,877
|
)
|
|
|
(238,877
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31,
2020
|
|
|
115
|
|
|
|
-
|
|
|
|
23,604,207
|
|
|
|
2,361
|
|
|
|
2,630,551
|
|
|
|
(2,894,681
|
)
|
|
|
(261,769
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock issued
for cash, net of offering cost
|
|
|
-
|
|
|
|
-
|
|
|
|
37,758,116
|
|
|
|
3,775
|
|
|
|
2,111,958
|
|
|
|
-
|
|
|
|
2,115,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock issued
for future services
|
|
|
-
|
|
|
|
-
|
|
|
|
8,586,184
|
|
|
|
859
|
|
|
|
686,036
|
|
|
|
-
|
|
|
|
686,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Shares Exchanged
for Common Stock
|
|
|
(115
|
)
|
|
|
|
|
|
|
1,437,500
|
|
|
|
144
|
|
|
|
(144
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock issued
in connection with employment agreement
|
|
|
-
|
|
|
|
-
|
|
|
|
7,630,949
|
|
|
|
763
|
|
|
|
609,713
|
|
|
|
-
|
|
|
|
610,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock issued
for Exchange of Notes
|
|
|
-
|
|
|
|
-
|
|
|
|
4,125,000
|
|
|
|
412
|
|
|
|
527,588
|
|
|
|
-
|
|
|
|
528,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed dividend on
Preferred Stock Exchange
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
69,000
|
|
|
|
(69,000
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,375,031
|
)
|
|
|
(1,375,031
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30,
2020
|
|
|
-
|
|
|
|
-
|
|
|
|
83,141,956
|
|
|
|
8,314
|
|
|
|
6,634,702
|
|
|
|
(4,338,712
|
)
|
|
|
2,304,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock issued
for conversion of Redeemable Series A Preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
2,000,000
|
|
|
|
200
|
|
|
|
399,800
|
|
|
|
-
|
|
|
|
400,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(633,795
|
)
|
|
|
(633,795
|
)
|
Balance,
September 30, 2020
|
|
|
-
|
|
|
$
|
-
|
|
|
|
85,141,956
|
|
|
$
|
8,514
|
|
|
$
|
7,034,502
|
|
|
$
|
(4,972,507
|
)
|
|
$
|
2,070,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
Stockholders’
|
|
|
|
Series
B Preferred Stock
|
|
|
Common
Stock
|
|
|
Paid
In
|
|
|
Accumulated
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
(Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
|
23,417,540
|
|
|
$
|
2,342
|
|
|
$
|
2,047,610
|
|
|
$
|
(1,642,510
|
)
|
|
$
|
407,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued
for services
|
|
|
-
|
|
|
|
-
|
|
|
|
25,000
|
|
|
|
2
|
|
|
|
8,748
|
|
|
|
-
|
|
|
|
8,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(123,523
|
)
|
|
|
(123,523
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31,
2019
|
|
|
-
|
|
|
|
-
|
|
|
|
23,442,540
|
|
|
|
2,344
|
|
|
|
2,056,358
|
|
|
|
(1,766,033
|
)
|
|
|
292,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued
for services
|
|
|
-
|
|
|
|
-
|
|
|
|
25,000
|
|
|
|
3
|
|
|
|
8,747
|
|
|
|
-
|
|
|
|
8,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of stock
options for services
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
43,737
|
|
|
|
-
|
|
|
|
43,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(242,211
|
)
|
|
|
(242,211
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30,
2019
|
|
|
-
|
|
|
|
-
|
|
|
|
23,467,540
|
|
|
|
2,347
|
|
|
|
2,108,842
|
|
|
|
(2,008,244
|
)
|
|
|
102,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued
for services
|
|
|
-
|
|
|
|
-
|
|
|
|
25,000
|
|
|
|
2
|
|
|
|
8,748
|
|
|
|
-
|
|
|
|
8,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of stock
options for services
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
52,485
|
|
|
|
-
|
|
|
|
52,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(265,481
|
)
|
|
|
(265,481
|
)
|
Balance,
September 30, 2019
|
|
|
-
|
|
|
$
|
-
|
|
|
|
23,492,540
|
|
|
$
|
2,349
|
|
|
$
|
2,170,075
|
|
|
$
|
(2,273,725
|
)
|
|
$
|
(101,301
|
)
|
See accompanying unaudited notes to condensed
financial statements.
SILO Pharma, INC.
(FORMERLY KNOWN AS UPPERCUT BRANDS,
INC.)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
For the Nine Months Ended
|
|
|
|
September
30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,247,703
|
)
|
|
$
|
(631,215
|
)
|
Adjustments to reconcile net loss to net cash
used in operating activities
|
|
|
|
|
|
|
|
|
Bad debt expense
|
|
|
90,000
|
|
|
|
-
|
|
Stock-based compensation
|
|
|
610,476
|
|
|
|
122,472
|
|
Amortization of prepaid stock-based expense
|
|
|
460,289
|
|
|
|
-
|
|
Amortization of debt discount to interest expense
|
|
|
268,125
|
|
|
|
-
|
|
Inventory write-down
|
|
|
19,879
|
|
|
|
-
|
|
Net realized gain on equity investments
|
|
|
-
|
|
|
|
(138,032
|
)
|
Net unrealized loss on equity investments
|
|
|
-
|
|
|
|
170,191
|
|
Loss from debt extinguishment
|
|
|
198,000
|
|
|
|
-
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in inventory - current
|
|
|
105,743
|
|
|
|
(72,607
|
)
|
(Increase) decrease in prepaid expenses and other current assets
|
|
|
(68,045
|
)
|
|
|
10,471
|
|
(Increase) in inventory - non-current
|
|
|
(117,347
|
)
|
|
|
-
|
|
Increase in accounts payable and accrued expenses
|
|
|
59,910
|
|
|
|
36,825
|
|
Increase in accrued interest payable - related party
|
|
|
-
|
|
|
|
375
|
|
NET CASH USED IN OPERATING ACTIVITIES
|
|
|
(620,673
|
)
|
|
|
(501,520
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from sale of equity investments
|
|
|
-
|
|
|
|
191,938
|
|
Purchase of equity investment
|
|
|
-
|
|
|
|
(5,197
|
)
|
Collection on note receivable
|
|
|
20,000
|
|
|
|
-
|
|
NET CASH PROVIDED BY INVESTING ACTIVITIES
|
|
|
20,000
|
|
|
|
186,741
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from note payable - related party
|
|
|
35,000
|
|
|
|
25,000
|
|
Proceeds from note payable
|
|
|
18,900
|
|
|
|
-
|
|
Repayment of note payable - related party
|
|
|
(35,000
|
)
|
|
|
-
|
|
Net proceeds from sale of common stock
|
|
|
2,115,733
|
|
|
|
-
|
|
Repayment of insurance finance loan
|
|
|
-
|
|
|
|
(22,344
|
)
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
2,134,633
|
|
|
|
2,656
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:
|
|
|
1,533,960
|
|
|
|
(312,123
|
)
|
CASH AND CASH EQUIVALENTS - beginning of period
|
|
|
111,752
|
|
|
|
336,679
|
|
CASH AND CASH EQUIVALENTS - end of period
|
|
$
|
1,645,712
|
|
|
$
|
24,556
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
224
|
|
|
$
|
-
|
|
Income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Non-Cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Common stock issued for prepaid services
|
|
$
|
686,895
|
|
|
$
|
-
|
|
Common Stock issued for Exchange of Notes
|
|
$
|
528,000
|
|
|
$
|
-
|
|
Common Stock issued for conversion of Redeemable Series
A Preferred stock
|
|
$
|
400,000
|
|
|
$
|
-
|
|
See accompanying unaudited notes to condensed
financial statements.
SILO PHARMA, INC.
(FORMERLY KNOWN AS UPPERCUT BRANDS,
INC.)
NOTES TO UNAUDITED CONDENSED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2020
(Unaudited)
NOTE
1 – ORGANIZATION AND BUSINESS
Silo
Pharma, Inc. (formerly Uppercut Brands, Inc.) (the “Company”) was incorporated in the State of New York on July 13,
2010. On January 24, 2013, the Company changed its state of incorporation from New York to Delaware. On September 29, 2018, the
Company entered into an Asset Purchase Agreement (“APA”) with Blind Faith Concepts Holdings, Inc. a Nevada corporation
(the “Seller”) whereby the Company completed the acquisition of 100% of the assets of “NFID” from the
Seller. The Company is developing NFID as an exclusive brand of apparel consisting initially of sweatshirts, hoodies, pants,
t-shirts, jackets and hats.
On
October 4, 2013, the Company filed a Form N-54A and elected to become a business development company (“BDC”) under
the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, the Company previously elected to be
treated for federal income tax purpose as a regulated investment company, or (“RIC”), under Subchapter M of the Internal
Revenue Code of 1986, as amended, (the “Code”). Through September 29, 2018, the Company met the definition of an investment
company in accordance with the guidance under Accounting Standards Codification Topic 946 “Financial Services –
Investment Companies”. On September 29, 2018, the Company filed Form N-54C, Notification of Withdrawal of election to
be Subject to Section 55 through 65 of the Investment Company Act of 1940, whereas the Company has changed the nature of its business
so as to cease to be a business development company (See Note 2 – Basis of Presentation). Additionally, since 2017, the
Company is subject to income taxes at corporate tax rates.
On
May 21, 2019, the Company had amended its articles of incorporation with the State of Delaware to change the Company’s name
to Uppercut Brands, Inc. On September 24, 2020, the Company amended its articles of incorporation with the State of Delaware to
change the Company’s name to Silo Pharma, Inc.
On
April 8, 2020, the Company incorporated a new wholly owned subsidiary, Silo Pharma Inc., in the State of Florida. The Company
has also secured the domain name www.silopharma.com. In July 2020, through the Company’s newly formed subsidiary, the Company
entered into a commercial evaluation license and option agreement with a university (see Note 9). Recently, management has been
exploring opportunities to expand the Company’s business by seeking to acquire and/or develop intellectual property or technology
rights from leading universities and researchers to treat rare diseases, including the use of psychedelic drugs, such as psilocybin,
and the potential benefits they may have in certain cases involving depression, mental health issues and neurological disorders.
The new subsidiary had no operations during the nine months ended September 30, 2020.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of presentation
Management
acknowledges its responsibility for the preparation of the accompanying unaudited condensed financial statements which reflect
all adjustments, consisting of normal recurring adjustments, considered necessary in its opinion for a fair statement of its financial
position and the results of its operations for the periods presented. The accompanying unaudited condensed financial statements
of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America
(the “U.S. GAAP”) for interim financial information and with the instructions Article 8-03 of Regulation S-X. Operating
results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. Certain
information and note disclosure normally included in financial statements prepared in accordance with U.S. GAAP has been condensed
or omitted from these statements pursuant to such accounting principles and, accordingly, they do not include all the information
and notes necessary for comprehensive financial statements These unaudited condensed financial statements should be read in conjunction
with the summary of significant accounting policies and notes to the financial statements for the years ended December 31, 2019
and 2018 of the Company which were included in the Company’s Annual Report on Form 10-K as filed with the Securities and
Exchange Commission on March 20, 2020.
SILO PHARMA, INC.
(FORMERLY KNOWN AS UPPERCUT BRANDS,
INC.)
NOTES TO UNAUDITED CONDENSED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2020
(Unaudited)
Going
Concern
These
financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of business. As reflected in the accompanying financial statements, the Company
had a net loss and cash used in operations of $2,247,703 and $620,673 for the nine months ended September 30, 2020. Additionally,
the Company had an accumulated deficit of $4,972,507 at September 30, 2020 and has generated minimal revenues under its new business
plan. These factors raise substantial doubt about the Company’s ability to continue as a going concern for a period of twelve
months from the issuance date of this report. Management cannot provide assurance that the Company will ultimately achieve profitable
operations or become cash flow positive or raise additional debt and/or equity capital. The Company is seeking to raise additional
capital through additional debt and/or equity financings to fund its operations in the future. If the Company is unable to raise
additional capital or secure additional lending in the near future to fund its business plan, management expects that the Company
will need to curtail its operations. Between April 9, 2020 to April 18, 2020, the Company received gross proceeds of $75,644 and
subscription receivable of $2,000 (collected in July 2020) or $0.01 per share from the sale of an aggregate of 7,764,366 shares
of the Company’s common stock. Additionally, on April 28, 2020, the Company received gross proceeds of $2,399,500, before
deducting placement agent and other offering expenses of $361,410, from the sale of an aggregate of 29,993,750 shares of the Company’s
common stock at a price of approximately $0.08 per share (see Note 7). These financial statements do not include any adjustments
related to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
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 financial statements and the reported amounts of revenues and expenses
during the reporting period. Making estimates requires management to exercise significant judgment. It is at least reasonably
possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial
statements, which management considered in formulating its estimate could change in the near term due to one or more future confirming
events. Accordingly, the actual results could differ significantly from estimates. Significant estimates during the nine months
ended September 30, 2020 and 2019 include the collectability of notes receivable, the valuation of the Company’s equity
investments, amortization period and valuation of intangibles, estimates for obsolete and slow moving inventory, assumptions used
in assessing impairment of long-term assets, valuation allowances for deferred tax assets, the fair value of warrants issued with
debt, and the fair value of shares issued for services and in settlements.
Fair
Value of Financial Instruments and Fair Value Measurements
The
Company uses the guidance of ASC Topic 820 for fair value measurements which clarifies the definition of fair value, prescribes
methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as
follows:
Level
1- Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.
Level
2- Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar
assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived
from or corroborated by observable market data.
Level
3- Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants
would use in pricing the asset or liability based on the best available information.
SILO PHARMA, INC.
(FORMERLY KNOWN AS UPPERCUT BRANDS,
INC.)
NOTES TO UNAUDITED CONDENSED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2020
(Unaudited)
The
carrying amounts reported in the balance sheets for cash, notes receivable, inventory, prepaid expenses and other current assets,
accounts payable and accrued expenses, notes payable – related party and accrued interest – related party approximate
their fair market value based on the short-term maturity of these instruments.
ASC
825-10 “Financial Instruments”, allows entities to voluntarily choose to measure certain financial assets and liabilities
at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable,
unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that
instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value
option to any outstanding instruments.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with a maturity of three months or less when acquired to be cash equivalents.
The Company places its cash with high credit quality financial institutions. The Company’s accounts at these institutions
are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 or by the Securities Investor Protection
Corporation (“SIPC”) up to $250,000. To reduce its risk associated with the failure of such financial institutions,
the Company evaluates at least annually the rating of the financial institutions in which it holds deposits. At September 30,
2020, the Company had cash in excess of FDIC limits of approximately $1,396,000 and at December 31, 2019, the Company had no cash
in excess of FDIC limits.
Notes
Receivable
The
Company recognizes an allowance for losses on notes receivable in an amount equal to the estimated probable losses net of recoveries.
The allowance is based on an analysis of historical bad debt experience, current note receivable aging, and expected future write-offs,
as well as an assessment of specific identifiable accounts considered at risk or uncollectible. The expense associated with the
allowance for doubtful accounts is recognized as general and administrative expense.
Prepaid
Expenses and Other Current Assets
Prepaid
expenses and other current assets of $310,984 and $16,333 at September 30, 2020 and December 31, 2019, respectively, consist primarily
of costs paid for future services which will occur within a year. Prepaid expenses may include prepayments in cash and equity
instruments for consulting, business advisory, legal services, and insurance which are being amortized over the terms of their
respective agreements.
Inventory
Inventory,
consisting of raw materials and finished goods, are stated at the lower of cost and net realizable value utilizing the first-in,
first-out (FIFO) method. A reserve is established when management determines that certain inventories may not be saleable. If
inventory costs exceed expected net realizable value due to obsolescence or quantities in excess of expected demand, the Company
will record reserves for the difference between the cost and the net realizable value. These reserves shall be recorded based
on estimates and included in cost of sales. The Company recorded an inventory write-down of its raw material of $19,879 during
the nine months ended September 30, 2020 and was included in cost of sales as reflected in the accompanying unaudited condensed
statements of operations. No allowance was required at September 30, 2020 and December 31, 2019. Additionally, the Company shall
make an analysis of its inventory for any slow-moving inventory. Accordingly, the Company shall reclass sellable inventories that
may not be sold within one year to non-current assets (see Note 3).
SILO PHARMA, INC.
(FORMERLY KNOWN AS UPPERCUT BRANDS,
INC.)
NOTES TO UNAUDITED CONDENSED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2020
(Unaudited)
Equity
Investments, at Cost
Equity
investments, at cost comprised mainly of non-marketable capital stock and stock warrants, are recorded at cost, as adjusted for
other than temporary impairment write-downs and are evaluated for impairment periodically. Prior to September 29, 2018, equity
investments, at cost were recorded at fair value, represented as cost, plus or minus unrealized appreciation or depreciation.
The fair value of equity investments, at cost that had no ready market were determined in good faith by the Board of Directors,
based upon the financial condition and operating performance of the underlying investee companies as well as general market trends
for businesses in the same industry. At September 30, 2020 and December 31, 2019, equity investments, at cost of $9,394 and $9,394,
respectively, comprised mainly of non-marketable capital stock, are recorded at cost, as adjusted for other than temporary impairment
write-downs and are evaluated for impairment periodically.
Impairment
of Long-lived Assets
In
accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an
impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount
of impairment is measured as the difference between the asset’s estimated fair value and its book value.
Net
Realized Gain or Loss and Net Change in Unrealized Appreciation or Depreciation of Equity Investments, at Fair Value
Realized
gain or loss is recognized when an investment is disposed of and is computed as the difference between the Company’s cost
basis and the net proceeds received from such disposition. Realized gains and losses on investment transactions are
determined by specific identification. Net change in unrealized appreciation or depreciation is computed as the difference between
the fair value of the investment and the cost basis of such investment, including any reversal of previously recorded unrealized
appreciation/depreciation when gains or losses are realized.
Revenue
Recognition
The
Company applies ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). ASC 606 establishes a single
comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of
the existing revenue recognition guidance. This standard requires an entity to recognize revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange
for those goods or services and also requires certain additional disclosures. The Company adopted this standard using the modified
retrospective approach, which requires applying the new standard to all existing contracts not yet completed as of the effective
date and recording a cumulative-effect adjustment to retained earnings as of the date of adoption. The adoption of ASC 606 on
January 1, 2018 did not have any impact on the process for, timing of, and presentation and disclosure of revenue recognition
from contracts and there was no cumulative effect adjustment.
The
Company records interest and dividend income on an accrual basis to the extent that the Company expects to collect such amounts.
Product
sales are recognized when the product is shipped to the customer and title is transferred and are recorded net of any discounts
or allowances.
Cost
of Sales
The
primary components of cost of sales include the cost of the product, production costs, warehouse storage costs and shipping fees.
Stock-based
Compensation
Stock-based
compensation is accounted for based on the requirements of ASC 718 – “Compensation – Stock Compensation”,
which requires recognition in the financial statements of the cost of employee, director, and non-employee services received in
exchange for an award of equity instruments over the period the employee, director , or non-employee is required to perform the
services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee,
director, and non-employee services received in exchange for an award based on the grant-date fair value of the award. The Company
has elected to recognize forfeitures as they occur as permitted under ASU 2016-09 Improvements to Employee Share-Based Payment.
SILO
PHARMA, INC.
(FORMERLY KNOWN AS UPPERCUT BRANDS,
INC.)
NOTES TO UNAUDITED CONDENSED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2020
(Unaudited)
Income
Taxes
Deferred
income tax assets and liabilities arise from temporary differences between the financial statements and tax basis of assets and
liabilities, as measured by the enacted tax rates, which are expected to be in effect when these differences reverse. Deferred
tax assets and liabilities are classified as current or non-current, depending upon the classification of the asset or liabilities
to which they relate. Deferred tax assets and liabilities not related to an asset or liability are classified as current or non-current
depending on the periods in which the temporary differences are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
The
Company follows the provisions of FASB ASC 740-10, “Uncertainty in Income Taxes”. Certain recognition thresholds must
be met before a tax position is recognized in the financial statements. An entity may only recognize or continue to recognize
tax positions that meet a “more-likely-than-not” threshold. The Company does not believe it has any uncertain tax
positions as of September 30, 2020 and December 31, 2019 that would require either recognition or disclosure in the accompanying
financial statements.
Net
Loss per Common Share
Basic
loss per share is computed by dividing net loss allocable to common shareholders by the weighted average number of shares of common
stock outstanding during each period. Diluted earnings per share is computed by dividing net income available to common shareholders
by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding
during the period using the as-if converted method. Potentially dilutive securities which included convertible preferred shares
and stock options are excluded from the computation of diluted shares outstanding if they would have an anti-dilutive impact on
the Company’s net losses. The following potentially dilutive shares have been excluded from the calculation of diluted net
loss per share as their effect would be anti-dilutive for the six months ended September 30, 2020 and 2019:
|
|
September
30,
2020
|
|
|
September
30,
2019
|
|
Series A convertible preferred stock
|
|
|
-
|
|
|
|
2,000,000
|
|
Stock options
|
|
|
300,000
|
|
|
|
300,000
|
|
Leases
In
February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. ASU 2016-02 sets out the principles for the
recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The
new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the
principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether
lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee
is also required to recognize a right-of-use asset and a lease liability for all leases with a term of greater than 12 months
regardless of their classification.
Leases
with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard
requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type
leases, direct financing leases and operating leases. The pronouncement requires a modified retrospective method of adoption and
is effective on January 1, 2019, with early adoption permitted. For the Company’s administrative office lease, the Company
analyzed if it would be required to record a lease liability and a right of use asset on its consolidated balance sheets at fair
value upon adoption of ASU 2016-02. The Company has elected not to recognize right-of-use assets and lease liabilities for short-term
leases that have a term of 12 months or less.
SILO PHARMA, INC.
(FORMERLY KNOWN AS UPPERCUT BRANDS,
INC.)
NOTES TO UNAUDITED CONDENSED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2020
(Unaudited)
New
Accounting Pronouncements
Accounting
standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have
a material impact on the financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated
to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.
NOTE
3 – INVENTORY
At
September 30, 2020 and December 31, 2019, inventory, including jackets, t-shirts, sweatshirts, hats and fabric, consisted of the
following:
|
|
September
30,
2020
|
|
|
December 31,
2019
|
|
|
|
(Unaudited)
|
|
|
|
|
Raw materials
|
|
$
|
23,705
|
|
|
$
|
41,231
|
|
Finished goods
|
|
|
124,386
|
|
|
|
115,135
|
|
Total
|
|
|
148,091
|
|
|
|
156,366
|
|
Less: inventory – current
|
|
|
(30,744
|
)
|
|
|
-
|
|
Inventory – non-current
|
|
$
|
117,347
|
|
|
$
|
-
|
|
During
the nine months ended September 30, 2020, the Company made an analysis of its inventory and determined that certain sellable inventories
may not be sold within one year. Accordingly, the Company reclass such slow moving inventory to non-current assets.
NOTE
4 – NOTES RECEIVABLE
On
September 28, 2018, the Company and the Seller executed a two-year promissory note receivable agreement with a principal balance
of $200,000 of which $100,000 was funded to the Seller in September 2018 and the remaining $100,000 was funded in October 2018.
The terms of the promissory note include an interest rate of 6% and the Company shall be repaid in interest only payments on a
quarterly basis, until the maturity date of September 27, 2020, at which time the full principal and any interest payments will
be due to the Company. At the time the promissory note receivable agreement was executed, the Company also executed a Security
Interest and Pledge Agreement with the borrower. Pursuant to the Security Interest and Pledge Agreement, the borrower has pledged
all of the assets of its company as security for the performance of the note obligations.
On
November 2, 2018, the Company and Seller entered into a Promissory Note Agreement with a principal balance of $50,000. Pursuant
to the Promissory Note, the $50,000 note was a deposit and credit towards the acquisition of the assets of Lust for Life Group
such as inventory, trademarks and logos. Pursuant to this promissory note agreement, since the purchase did not close within 30
days from the note date, the note receivable became immediately due. Through the date of default, the outstanding principal balance
bore interest at an annual interest rate of 10% payable on a monthly basis. Upon default, the interest rate increased to 18% per
annum. As of December 31, 2018, the Company determined that this note receivable was doubtful and accordingly, recorded an allowance
for doubtful account and bad debt expense of $50,000.
SILO
PHARMA, INC.
(FORMERLY KNOWN AS UPPERCUT BRANDS,
INC.)
NOTES TO UNAUDITED CONDENSED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2020
(Unaudited)
In
December 2019, pursuant to Claim Purchase Agreements, the Company sold its notes receivable and related interest receivable balances
in the aggregate amount of $277,305 to an investor. Pursuant to the Claim Purchase Agreements, the investor shall pay the Company
the purchase price of $277,305 on the earlier of the payment of six-monthly installments or upon the liquidation of settlement
securities of the Seller pursuant to Section 3(a)(10) of the Securities Act, whichever occurs first. The first installment shall
be made following entry and full effectuation of a court order approving the settlement of the claim which occurred on March 6,
2020 in the United States district court for the District of Maryland Northern Division. Additionally, on January 6, 2020, the
Company and the Seller entered into a Settlement Agreement related to notes receivable. In lieu of the Company seeking default
and foreclosure against the Seller pursuant to the Note agreements, the Company received 10,420 shares of the Seller’s convertible
Series B preferred stock. Since these Series B preferred shares have limited marketability, no value was placed on these shares.
Between April 2020 and September 2020, the Company collected an aggregate of $20,000 on the notes receivable balance. During
the three and nine months ended September 30, 2020, the Company recorded an allowance for doubtful account and bad debt expense
of $90,000 due to slow collection of the installment payments pursuant to the agreement.
At
September 30, 2020 and December 31, 2019, notes receivable, net consisted of the following:
|
|
September
30,
2020
|
|
|
December 31,
2019
|
|
|
|
(Unaudited)
|
|
|
|
|
Principal amounts of notes receivable
|
|
$
|
230,000
|
|
|
$
|
250,000
|
|
Less: allowance for doubtful
accounts
|
|
|
(140,000
|
)
|
|
|
(50,000
|
)
|
Notes receivable, net
|
|
$
|
90,000
|
|
|
$
|
200,000
|
|
NOTE
5 – CONVERTIBLE NOTES PAYABLE
In
October 2019, the Company entered into Securities Purchase Agreements (the “Purchase Agreements”) with accredited
investors. Pursuant to the terms of the Purchase Agreements, the Company issued and sold to investors convertible promissory notes
in the aggregate principal amount of $330,000 (the “Notes”) and warrants to purchase up to 1,650,000 shares of the
Company’s common stock (the “Warrants”). The Company received net proceeds of $295,000, net of origination issue
discount of $30,000 and fees of $5,000. The Notes are due and payable in October 2020. Prior to an Event of Default, no interest
shall accrue on these Notes.
At
any time after the Original Issue Date, until the respective Note is no longer outstanding, the Notes were convertible, in whole
or in part, into shares of the Company’s common stock at the option of the Holder, at any time and from time to time. In
accordance with the Purchase Agreements and the Notes, subject to adjustments as defined in the Purchase Agreements and Notes.
The conversion price (the “Conversion Price”) was equal to $0.20. The Company may prepay the Notes at any time prior
to its six-month anniversary, subject to pre-payment charges as detailed in the Note. Upon every conversion, the Company would
deliver an additional $1,250 worth of shares (as calculated by the Conversion Price in effect on the conversion notice being honored)
to cover the Holder’s expenses and deposit fees associated with each notice of conversion.
The
Purchase Agreements and Notes contain customary representations, warranties and covenants, including certain restrictions on the
Company’s ability to sell, lease or otherwise dispose of any significant portion of its assets. The Investor also was entitled
to acquire, upon the terms applicable to such purchase rights, the aggregate purchase rights that the Holder could have acquired
if the Holder had held the number of shares of common stock acquirable upon complete conversion of the Note. The Investor’s
also had the right of first refusal with respect to any future equity (or debt with an equity component) offering conducted by
the Company until the 12-month anniversary of the Closing. The Purchase Agreements and the Notes also provided for certain events
of default, including, among other things, payment defaults, breaches of representations and warranties, bankruptcy or insolvency
proceedings, and delinquency in periodic report filings with the Securities and Exchange Commission. Upon the occurrence of an
event of default, the Investor’s may declare the outstanding obligations due and payable at significant applicable default
rates and take such other actions as set forth in the Note.
SILO PHARMA, INC.
(FORMERLY KNOWN AS UPPERCUT BRANDS,
INC.)
NOTES TO UNAUDITED CONDENSED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2020
(Unaudited)
The
Company would issue to each investor at the closing, that number of shares of its common stock equal to 14% of the aggregate amount
paid by the Investor for the Notes purchased, priced at the closing price of the Company’s common stock on the day prior
to the closing, as a due diligence fee. In connection with due diligence fee, during 2019, the Company shall issue 86,667 shares
of its common stock to the investors. These shares were valued at $42,000 using the closing price of the Company’s common
stock on the day prior to the closing which ranged from $0.35 to $0.60 per share, and the amount was recorded as a debt discount
and an increase in equity.
The
Warrants were exercisable at any time on or after the date of the issuance and entitles the investors to purchase shares of the
Company’s common stock for a period of five years from the initial date the warrants become exercisable. Under the terms
of the Warrant, the holders are entitled to exercise the Warrant to purchase up to 1,650,000 shares of the Company’s common
stock at an exercise price of $0.20, subject to customary adjustments as detailed in the Warrant.
This
Note and related Warrants included a down-round provision under which the Note conversion price and warrant exercise price could
be affected on a full-ratchet basis by future equity offerings undertaken by the Company.
In
connection with the issuance of the Note and Warrants, the Company determined that the terms of the Notes and Warrants contain
terms that are fixed monetary amounts at inception and accordingly, were not considered derivatives. The fair value of the warrants
was determined using the Binomial valuation model. In connection with the issuance of the warrants, on the measurement date, the
relative fair value of the warrants and the beneficial conversion feature of $253,000 was recorded as a debt discount and an increase
in paid-in capital.
On
April 15, 2020, the Company entered into Exchange Agreements with the holders of these convertible promissory notes. Pursuant
to these Exchange Agreements, the holders agreed to exchange their convertible promissory notes of $330,000 and 1,650,000 warrants
issued in connection with this debt for an aggregate of 4,125,000 shares of the Company’s common stock. at a price of $0.08
per share. After the exchanges, there are no convertible notes outstanding. The Company issued 4,125,000 shares of common stock
which was more than the shares that would have been issued at the original conversion price of $0.20 per share or 1,650,000 shares
of common stock, an excess of 2,475,000 shares of common stock. The excess shares were valued at a price of $0.08 per share. Consequently,
the Company recorded a loss on debt extinguishment of $198,000 during the nine months ended September 30, 2020.
For
the three and nine months ended September 30, 2020, interest expense related to convertible notes and warrants amounted to $268,125
and $185,625, which consisted of amortization of debt discount, respectively. There was no amortization of debt discount during
the prior period.
At
September 30, 2020 and December 31, 2019, convertible notes payable consisted of the following:
|
|
September
30,
2020
|
|
|
December 31,
2019
|
|
Principal amount
|
|
$
|
-
|
|
|
$
|
330,000
|
|
Less: unamortized debt discount
|
|
|
-
|
|
|
|
(268,125
|
)
|
Convertible notes payable, net
|
|
$
|
-
|
|
|
$
|
61,875
|
|
SILO
PHARMA, INC.
(FORMERLY KNOWN AS UPPERCUT BRANDS,
INC.)
NOTES TO UNAUDITED CONDENSED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2020
(Unaudited)
NOTE
6 - NOTE PAYABLE
Note
payable- related party
On
March 11, 2020, the Company entered into a Promissory Note Agreement (the “Note”) with the Company’s chief executive
officer in the amount of $15,000. The Note bearing at 6% per annum, was unsecured, and all principal and interest amounts outstanding
was due on April 10, 2020. In April 2020, this Note and related accrued interest of $126 was repaid. At September 30, 2020, notes
payable – related party amounted to $0. For the three and nine months ended September 30, 2020, interest expense related
to this Note amounted to $0 and $126, respectively.
On
April 1, 2020, the Company entered into a Promissory Note Agreement (the “Note”) with a company owned by the Company’s
chief executive officer in the amount of $20,000. The Note bearing at 6% per annum, was unsecured, and all principal and interest
amounts outstanding was due on September 30, 2020. On April 30, 2020, the Company repaid this note payable – related party
and all interest due. For the three and nine months ended September 30, 2020, interest expense related to this Note amounted to
$0 and $99, respectively.
Note
payable- unrelated party
Paycheck
Protection Program Funding
On
April 30, 2020, the Company received federal funding in the amount of $18,900 through the Paycheck Protection Program (the “PPP”).
PPP funds have certain restrictions on use of the funding proceeds, and generally must be repaid within two (2) years at 1% interest.
The PPP loan may, under circumstances, be forgiven. There shall be no payment due by the Company during the nine months period
beginning on the date of this note (“Deferral Period”). Commencing one month after the expiration of the Deferral
Period, the Company shall pay the lender monthly payments of principal and interest, each in equal amount required to fully amortize
by the maturity date. If a payment on this note is more than ten days late, the lender shall charge a late fee of up to 5% of
the unpaid portion of the regularly scheduled payment. As of September 30, 2020, the principal balance of this note amounted to
$18,900 and accrued interest of $80. During the three and nine months ended September 30, 2020, the Company recognized $48 and
$80 of interest expense, respectively.
|
|
As
of
September 30,
2020
|
|
|
As
of December 31,
2019
|
|
|
|
(Unaudited)
|
|
|
|
|
Principal amount
|
|
$
|
18,900
|
|
|
$
|
-
|
|
Less: current portion
|
|
|
(7,258
|
)
|
|
|
-
|
|
Note payable - long term portion
|
|
$
|
11,642
|
|
|
$
|
-
|
|
Minimum
principal payments under note payable to unrelated parties at September 30, 2020 are as follows:
Year ended December 31, 2020
|
|
$
|
2,001
|
|
Year ended December 31, 2021
|
|
|
12,653
|
|
Year ended December 31, 2022
|
|
|
4,246
|
|
Total principal payments
|
|
$
|
18,900
|
|
SILO
PHARMA, INC.
(FORMERLY KNOWN AS UPPERCUT BRANDS,
INC.)
NOTES TO UNAUDITED CONDENSED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2020
(Unaudited)
NOTE
7 – STOCKHOLDERS’ DEFICIT
Preferred
stock
The
Company has authorized the issuance of 5,000,000 shares of preferred stock, $0.0001 par value. The Company’s board of directors
is authorized at any time, and from time to time, to provide for the issuance of shares of Preferred Stock in one or more series,
and to determine the designations, preferences, limitations and relative or other rights of the Preferred Stock or any series
thereof. In April 2013, 1,000,000 shares were designated as Series A Convertible Preferred Stock and in November 2019, 2,000 shares
were designated as Series B Convertible Preferred Stock.
Series
A redeemable convertible preferred stock
In
April 2013, pursuant to a Series A Preferred Stock Purchase Agreement (the “Preferred Stock Agreement”), the Company
issued 4,000 shares of Series A Convertible Preferred Stock (the “Series A Preferred Stock”) for $400,000. Holders
of Series A Preferred Stock vote together with holders of Common Stock on an as-converted basis. Each share of Series A Preferred
Stock was currently convertible into 500 shares of common stock at the option of the holder (subject to a 9.99% beneficial ownership
limitation) based on a conversion formula (the Stated Value, currently $100, divided by the Conversion Rate, currently $0.20).
The Conversion Rate may be adjusted upon the occurrence of stock dividends or stock splits or subsequent equity sales at a price
lower than the current conversion rate. Each share had a $100 liquidation value. The holders of Series A Preferred Stock were
entitled to receive dividends on an as-converted basis if paid on Common Stock.
The
Series A Convertible Preferred Stock was redeemable at the option of the holder upon the occurrence of certain “triggering
events.” In case of a triggering event, the holder had the right to redeem each share held for cash (currently $100/share)
or impose a dividend rate on all of the outstanding Preferred Stock at 6% per annum thereafter. A triggering event occurs if the
Company fails to deliver certificates representing conversion shares, fails to pay the amount due pursuant to a Buy-In, fails
to have available a sufficient number of authorized shares, fails to observe any covenant in the Certificate of Designation unless
cured within 30 calendar days, shall be party to a Change in Control Transaction, sustains a bankruptcy event, fails to list or
quote its common stock for more than 20 trading days in a twelve-month period, sustains any monetary judgment, writ or similar
final process filed against the Company for more than $100,000 and such judgment writ or similar final process shall remain unvacated,
unbonded or unstayed for a period of 45 calendar days, or fails to comply with the Asset Coverage requirement.
Because
certain of these “triggering events” were outside the control of the Company, the Preferred Stock was classified within
the temporary equity section of the accompanying balance sheets.
The
Series A Preferred Stock has forced conversion rights where the Company may force the conversion of the Series A Preferred Stock
if certain conditions are met. Additionally, the Company may elect to redeem some or all of the outstanding Series A Preferred
Stock for the Stated Value (currently $100/share) provided that proper notice is provided to the holders and that a number of
conditions (the “Equity Conditions”) have been met.
The
Company believes the carrying amount reported in the balance sheets for the Series A Preferred Stock of $400,000 approximates
the fair market value of such Preferred Stock based on the short-term maturity of these instruments which also equals the redemption
value reflected as on the balance sheets as of December 31, 2019.
On
March 31, 2017, the Board approved the amendment and restatement of the original Certificate of Designation in order to expressly
ensure that holders of the Company’s Series A Preferred Stock have the right to elect at least two directors at all times,
have complete priority over any other class as to distribution of assets and payments of dividends, and have equal voting rights
with every other outstanding voting stock. On May 11, 2017, the Company filed the amendment and restatement with the State of
Delaware.
SILO
PHARMA, INC.
(FORMERLY KNOWN AS UPPERCUT BRANDS,
INC.)
NOTES TO UNAUDITED CONDENSED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2020
(Unaudited)
Conversion
of Series A Preferred Stock into common shares
On
August 3, 2020, at the request of the investor, the Company converted 4,000 Series A Preferred Stock into 2,000,000 shares of
common stock. After such conversion, the Company reclassed the $400,000 redemption value of the Series A preferred stock to additional
paid in capital. Accordingly, there are no shares of Series A preferred stock issued and outstanding as of September 30, 2020.
Series
B convertible preferred stock
In
November 2019, the Company filed an Amendment to its Articles of Incorporation to designate a series of preferred stock, the Series
B Convertible Preferred Stock, with the Secretary of State of the State of Delaware.
The
Certificate of Designations established 2,000 shares of the Series B Preferred Stock, par value $0.0001, having such designations,
preferences, and rights as determined by the Company’s Board of Directors in its sole discretion, in accordance with the
Company’s Articles of Incorporation and Amended and Restated Bylaws. The Certificate of Designations, Preferences, Rights,
and Limitations of Series B Convertible Preferred Stock (“Certificate of Designations”) provides that the Series B
Convertible Preferred Stock shall have no right to vote on any matters on which the common shareholders are permitted to vote.
However, as long as any shares of Series B Preferred Stock are outstanding, the Company shall not, without the affirmative vote
of the Holders of a majority of the then outstanding shares of the Series B Preferred Stock, (a) alter or change adversely the
powers, preferences or rights given to the Series B Preferred Stock or alter or amend this Certificate of Designation, (b) authorize
or create any class of stock ranking as to dividends, redemption or distribution of assets upon a liquidation senior to, or otherwise
pari passu with, the Series B Preferred Stock, (c) amend its certificate of incorporation or other charter documents in any manner
that adversely affects any rights of the Holders, (d) increase the number of authorized shares of Series B Preferred Stock, or
(e) enter into any agreement with respect to any of the foregoing. The Series B Convertible Preferred Stock ranks senior with
respect to dividends and right of liquidation to the Company’s common stock and junior with respect to dividends and right
of liquidation to all existing and future indebtedness of the Company and existing and outstanding preferred stock of the Company.
Each share of Series B Preferred Stock shall have a stated value of $1,000 (the “Stated Value”).
Except
for stock dividends or distributions for which adjustments are to be made pursuant to the certificate of designation, Holders
shall be entitled to receive, and the Company shall pay, dividends on shares of Series B Preferred Stock equal (on an as-if-converted-to-Common-Stock
basis) to and in the same form as dividends actually paid on shares of the Company’s common stock when, as and if such dividends
are paid on shares of the common stock. No other dividends shall be paid on shares of Series B Preferred Stock.
The
Holder of Series B Preferred stock shall have the right from time to time, and at any time after the original issue date, to convert
all or any part of the outstanding Series B Preferred Stock into the Company’s common stock. The conversion price (the “Conversion
Price”) shall equal $0.20 per share (subject to equitable adjustments by the Company relating to the Company’s securities
or the securities of any subsidiary of the Company, combinations, recapitalization, reclassifications, extraordinary distributions
and similar events).
If,
at any time while the Series B Preferred Stock is outstanding, the Company sells or grants any option to purchase or sells or
grants any right to reprice, or otherwise disposes of or issues (or announces any sale, grant or any option to purchase or other
disposition), any common stock or common stock equivalents entitling any Person to acquire shares of common stock at an effective
price per share that is lower than the then Conversion Price (such lower price, the “Base Conversion Price” and such
issuances, collectively, a “Dilutive Issuance”), then simultaneously with the consummation (or, if earlier, the announcement)
of each Dilutive Issuance the Conversion Price shall be reduced to equal the Base Conversion Price. In addition, if at any time
the Company grants, issues or sells any common stock equivalents or rights to purchase stock, warrants, securities or other property
pro rata to the record holders of any class of shares of common stock (the “Purchase Rights”), then the Holder will
be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could
have acquired if the Holder had held the number of shares of common stock acquirable upon complete conversion of such Holder’s
Series A Preferred Stock.
SILO
PHARMA, INC.
(FORMERLY KNOWN AS UPPERCUT BRANDS,
INC.)
NOTES TO UNAUDITED CONDENSED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2020
(Unaudited)
On
November 29, 2019, the Company entered into Series B Preferred Stock Purchase Agreements with accredited investors whereby the
investors agreed to purchase an aggregate of 115 unregistered shares of the Company’s Series B Preferred stock for $115,000,
or $1,000 per share. In November 2019, the Company received the cash proceeds of $110,000, net of fees of $5,000 which was charged
to additional paid in capital. In connection with the sale of Series B preferred shares, the Company issued 575,000 warrants to
purchase 575,000 common shares at $0.20 per share. subject to adjustment on terms similar to the Series B preferred shares.
In
connection with the issuance of these Series B preferred shares and Warrants, the Company determined that the terms of the Series
B preferred shares and related warrants contain terms that were fixed monetary amounts at inception and accordingly, were not
considered derivatives.
On
April 15, 2020, the Company entered into Exchange Agreements with the holders of its Series B Convertible Preferred Stock, which
shares of Series B Convertible Preferred Stock were originally issued in November 2019. Pursuant to the Exchange Agreements, the
holders agreed to exchange their 115 shares of Series B Convertible Preferred Stock with a stated value of $115,000 and 575,000
warrants issued in connection with the Series B convertible preferred stock for an aggregate of 1,437,500 shares of the Company’s
common stock at a price of $0.08 per share. After the exchanges, there are no shares of the Company’s Series B Convertible
Preferred Stock outstanding. The Company issued 1,437,500 shares of common stock which was more than the shares that would have
been issued at the original conversion price of $0.20 per share or 575,000 shares of common stock, an excess of 862,500 shares
of common stock. The excess shares were valued at a price of $0.08 per share. Consequently, in connection with this share exchange,
the Company recorded a deemed dividend on this extinguishment of $69,000.
Common
stock
Sale
of common stock
Between
April 9, 2020 to April 18, 2020, the Company entered into subscription agreements with certain accredited investors pursuant to
which it issued an aggregate of 7,764,366 shares of the Company’s common stock for proceeds of $75,644, and subscription
receivable of $2,000 or $0.01 per share, for a total of $77,644. The Company collected the subscription receivable of $2,000 on
July 6, 2020.
On
April 28, 2020 (the “Closing Date”), the Company entered into securities purchase agreements (collectively, the “Purchase
Agreement”) with certain institutions and accredited investors (each an “Investor” and collectively, the “Investors”)
for the sale of an aggregate 29,993,750 shares of the Company’s common stock at a price of $0.08 per share for gross proceeds
of $2,399,500, before deducting placement agent fees of $242,950 and other offering expenses of $118,460 (the “Private Placement”)
for total net proceeds of $2,038,090. The Purchase Agreement contains customary representations, warranties and covenants of the
parties, and the closing was subject to customary closing conditions.
The
Purchase Agreement also provides that until the six (6) month anniversary of the date of the Purchase Agreement, in the event
of a subsequent financing (except for certain exempt issuances as provided in the Purchase Agreement) by the Company, each Investor
that invested over $100,000 pursuant to the Purchase Agreement will have the right to participate in such subsequent financing
up to an amount equal to 50% of the subsequent financing on the same terms, conditions and price provided for in the subsequent
financing.
In
connection with the Private Placement, the Company entered into separate Registration Rights Agreements with the Investors, pursuant
to which the Company agreed to undertake to file a registration statement to register the resale of the shares underlying the
Registrable Securities (as defined therein) within thirty (30) calendar days following the Closing Date, and to maintain the effectiveness
of the registration statement until all of such shares of common stock have been sold or are otherwise able to be sold pursuant
to Rule 144. If the Company fails to file the registration statement or have it declared effective by the dates set forth above,
amongst other things, the Company is obligated to pay the investors liquidated damages in the amount of 1% of their subscription
amount, per month, until such events are satisfied, subject to a cap of 6%.
SILO
PHARMA, INC.
(FORMERLY KNOWN AS UPPERCUT BRANDS,
INC.)
NOTES TO UNAUDITED CONDENSED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2020
(Unaudited)
In
conjunction with the Private Placement, all officers and directors of the Company have entered into lock-up agreements pursuant
to which they have agreed not to sell their shares of common stock or common stock equivalents in the Company until the twelve-month
anniversary of the Closing Date.
Common
stock issued for future services
On
April 17, 2020, the Company entered into one-year advisory agreements with certain accredited investors pursuant to which it agreed
to issue an aggregate of 5,117,343 shares of the Company’s common stock to the advisors for advisory services to be rendered.
These shares were valued at $409,387, or $0.08 per common share, based on contemporaneous common share sales which are being amortized
over the term of the agreements.
On
April 17, 2020, the Company entered into a six-month consulting agreement with an accredited investor pursuant to which it agreed
to issue an aggregate of 3,468,841 shares of the Company’s common stock to the consultant for consulting services to be
rendered. These shares were valued at $277,508, or $0.08 per common share, based on contemporaneous common share sales which is
being amortized over the term of the agreement.
During
the nine months ended September 30, 2020, the Company recognized stock-based consulting of $460,289 and prepaid expense of $226,806
to be amortized over the remaining service period.
Common
stock issued for employment agreement
On
April 17, 2020, the Company entered into an Employment Agreement with the Company’s chief executive officer (“CEO”)
pursuant to which CEO will continue to serve as chief executive officer and chief financial officer of the Company. In connection
with this employment agreement, the CEO was granted 7,630,949 shares of the Company’s common stock. These shares were valued
at $610,476, or $0.08 per common share, based on contemporaneous common share sales. During the nine months ended September 30,
2020, the Company recognized stock-based compensation of $610,476.
Common
stock issued for conversion of Series A Preferred Stock
On
August 3, 2020, at the request of the investor, the Company converted 4,000 Series A Preferred Stock into 2,000,000 shares of
common stock. After such conversion, the Company reclassed the $400,000 redemption value of the Series A preferred stock to additional
paid in capital.
Stock
options
Stock
option activities for the nine months ended September 30, 2020 are summarized as follows:
|
|
Number
of Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
(Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Balance Outstanding, December 31, 2019
|
|
|
300,000
|
|
|
$
|
0.0001
|
|
|
|
4.5
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Balance Outstanding, September
30, 2020
|
|
|
300,000
|
|
|
$
|
0.0001
|
|
|
|
3.79
|
|
|
$
|
104,970
|
|
Exercisable, September 30, 2020
|
|
|
300,000
|
|
|
$
|
0.0001
|
|
|
|
4.79
|
|
|
$
|
104,970
|
|
SILO
PHARMA, INC.
(FORMERLY KNOWN AS UPPERCUT BRANDS,
INC.)
NOTES TO UNAUDITED CONDENSED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2020
(Unaudited)
Warrants
Warrant
activities for the nine months ended September 30, 2020 are summarized as follows:
|
|
Number
of Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
(Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Balance Outstanding, December 31, 2019
|
|
|
2,225,000
|
|
|
|
0.20
|
|
|
|
4.8
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(2,225,000
|
)
|
|
|
0.20
|
|
|
|
|
|
|
|
|
|
Balance Outstanding, September
30, 2020
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Exercisable, September 30,
2020
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
On
April 15, 2020, the Company entered into Exchange Agreements with the holders of convertible promissory notes (see Note 5). Pursuant
to these Exchange Agreements, the noteholders agreed to exchange their convertible promissory notes of $330,000 and 1,650,000
warrants issued in connection with this debt for an aggregate of 4,125,000 shares of the Company’s common stock at a price
of $0.08 per share. After the exchanges, there are no convertible notes outstanding. The Company issued 4,125,000 shares of common
stock which was more than the shares that would have been issued at the original conversion price of $0.20 per share or 1,650,000
shares of common stock, an excess of 2,475,000 shares of common stock. The excess shares were valued at a price of $0.08 per share.
Consequently, the Company recorded a loss on debt extinguishment of $198,000 during the nine months ended September 30, 2020.
NOTE
8 – CONCENTRATIONS
Customer
concentration
For
the nine months ended September 30, 2020, no customer accounted for over 10% of total sales.
Vendor
concentrations
Generally,
the Company purchases substantially all of its raw materials and inventory from two suppliers. The loss of these suppliers may
have a material adverse effect on the Company’s results of operations and financial condition. However, the Company believes
that, if necessary, alternate vendors could supply similar products in adequate quantities to avoid material disruptions to operations.
NOTE
9 – COMMITMENTS AND CONTINGENCIES
Employment
Agreement
On
April 17, 2020, the Company entered into an Employment Agreement with the Company’s chief executive officer (“CEO”)
pursuant to which CEO will continue to serve as chief executive officer and chief financial officer of the Company. The term of
the agreement will continue for a period of one year from the date of execution and automatically renews for successive one-year
periods at the end of each term until either party delivers written notice of their intent not to review at least 6 months prior
to the expiration of the then effective term. Pursuant to the terms of the agreement, CEO’s base salary was increased to
$120,000, and the CEO shall continue be entitled to earn a bonus, subject to the sole discretion of the Company’s Board.
In addition, CEO was granted 7,630,949 vested shares of the Company’s common stock (see Note 7).
SILO PHARMA, INC.
(FORMERLY KNOWN AS UPPERCUT BRANDS,
INC.)
NOTES TO UNAUDITED CONDENSED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2020
(Unaudited)
The
agreement may be terminated by either the Company or CEO at any time and for any reason upon 60 days prior written notice. Upon
termination of the agreement, CEO shall be entitled to (i) any equity award that has vested prior to the termination date, (ii)
reimbursement of expenses incurred on or prior to such termination date and (iii) such employee benefits to which CEO may be entitled
as of the termination date (collectively, the “Accrued Amounts”). The agreement shall also terminate upon CEO’s
death or the Company may terminate CEO’s employment upon his disability (as defined in the agreement). Upon the termination
of CEO’s employment for death or disability, CEO shall be entitled to receive the Accrued Amounts. The agreement also contains
covenants prohibiting CEO from disclosing confidential information with respect to the Company.
Commercial
Evaluation License and Option Agreement with the University of Baltimore, Maryland
Recently,
management has been exploring opportunities to expand its business by seeking to acquire and/or develop intellectual property
or technology rights from leading universities and researchers. Effective as of July 15, 2020, through the Company’s subsidiary,
Silo Pharma Inc. (see Note 1), the Company entered into a commercial evaluation license and option agreement with the University
of Maryland, Baltimore (“UMD”), pursuant to which, UMD has granted the Company an exclusive, non-sublicenseable, non-transferable
license to with respect to the exploration of the potential use of central nervous system-homing peptides in vivo and their use
for the investigation and treatment of multiple sclerosis and other neuroinflammatory pathology. In addition, UMB granted
the Company an exclusive, option to negotiate and obtain an exclusive, sublicenseable, royalty-bearing license to with respect
to the subject technology. This agreement shall be effective on the effective date and shall expire six months from July 15, 2020
unless sooner terminated. Both parties may terminate this agreement within thirty days by giving a written notice. Pursuant to
the agreement, the Company paid the initial fee of $10,000 to UMD in July 2020 which was recorded in professional fees during
the three and nine months ended September 30, 2020 since the Company could not conclude that such costs would be recoverable for
this early stage venture.
PART II- INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and
Distribution.
The following table sets forth the costs
and expenses payable by the Company in connection with the issuance and distribution of the securities being registered hereunder.
All amounts are estimates except the SEC registration fee.
SEC registration fees
|
|
$
|
995.22
|
|
Printing expenses
|
|
$
|
5,000
|
|
Accounting fees and expenses
|
|
$
|
5,000
|
|
Legal fees and expenses
|
|
$
|
25,000
|
|
Miscellaneous
|
|
$
|
2,004.78
|
|
Total
|
|
$
|
38,000
|
|
Item 14. Indemnification of Directors and
Officers.
The Company’s Certificate of Incorporation
and Bylaws (collectively, the “Charter Documents”) provide that, to the fullest extent permitted under the DGCL, no
director of the Company shall be personally liable to the Company or its stockholders for monetary damages for breach of fiduciary
duty as a director. In addition, the Company’s Charter Documents provide that the Company shall indemnify and hold harmless,
to the fullest extent permitted by applicable law, any person (a “Covered Person”) who was or is made or is threatened
to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative
(a “Proceeding”) by reason of the fact that he or she, or a person for whom he or she is the legal representative,
is or was a director or officer of the Company or, while a director or officer of the Company, is or was serving
at the request of the Company as a director, officer, employee or agent of another corporation or of a partnership, joint
venture, trust, enterprise or nonprofit entity against all liability and loss suffered and expenses (including attorneys’
fees) reasonably incurred by such Covered Person. Pursuant to the Company’s Charter Documents, the Company shall pay
the expenses (including attorneys’ fees) incurred by a Covered Person in defending any Proceeding in advance of its final
disposition; provided, however, that, to the extent required by applicable law, such payment of expenses in advance of the final
disposition of the Proceeding shall be made only upon receipt of an undertaking by the Covered Person to repay all amounts advanced
if it should be ultimately determined that the Covered Person is not entitled to be indemnified pursuant to the Company’s
Certificate of Incorporation.
Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions,
we have been informed that, in the opinion of the SEC, this indemnification is against public policy as expressed in the Securities
Act and is therefore unenforceable
Item 15. Recent
Sales of Unregistered Securities.
The following is a list of unregistered
sales of our equity securities during the prior three years.
On September 29, 2018, pursuant to an Asset
Purchase Agreement, we issued 2,000,000 shares of common stock of the Company to acquire assets.
On December 4, 2018, we issued 70,000 shares
of our common stock for cash proceeds of $24,500, or $0.35 per share.
On January 22, 2019, we entered into a
consulting agreement with a consultant in connection with our marketing and branding of our NFID products. The agreement ended
on December 31, 2019. For services rendered, we issued 100,000 shares of common stock of the Company to the consultant on a quarterly
basis in tranches of 25,000 shares per quarter, commencing on March 31, 2019, and continuing on to the last day of each subsequent
quarter in the year 2019. These shares were valued on the January 22, 2019 grant date at $35,000, or $0.35 per common share, based
on recent common share sales which was amortized over the vesting period. Through December 31, 2019, the Company issued 100,000
shares of its common stock to the consultant.
On April 7, 2020, we entered into advisory
agreements with certain accredited investors pursuant to which we agreed to issue an aggregate of 5,117,343 shares of our common
stock to the advisors for advisory services to be rendered.
On April 10, 2020, we entered into a consulting
agreement with an accredited investor pursuant to which we agreed to issue an aggregate of 3,468,841 shares of our common stock,
to the consultant for consulting services to be rendered.
On April 15, 2020, we entered into exchange
agreements with holders of our convertible promissory notes, which notes were originally issued in October 2019. Pursuant to the
exchange agreements, the holders agreed to exchange their convertible promissory notes and related warrants for an aggregate of
4,125,000 shares of our common stock at a price of $0.08 per share.
On April 15, 2020, we entered into exchange
agreements with the holders of our Series B Convertible Preferred Stock, which shares of Series B Convertible Preferred Stock were
originally issued in November 2019. Pursuant to the exchange agreements, the holders agreed to exchange their Series B Convertible
Preferred Stock and related warrants for an aggregate of 1,437,500 shares of our common stock at a price of $0.08 per share.
Between April 9,, 2020 and April 18, 2020,
we entered into subscription agreements with certain accredited investors pursuant to which we issued an aggregate of 7,764,366
shares of the our common stock for an aggregate of $75,644.
On April 17, 2020, in connection with an
Employment Agreement with the Company’s Chief Executive Officer, we issued 7,630,949 shares of our common stock.
On April 28, 2020 we entered into securities
purchase agreements with certain institutions and accredited investors for the sale of an aggregate 29,993,750 shares of the Company’s
common stock for gross proceeds of $2,399,500.
On January 18, 2021, we issued a service
provider warrants to purchase up to 250,000 shares of our common stock at an exercise price of $0.20 per share.
On February 12, 2021, we sold an aggregate
of 4,276 shares of Series C Preferred Stock and Warrants to purchase up to 14,253,323 shares of our common stock for gross proceeds
of approximately $4,276,000, before deducting placement agent and other offering expenses. Pursuant to the terms of the offering,
we also issued the placement agents warrants to purchase up to an aggregate of 2,850,664 shares of our common stock.
Unless otherwise indicated, the foregoing
securities were offered and issued in reliance on the exemption from registration requirements under the Securities Act afforded
by Section 4(a)(2) thereof and/or Rule 506 of Regulation D promulgated thereunder.
Item 16. Exhibits and Financial Statement Schedules.
|
|
Description
|
3.1
|
|
Certificate of Incorporation of Point Capital, Inc., filed as an exhibit to the Definitive Information Statement on Schedule 14C, filed with the Commission on December 28, 2012 and incorporated herein by reference.
|
3.2
|
|
Bylaws of Point Capital, Inc., filed as an exhibit to the Definitive Information Statement on Schedule 14C, filed with the Commission on December 28, 2012 and incorporated herein by reference.
|
3.3
|
|
Certificate of Designation of the Series A Convertible Preferred Stock, filed as an exhibit to the Current Report on Form 8-K, filed with the Commission on April 30, 2013 and incorporated herein by reference.
|
3.4
|
|
Amended and Restated Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock, filed as an exhibit to the Quarterly Report on Form 10-Q, filed with the Commission on May 17, 2017 and incorporated herein by reference.
|
3.5
|
|
Amendment to Certificate of Incorporation for name change dated May 20, 2019, filed as an appendix to the Definitive Proxy Statement on Schedule 14A, filed with the Commission on May 1, 2019 and incorporated herein by reference.
|
3.6
|
|
Certificate of Designation of the Series B Convertible Preferred Stock, filed as an exhibit to the Annual Report on Form 10-K filed with the Commission on March 20, 2020 and incorporated herein by reference.
|
3.7
|
|
Certificate of Amendment filed with the Delaware Secretary of State on September 24, 2020, filed as an exhibit to the Current Report on Form 8-K filed with the Commission on October 6, 2020 and incorporated herein by reference.
|
3.8
|
|
Certificate of Designations of Preferences, Rights and Limitations of Series C Convertible Preferred Stock (Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on February 10, 2021)
|
5.1*
|
|
Opinion of Sheppard, Mullin, Richter & Hampton, LLP
|
10.1
|
|
Stock Purchase Agreement dated April 24, 2013 between Point Capital, Inc. and Alpha Capital Anstalt, filed as an exhibit to the Current Report on Form 8-K, filed with the Commission on April 30, 2013 and incorporated herein by reference.
|
10.2
|
|
Corrected Asset Purchase Agreement with Blind Faith Concepts Holdings, Inc. dated September 28, 2018, filed as an exhibit to the Current Report on Form 8-K, filed with the Commission on December 20, 2018 and incorporated herein by reference.
|
10.3
|
|
Form of Return to Treasury Agreement, filed as an exhibit to the Current Report on Form 8-K, filed with the Commission on December 20, 2018 and incorporated herein by reference.
|
10.4
|
|
Form of Securities Purchase Agreement, dated October 2019, between Uppercut Brands, Inc., and Investors, filed as an exhibit to the Annual Report on Form 10-K filed with the Commission on March 20, 2020 and incorporated herein by reference.
|
10.5
|
|
Form of convertible note agreement with Investors dated October 2019, filed as an exhibit to the Annual Report on Form 10-K filed with the Commission on March 20, 2020 and incorporated herein by reference.
|
10.6
|
|
Form of Warrant, dated October 2019, filed as an exhibit to the Quarterly Report on Form 10-Q filed with the Commission on November 13, 2019 and incorporated herein by reference.
|
10.7
|
|
Form of Securities Purchase Agreement for the purchase of Series B preferred shares, dated November 2019, between Uppercut Brands, Inc., and Investors, filed as an exhibit to the Annual Report on Form 10-K filed with the Commission on March 20, 2020 and incorporated herein by reference.
|
10.8
|
|
Form of Warrant related to Series B preferred shares, dated November 2019, between Uppercut Brands, Inc., and Investors, filed as an exhibit to the Annual Report on Form 10-K, filed with the Commission on March 20, 2020 and incorporated herein by reference.
|
10.9
|
|
Form of registration rights agreement related to Series B preferred shares, dated November 2019, between Uppercut Brands, Inc., and Investors, filed as an exhibit to the Annual Report on Form 10-K filed with the Commission on March 20, 2020 and incorporated herein by reference.
|
10.10
|
|
Form of Exchange Agreement for Convertible Notes, dated as of April 15, 2020, filed as an exhibit to the Current Report on Form 8-K/A, filed with the Commission on April 22, 2020 and incorporated herein by reference.
|
10.11
|
|
Form of Exchange Agreement for Series B Preferred Stock, dated as of April 15, 2020, filed as an exhibit to the Current Report on Form 8-K/A, filed with the Commission on April 22, 2020 and incorporated herein by reference.
|
10.12
|
|
Form of Subscription Agreement, dated as of April 17, 2020, filed as an exhibit to the Current Report on Form 8-K/A, filed with the Commission on April 22, 2020 and incorporated herein by reference.
|
10.13
|
|
Form of Consulting Agreement, dated as of April 17, 2020, filed as an exhibit to the Current Report on Form 8-K/A, filed with the Commission on April 22, 2020 and incorporated herein by reference.
|
10.14
|
|
Form of Advisory Agreement, dated as of April 17, 2020, filed as an exhibit to the Current Report on Form 8-K/A, filed with the Commission on April 22, 2020 and incorporated herein by reference.
|
10.15+
|
|
Employment Agreement by and between the Company and Eric Weisblum, dated as of April 17, 2020, filed as an exhibit to the Current Report on Form 8-K/A, filed with the Commission on April 22, 2020 and incorporated herein by reference.
|
10.16
|
|
Form of Securities Purchase Agreement, dated as of April 28, 2020, filed as an exhibit to the Current Report on Form 8-K, filed with the Commission on April 28, 2020 and incorporated herein by reference.
|
10.17
|
|
Form of Registration Rights Agreement, dated as of April 28, 2020, filed as an exhibit to the Current Report on Form 8-K, filed with the Commission on April 28, 2020 and incorporated herein by reference.
|
10.18
|
|
Form of Lock-Up Agreement, dated as of April 28, 2020, filed as an exhibit to the Current Report on Form 8-K, filed with the Commission on April 28, 2020 and incorporated herein by reference.
|
10.19
|
|
Patent
License Agreement by and among the Company and Silo Pharma, Inc., a Florida corporation and their affiliates and subsidiaries
and AIkido Pharma Inc., filed as an exhibit to the Current Report on Form 8-K filed with the Commission on January
11, 2021 and incorporated herein by reference.
|
10.20
|
|
Sponsored Research Agreement by and between the Company and the University of Maryland, Baltimore, filed as an exhibit to the Current Report on Form 8-K filed with the Commission on January 11, 2021 and incorporated herein by reference.
|
10.21+
|
|
Silo Pharma, Inc. 2020 Omnibus Equity Incentive Plan, filed as an exhibit to the Current Report on Form 8-K filed with the Commission on January 28, 2021 and incorporated herein by reference.
|
10.22+
|
|
First Amendment to Employment Agreement, dated January 18, 2021, by and between the Company and Eric Weisblum, filed as an exhibit to the Current Report on Form 8-K filed with the Commission on January 28, 2021 and incorporated herein by reference.
|
10.23
|
|
Form of Securities Purchase Agreement, dated as of February 9, 2021, between Silo Pharma, Inc. and the signatories thereto (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 10, 2021)
|
10.24
|
|
Form of Warrant (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February 10, 2021)
|
10.25
|
|
Form of Registration Rights Agreement, dated as of February 9, 2021, between Silo Pharma, Inc. and the signatories thereto (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on February 10, 2021)
|
10.26
|
|
Form of Lock-Up Agreement, dated as of February 9, 2021 (Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on February 10, 2021)
|
10.27
|
|
Form of Placement Agent Warrant (Incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K/A filed on February 12, 2021)
|
10.28#
|
|
Master License Agreement, dated February 12, 2021, by and between the Company and the University of Maryland, Baltimore (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 16, 2021)
|
10.29#
|
|
Letter of Intent, dated February 12, 2021, by and between the Company and Aikido Pharma, Inc. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February 16, 2021)
|
21.1*
|
|
Subsidiaries
|
23.1*
|
|
Consent of Salberg & Company, P.A.
|
23.2*
|
|
Consent of Sheppard, Mullin, Richter & Hampton, LLP (included in Exhibit 5.1)
|
24.1
|
|
Power of Attorney (included on signature page)
|
101.INS*
|
|
XBRL INSTANCE DOCUMENT
|
101.SCH*
|
|
XBRL TAXONOMY EXTENSION SCHEMA
|
101.CAL*
|
|
XBRL TAXONOMY EXTENSION CALCULATION LINKBASE
|
101.DEF*
|
|
XBRL TAXONOMY EXTENSION DEFINITION LINKBASE
|
101.LAB*
|
|
XBRL TAXONOMY EXTENSION LABEL LINKBASE
|
101.PRE*
|
|
XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE
|
|
*
|
Filed herewith.
|
|
|
|
|
#
|
Portions of this exhibit (indicated by asterisks)
have been redacted in compliance with Regulation S-K Item 601(b)(10)(iv).
|
|
(b)
|
Financial Statement Schedule
|
All schedules have been omitted because
the required information is included in the consolidated financial statements or the note thereto or is not applicable or required.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
|
(1)
|
To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
|
|
|
(i)
|
To include any prospectus required by section 10(a)(3) of the Securities Act;
|
|
|
|
|
|
|
(ii)
|
To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement.
|
|
|
|
|
|
|
(iii)
|
To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;
|
|
(2)
|
That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
|
|
(3)
|
To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
|
|
(4)
|
That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser, if the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
|
|
(5)
|
That, for the purpose of determining liability of the registrant under the Securities Act to any purchaser in the initial distribution of the securities, the undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
|
|
|
(i)
|
Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;
|
|
|
(ii)
|
Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;
|
|
|
(iii)
|
The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
|
|
|
(iv)
|
Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
|
Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the SEC such indemnification
is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
The undersigned registrant
hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements certificates in such denominations
and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.
The undersigned registrant
hereby undertakes that:
|
(1)
|
For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
|
|
(2)
|
For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
|
SIGNATURES
Pursuant to the requirements of the Securities
Act of 1933, as amended, the registrant has duly caused this Registration Statement on Form S-1 to be signed on its behalf
by the undersigned, thereunto duly authorized in the Englewood Cliffs, State of New Jersey, on the 16th day of February, 2021.
|
SILO PHARMA, INC.
|
|
|
|
|
By:
|
/s/ Eric Weisblum
|
|
|
Eric Weisblum
|
|
|
Chief Executive Officer and
Chief Financial Officer
|
SIGNATURES AND POWER OF ATTORNEY
Each of the undersigned officers and directors
of Silo Pharma, Inc. hereby constitutes and appoints Eric Weisblum the individual’s true and lawful attorneys-in-fact and
agents, each with full power of substitution and resubstitution, for the person and in his or her name, place and stead, in any
and all capacities, to sign this registration statement of Silo Pharma, Inc. on Form S-1, and any other registration statement
relating to the same offering (including any registration statement, or amendment thereto, that is to become effective upon filing
pursuant to Rule 462(b) under the Securities Act of 1933, as amended), and any and all amendments thereto (including post-effective
amendments to the registration statement), and to file the same, with all exhibits thereto, and all other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority
to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his
substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities
Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities held and on the
dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ Eric Weisblum
|
|
Chairman, Chief Executive Officer,
Chief Financial Officer and President
|
|
February 16, 2021
|
Eric Weisblum
|
|
(Principal Executive Officer and Principal Financial and Accounting Officer)
|
|
|
|
|
|
|
|
/s/ Wayne D. Linsley
|
|
Director
|
|
February 16, 2021
|
Wayne D. Linsley
|
|
|
|
|
|
|
|
|
|
/s/ Dr. Kevin Muñoz
|
|
Director
|
|
February 16, 2021
|
Dr. Kevin Muñoz
|
|
|
|
|
II-7
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