NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
QSAM
Biosciences Inc. (f/k/a Q2Earth, Inc.) (hereinafter the “Company”, “we”, “our”, “us”),
incorporated in Delaware on August 26, 2004, is currently engaged in the business of developing a novel radiopharmaceutical
drug candidate for the treatment of bone cancer. This business line commenced in earnest in the fourth fiscal quarter of 2020
as a result of the separation and transfer pursuant to an Omnibus Separation Agreement dated November 6, 2020 (the “Separation
Agreement”) of the Company’s prior business of managing compost and soil manufacturing facilities (the “Legacy
Business”) through an unconsolidated investee entity called Earth Property Holdings LLC, a Delaware limited liability company
(“EPH”). Pursuant to the Separation Agreement, the Company transferred to EPH all assets and related liabilities in
connection with the Legacy Business in return for a forgiveness of debt. The financial statements presented herein have been adjusted
to account for the Legacy Business as discontinued operations (see Notes 4 – Separation Agreement and 9 –
Discontinued Operations). The Company owns approximately an 18% subordinated equity interest in EPH as of December 31, 2020,
which was sold to a third party in 2021 for $100,000 (see Note 14 – Subsequent Events).
In
April 2020, the Company established QSAM Therapeutics Inc. (“QSAM”) as a wholly-owned subsidiary incorporated in the
state of Texas, and through QSAM, executed a Patent and Technology License Agreement and Trademark Assignment (the “License
Agreement”) with IGL Pharma, Inc. (“IGL”). The License Agreement provides QSAM with exclusive, worldwide and
sub-licensable rights to all of IGL’s patents, product data and knowhow with respect to Samaium-153 DOTMP aka CycloSam®
(the “Technology”), a clinical stage novel radiopharmaceutical meant to treat different types of bone cancer and related
diseases. The establishment of QSAM and execution of the License Agreement and the Separation Agreement are part of the Company’s
strategic plan to transition its business into the broader biosciences sector which currently is the Company’s focus.
In
connection with the transition to the biosciences sector, the Company changed its name to QSAM Biosciences Inc. on September 4,
2020, and subsequently changed its stock symbol to QSAM, to better reflect its business moving forward.
On
September 4, 2020, the Company completed a 25:1 reverse stock split of its common shares. All shares and share prices set forth
in this report have been adjusted to account for this reverse stock split as if it had occurred on the date presented.
Prior
to 2017, the Company owned and licensed technology that converts waste fuels and heat to power, which it sold to a licensee in
August of that year. Much of these operations were conducted through a wholly-owned subsidiary of the Company called Q2Power Corp.
(“Q2P”), which still exists but has no current operations. Q2P and QSAM are sometimes referred to herein as the “Subsidiaries”.
Formerly, the Company’s name was Q2Power Technologies, Inc., and before that, Anpath Group, Inc.
The
recent outbreak of the novel coronavirus (COVID-19) is impacting worldwide economic activity. COVID-19 poses the risk that we
or our employees and other partners may be prevented from conducting business activities for an indefinite period of time, including
due to the spread of the disease or shutdowns that may be requested or mandated by governmental authorities. While it is not possible
at this time to estimate the full impact that COVID-19 could have on our business, the continued spread of COVID-19 could disrupt
our research and development of CycloSam and other related activities, which could have a material adverse effect on our business,
financial condition and results of operations. In addition,
a severe or prolonged economic downturn could result in a variety of risks to the business.
While we have not yet experienced any material disruptions in our business or other negative consequences relating to COVID-19,
the extent to which the COVID-19 pandemic impacts our results will depend on future developments that are highly uncertain and
cannot be predicted.
NOTE
2 – BASIS OF PRESENTATION AND GOING CONCERN
For
the year ended December 31, 2020, the Company used cash in operating activities for its continuing operations of $742,899
and incurred a loss from its continuing operations of $4,862,683. The accumulated deficit since inception is $15,911,895,
which was comprised of operating losses and other expenses for both the continuing and discontinued operations.
The
Company raised a total of $2,851,908 in convertible bridge notes (the “Bridge Notes”) starting in March 2017 and ending
in 2019. In 2020, $2,928,679 of the Bridge Notes inclusive of principal and accrued and capitalized interest were converted
by the holders into 13,312,175 shares of common stock. As of December 31, 2020, approximately $1.4 million of Bridge Notes inclusive
of principal and accrued and capitalized interest remained outstanding and in default. As of March 31, 2021, all remaining
Bridge Notes including principal and accrued and capitalized interest were converted into common stock (see Note 14
- Subsequent Events).
The
Company’s convertible debentures totaling $137,500 and $600,000 of redeemable convertible preferred stock were in default
as of December 31, 2020. Management is in discussions with the holders of these debt and equity securities to reach an agreement
to convert the outstanding balances into common stock. As of March 31, 2021, only $35,000 of the debentures and $480,000 of the
preferred stock remained outstanding and in default (see Note 14 - Subsequent Events).
As
of December 31, 2020, the Company had a working capital deficit of $4,168,618.
These
conditions raise substantial doubt about the Company’s ability to continue as a going concern. There is no guarantee whether
the Company will be able to generate revenue and/or raise capital sufficient to support its continuing operations. The ability
of the Company to continue as a going concern is dependent on management’s plans which include implementation of its business
model to develop and commercialize its drug candidate, seek strategic partnerships to advance clinical trials and other research
endeavors which could provide additional capital to the Company, and continue to raise funds for the Company through equity or
debt offerings. The consolidated financial statements do not include any adjustments that might result from the outcome of these
uncertainties.
In
2018, the Company signed an eight-year Management Agreement with EPH to oversee all of the operations of EPH and its acquired
subsidiaries for an initial annual fee of $200,000, and acquired 124,999 Class B Membership Units of EPH, equal to 19.9% of the
voting interests of EPH, for $50,000. In January 2019, the Company acquired an additional 53,970 Class B Membership Units in EPH
for $21,588 through a subscription payable which was paid off in April 2020, and received an additional annual management
fee of $500,000 plus expenses. Pursuant to the Separation Agreement (see Note 4 – Separation Agreement), the Management
Agreement was terminated in November 2020, and operations from the Management Agreement have been included in discontinued
operations on the accompanying statements of operations and are not part of the continuing operation of the Company
(see Note 9 - Discontinued Operations). The Company evaluated its ownership interest held in EPH and concluded
that EPH is an equity method investment. The primary investor, and not the Company, has ultimate control over major decisions
affecting EPH and the greatest economic risk. In 2021, the Company divested its equity interest in EPH completely (see Note 14
– Subsequent Events).
Our
net loss from continuing operations in 2020 and 2019 resulted largely from activities related to the public company and
in 2020 also from certain license and research expenses in connection with the continuing operations of the Company’s drug
development business. All income and losses related to expenses from the Legacy Business are included in discontinued operations
(see Note 9 - Discontinued Operations).
Management
is taking steps to improve its balance sheet and negative cashflow. Commencing in December 2020 and closing in February
2021, management raised $2.5 million in Series B Preferred Stock to support its new business model, which is expected to
support continuing operations through the end of 2021 (see Note 14 – Subsequent Events). In 2020, management
also was able to reduce debt significantly, in part from the forgiveness of notes payable owed to EPH (see Note 4 – Separation
Agreement) and also by converting a portion of additional liabilities into common stock (see Note 7 – Debentures, Convertible
Bridge Notes and Notes Payable).
NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and its Subsidiaries. All significant inter-company transactions
and balances have been eliminated in consolidation. References herein to the Company include the Company and its Subsidiaries
unless the context otherwise requires.
Cash
The
Company considers cash, short-term deposits, and other investments with original maturities of no more than ninety days when acquired
to be cash and cash equivalents for the purposes of the statement of cash flows. The Company maintains cash balances at two financial
institutions and has experienced no losses with respect to amounts on deposit. The Company held no cash equivalents as of December
31, 2020 and 2019.
Revenue
Recognition
On
January 1, 2018, the Company adopted ASC Topic 606, “Revenue from Contracts with Customers (“ASC 606”) and all
the related amendments. The Company elected to adopt this guidance using the modified retrospective method. The adoption of this
guidance did not have a material effect on the Company’s financial position, results of operations, or cash flows.
The
core principle of ASC 606 requires that an entity recognize revenue to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.
ASC 606 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates
may be required within the revenue recognition process than previously required under U.S. GAAP, including identifying performance
obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating
the transaction price to each separate performance obligation.
The
Company had no revenue in 2020 and 2019 from continuing operations.
Stock
Based Compensation
The
Company applies the fair value method of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) 718, “Share Based Payment”, in accounting for its stock-based compensation with employees
and non-employees. This standard states that compensation cost is measured at the grant date based on the fair value of the
award and is recognized over the service period, which is usually the vesting period. The Company values stock-based compensation
at the market price for the Company’s common stock and other pertinent factors at the grant date.
The
Black-Scholes option pricing valuation method is used to determine fair value of stock options consistent with ASC 718, “Share
Based Payment”. Use of this method requires that the Company make assumptions regarding stock volatility, dividend yields,
expected term of the awards and risk-free interest rates.
Research
and Development
Research
and development costs are expensed as incurred. Research and development costs were $362,456 for year ended December 31,
2020, and are a result of the License Agreement for the Company’s drug Technology executed during the period (see Note
13 – Commitments and Contingencies). The Company did not incur any research and development costs during 2019.
Fair
Value Measurement
The
Company measures fair value in accordance with a fair value hierarchy that prioritizes the inputs to valuation techniques used
to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets
or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The Company’s
convertible Bridge Notes are valued by using Monte Carlo Simulation methods and discounted future cash flow models. Where possible,
the Company verifies the values produced by its pricing models to market prices. Valuation models require a variety of inputs,
including contractual terms, market prices, yield curves, credit spreads, measures of volatility and correlations of such inputs.
These convertible Bridge Notes do not trade in liquid markets, and as such, model inputs cannot generally be verified and do involve
significant management judgment. Such instruments are typically classified within Level 3 of the fair value hierarchy.
Equity
Method Investment
Investments
in partnerships, joint ventures and less-than majority-owned subsidiaries in which we have significant influence are accounted
for under the equity method. The Company’s consolidated net income includes the Company’s proportionate share of the
net income or loss of our equity method investee. When we record our proportionate share of net income, it increases income (loss)
— net in our consolidated statements of operations and our carrying value in that investment. Conversely, when we record
our proportionate share of a net loss, it decreases income (loss) — net in our consolidated statements of income and our
carrying value in that investment. The Company’s proportionate share of the net income or loss of our equity method investees
includes significant operating and nonoperating items recorded by our equity method investee. These items can have a significant
impact on the amount of income (loss) — net in our consolidated statements of operations and our carrying value in those
investments.
Discontinued
Operations
In
accordance with ASC 205-20 Presentation of Financial Statements: Discontinued Operations, a disposal of a component of
an entity or a group of components of an entity is required to be reported as discontinued operations if the disposal represents
a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the components
of an entity meets the criteria in paragraph 205-20-45-10. In the period in which the component meets held-for-sale or discontinued
operations criteria the major current assets, other assets, current liabilities, and noncurrent liabilities shall be reported
as components of total assets and liabilities separate from those balances of the continuing operations. At the same time, the
results of all discontinued operations, less applicable income taxes (benefit), shall be reported as components of net income
(loss) separate from the net income (loss) of continuing operations.
The
Company disposed of a component of its business pursuant to a Separation Agreement in November 2020, which met the definition
of a discontinued operation. Accordingly, the operating results of the business disposed are reported as income (loss)
from discontinued operations in the accompanying consolidated statements of operations for the years ended December 31, 2020,
and 2019. For additional information, see Note 4 – Separation Agreement and Note 14 - Discontinued Operations.
Property
and Equipment
Property
and equipment are recorded at cost. Depreciation is computed on the straight-line method, based on the estimated useful lives
of the assets as follows:
|
|
Years
|
|
Furniture and equipment
|
|
|
7
|
|
Computers
|
|
|
5
|
|
Expenditures
for maintenance and repairs are charged to operations as incurred.
Income
Taxes
Income
taxes are accounted for under the asset and liability method as stipulated by FASB ASC 740, “Income Taxes”
(“ASC 740”). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating
loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740, the
effect on deferred tax assets and liabilities or a change in tax rate is recognized in income in the period that includes the
enactment date. Deferred tax assets are reduced to estimated amounts to be realized by the use of a valuation allowance. A valuation
allowance is applied when in management’s view it is more likely than not (50%) that such deferred tax will not be utilized.
In
the event that an uncertain tax position exists in which the Company could incur income taxes, the Company would evaluate whether
there is a probability that the uncertain tax position taken would be sustained upon examination by the taxing authorities. Reserves
for uncertain tax positions would be recorded if the Company determined it is probable that a position would not be sustained
upon examination or if payment would have to be made to a taxing authority and the amount is reasonably estimated. As of December
31, 2020, the Company does not believe it has any uncertain tax positions that would result in the Company having a liability
to the taxing authorities; however, federal returns have not been filed since the Company’s inception in 2014. Such delinquencies
are being resolved by management and a retained tax expert. Interest and penalties related to any unrecognized tax benefits is
recognized in the consolidated financial statements as a component of income taxes.
Basic
and Diluted Loss Per Share
Net
loss per share is computed by dividing the net loss attributable to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted net loss per share is calculated by dividing the net loss attributable to common
stockholders by the weighted average number of common shares outstanding during the period plus any potentially dilutive shares
related to the issuance of stock options, shares from the issuance of stock warrants, shares issued from the conversion of redeemable
convertible preferred stock and shares issued for the conversion of convertible debt.
At
December 31, 2020, there were the following potentially dilutive securities that were excluded from diluted net loss per share
because their effect would be anti-dilutive (all shares adjusted to reflect a 25:1 reverse stock split effected on September 4,
2020):
Shares from the conversion
of Series B Preferred Stock
|
|
|
1,756,250
|
|
Shares from the conversion of Series
E-1 Preferred Stock (subject to vesting in 2021 through 2023 and potential forfeiture)
|
|
|
7,650,000
|
|
Shares from common stock options
|
|
|
468,619
|
|
Shares from common stock warrants
|
|
|
46,154
|
|
Shares from the conversion of debentures
|
|
|
625,000
|
|
Shares that may be converted from Bridge
Notes (based upon an assumed conversion price at December 31, 2020 of $0.22 per share)
|
|
|
6,578,702
|
|
Shares from the conversion of redeemable
convertible preferred stock (based upon an assumed conversion price at December 31, 2020 of $0.22 per share; not inclusive
of cumulative dividends which may be converted to shares of common stock under certain conditions)
|
|
|
2,727,273
|
|
At
December 31, 2019, there were the following potentially dilutive securities that were excluded from diluted net loss per share
because their effect would be anti-dilutive (all shares adjusted to reflect a 25:1 reverse stock split effected on September 4,
2020):
Shares from common stock
options
|
|
|
340,619
|
|
Shares from common stock warrants
|
|
|
126,154
|
|
Shares from the conversion of debentures
|
|
|
66,000
|
|
Shares that may be converted from Bridge
Notes (based upon an assumed conversion price at December 31, 2019 of $2.10 per share);
|
|
|
2,858,671
|
|
Shares from the conversion of redeemable
convertible preferred stock (not inclusive of cumulative dividends which may be converted to shares of common stock under
certain conditions).
|
|
|
299,442
|
|
Significant
Estimates
U.S.
Generally Accepted Accounting Principles (“GAAP”) requires the Company to make judgments, estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements, the reported amounts of revenues and expenses, cash flows and the related footnote disclosures
during the period. On an on-going basis, the Company reviews and evaluates its estimates and assumptions, including, but not limited
to, those that relate to the fair value of stock based compensation fair value of convertible bridge notes, and deferred
the valuation allowance on deferred tax assets and contingencies. Actual
results could differ from these estimates.
Recent
Accounting Pronouncements
In
February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”, requiring management to recognize any
right-to-use-asset and lease liability on the statement of financial position for those leases previously classified as operating
leases. The criteria used to determine such classification is essentially the same as under the previous guidance, but it is more
subjective. The lessee would classify the lease as a finance lease if certain criteria at lease commencement are met. This ASU
is effective for fiscal years beginning after December 15, 2018. Effective January 1, 2019 the Company adopted ASU 2016-02 which
did not have an impact on the consolidated financial statements of the Company as the Company has no leases that meet the scope
of ASC 842.
In
June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee
Share-Based Payment Accounting, which is intended to simplify the accounting for nonemployee share-based payment transactions
by expanding the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees.
The guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2018. Early adoption
is permitted, but no earlier than an entity’s adoption date of ASC 606. Effective January 1, 2019 the Company adopted ASC
2018-07 and it did not have an impact on the Company’s consolidated financial statements.
In
August 2018, the FASB issued guidance that amends fair value disclosure requirements. The guidance removes disclosure requirements
on the transfers between Level 1 and Level 2 of the fair value hierarchy in addition to the disclosure requirements on the policy
for timing of transfers between levels and the valuation process for Level 3 fair value measurements. The guidance clarifies the
measurement uncertainty disclosure and adds disclosure requirements for Level 3 unrealized gains and losses and significant unobservable
inputs used to develop Level 3 fair value measurements. The guidance is effective for fiscal years beginning after December 15,
2019. Entities are permitted to early adopt any removed or modified disclosures upon issuance and delay adoption of the additional
disclosures until the effective date. The Company is currently evaluating the impact of this new guidance on its consolidated
financial statements and disclosures.
Reclassifications
Certain
reclassifications of prior year amounts have been made to conform to the 2020 presentation. These reclassifications had no effect
on net loss or loss per share as previously reported.
Concentration
of Risk
The
Company expects cash to be the asset most likely to subject the Company to concentrations of credit risk. The Company’s
bank deposits may at times exceed federally insured limits. The Company’s policy is to maintain its cash with high credit
quality financial institutions to limit its risk of loss exposure.
The
Company had no revenue from its continuing operations in 2020 and 2019. Revenue included in discontinued operations was generated
from one related customer in 2020 and two related customers in 2019.
NOTE
4 – SEPARATION AGREEMENT
On
November 6, 2020, the Company entered into the Separation Agreement with its unconsolidated investee, EPH. The Company’s
board of directors approved the Separation Agreement in support of the Company’s previously disclosed plan to secure new
technologies and business opportunities in the broader biosciences sector, and to significantly reduce debt and liabilities of
the Company and eliminate under-performing assets and agreements. The Separation Agreement resulted in the discontinuance of the
Company’s management of businesses and assets focused on compost and soil manufacturing to focus solely on the development
of its exclusively licensed pharmaceutical Technology, as well as other drug candidates that it may license or otherwise secure
in the future. Pursuant to the Separation Agreement:
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●
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The
Management Agreement, dated January 18, 2019, as amended, between EPH and the Company was terminated by mutual agreement of
the parties. Fees from this agreement constituted most of the Company’s revenue over the prior two years.
|
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●
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In
lieu of any severance or other termination payments due under the Management Agreement, EPH released the Company from a total
of $993,985 in liabilities, inclusive of advanced management fees and multiple promissory notes, including accrued and unpaid
interest. An additional $114,700 in promissory notes owed to an affiliate of EPH were converted into Company common stock
at a price of $0.22 per share.
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|
|
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●
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The
Company agreed to transfer to EPH its license agreement with Agrarian Technologies LLC
and Mulch Masters Inc. for the ABS soil enhancement product and all associated knowhow,
trade secrets and trademark/service marks. Accrued license fees in connection with this
license agreement were also assumed by EPH in the amount of $37,500.
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|
|
|
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●
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The
prior officers and employees of the Company engaged in the Legacy Business were released
from any non-competition, non-solicitation or other restricted covenant pursuant to their
respective employment agreements. Effective October 1, 2020, several of these employees
had already separated from the Company.
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|
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|
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●
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EPH
received the right in its sole discretion to use the name “Q2Earth” in all
jurisdictions of the United States and worldwide.
|
Pursuant
to ASC 205-20 Presentation of Financial Statements: Discontinued Operations and amended by ASU No. 2014-08, management
has determined that the Separation Agreement results in the disposal of a component that represents a strategic shift in the Company’s
business operations that will have a major effect on the Company’s operations and financial results. Therefore, the net
income (loss) generated from this disposed component have been presented as discontinued operations for the years ended December
31, 2020 and 2019 on the statement of operations. Further, liabilities forgiven or assumed in connection with the Separation Agreement
have been presented as liabilities held for disposal as of December 31, 2019 on the accompanying balance sheet (see Note 9 –
Discontinued Operations).
NOTE
5 – EQUITY METHOD INVESTMENT
During
November 2018, the Company invested $50,000 for a 19.9% Class B limited liability membership interest in EPH and recorded this
transaction as an equity method investment due to the Company’s ability to exercise significant influence over EPH. The
carrying value of the investment in EPH was reduced to zero after recording the proportionate share of the investee’s net
loss for the 2018 fiscal year. In January 2019, the Company committed an additional $21,588 through a subscription payable to
maintain its 19.9% Class B limited liability interests in EPH, after additional Class A units were sold to investors, which
was fully paid in April 2020. The carrying value of the investment at December 31, 2019 was zero and remains at zero
at December 31, 2020 due to continued losses incurred by EPH. The loss on equity investment has been presented on the consolidated
statement of operations for the year ended December 31, 2019. There were no distributions received from the equity method investment
in 2020 or 2019. See Note 4 for discussion of the Separation Agreement with our equity method investment in November 2020.
For
the year ended December 31, 2020, EPH generated $11,676,137 in revenue and had a loss prior to income taxes of $2,121,397. Of
this loss, $1,110,674 was from the write-off of notes payable due from the Company inclusive of a transfer of the $114,700
note plus interest to a related party, pursuant to the Separation Agreement (see Note 4 – Separation
Agreement).
Our prior Chairman and CEO of the Company, also serves as President
of EPH; and Christopher Nelson, General Counsel and Director of the Company, also serves as General Counsel and Secretary
of EPH. See
Note 6 – Related Party Transactions for transactions with our equity method investment during the years ended December
31, 2020 and 2019.
NOTE
6 – RELATED PARTY TRANSACTIONS
The
Company currently has a License Agreement with IGL Pharma, Inc., an entity in which the Company’s Executive Chairman serves
as President and holds a non-controlling equity interest.
The
Company currently maintains an executive office in Florida, which is leased by an investment firm in which the Company’s
General Counsel serves as an officer but does not hold any equity or voting rights. The Company has no formal agreement for this
space and pays no rent.
During
the years ended December 31, 2020 and 2019, the Company received $525,000 and $549,000 from its equity method
investee, EPH, as management fee revenue. Due to the Separation Agreement disclosed in Note 4, management fee
revenues received during the years ended December 31, 2010 and 2019 have been presented on the statement of operations as
discontinued operations (see Note 9 – Discontinued Operations). Management fee revenues were the Company’s
primary source of revenue during the years ended December 31, 2020 and 2019. During 2019, the Company also received a fee of $250,000 for advisory services related to an acquisition completed
by a related party which was also included in the Company’s discontinued operations.
During
the years ended December 31, 2020 and 2019, the Company received $291,283 and $788,500 from EPH under
multiple demand notes payable with interest payable at 6% annually. As of November 6, 2020, pursuant to the Separation
Agreement, the amount of $993,985, inclusive of all unpaid accrued interest, of these notes was terminated; and
$37,500 of accrued royalties under the Company’s license agreement with Agrarian Technologies were assumed by EPH.
As of December 31, 2020, $117,659 of additional debt, inclusive of all unpaid accrued interest, was
converted into 534,815 shares of common stock. The Company recorded a gain of $1,032,160 in connection with
this forgiveness and assumption of debt which has been presented within discontinued operations, and a loss of $155,096 in
connection with the conversion of notes into common stock which is included in loss on convertible debt and other
liabilities converted to common stock on the consolidated statements of operations. As of December 31, 2020, the Company
owes to EPH $33,492 of notes payable and accrued interest which is included in notes payable-related parties on the
consolidated balance sheet. As of December 31, 2019, $788,500 and $15,426 of principal and accrued interest remained
outstanding on these demand notes payable. Due to the Separation Agreement which resulted in the forgiveness of these demand
notes payable, including interest, these amounts have been presented in current liabilities held for disposal on the
consolidated balance sheet (see Note 9 – Discontinued Operations).
During the year ended
December 31, 2020, the Company received $45,500 of proceeds from short-term notes payable with officers and directors of the Company
bearing interest at 10%. As of December 31, 2020, $30,500 of principal remains outstanding on certain of these short-term notes
payable. See Note 14 – Subsequent Events for conversion of certain of these short-term notes payable into
shares of Series B preferred stock.
During
the years ended December 31, 2020 and 2019, the Company incurred approximately $67,147 and $12,000 in legal fees with a
law firm in which the Company’s audit committee chair is an employee. As of December 31, 2020 and 2019, accounts payable
and accrued expenses include $32,716 and $10,575, respectively, for legal fees due to the law firm for services.
In
2020, a total of approximately $413,000 in principal and accrued interest from Bridge Notes held by officers and directors of
the Company were converted into shares of common stock; and an additional $346,867 of deferred salary and bonuses,
accrued director fees and short-term notes payable were also converted by related parties into 1,576,668 shares of common stock
in 2020 which resulted in a loss of $309,430 which is included in loss on convertible debt and other liabilities converted to
common stock on the consolidated statements of operations.
NOTE
7 – DEBENTURES, CONVERTIBLE BRIDGE NOTES, AND NOTES PAYABLE
Debentures
The
Company has Original Issue Discount Senior Secured Convertible Debentures (the “Debentures”) with two holders in
the aggregate amount of $137,500 and $165,000 as of December 31, 2020 and 2019, respectively. On December 28, 2020,
$27,500 of these Debentures was converted into common stock at a price of $0.22 per share resulting in the issuance
of 125,000 shares of common stock and the recognition of a loss on conversion of $41,250 which is included in loss on
convertible debt and other liabilities converted to common stock on the consolidated statements of operations. All assets
of the Company are secured under the Debentures. The Debentures contain certain anti-dilutive protection provisions in the
instance that the Company issues stock at a price below the conversion price of the Debentures, as adjusted from time to
time, as well as other standard protections for the holder. As of December 31, 2020, the outstanding amount of
$137,500 is in default. See Note 14 – Subsequent Events for the conversion in 2021 of a portion of the amount still
owed into shares of common stock.
Convertible
Bridge Notes
In
2017 and 2018, the Company issued a total of $2,771,908 in a convertible promissory note (the “Bridge Notes”) offering
(collectively, the “Bridge Offering”), which included three of the Company’s directors converting $156,368 and
one shareholder converting $11,784 of prior notes and cash advances, including interest thereon, into the Bridge Offering. In
2019, an additional $30,000 Bridge Note was issued to one investor. In June 2018, one of the original Bridge Notes for $50,000
plus $7,664 accrued interest was converted by its holder into 24,538 shares of common stock. Maturity for the Bridge Notes was
36 months from issuance (24 months for the Bridge Notes issued in 2018 and 2019) with 15% annual interest which is capitalized
each year into the principal of the Bridge Notes and paid in kind.
As
of December 31, 2020, approximately $1.4 million of principal and accrued capitalized interest under the Bridge Notes was in default;
and $2.9 million in principal and accrued and capitalized interest under additional Bridge Notes was settled with the holders
of these notes converting their debt into 13,312,175 shares of common stock of the Company with a fair value of $3,017,499
based on the stock price of the Company on the date of conversion. These Bridge Note conversions included $413,469 of aggregate
principal and accrued interest from officers and directors of the Company. The Company recorded a loss on extinguishment of
these Bridge Notes of $495,320 which is included in loss on convertible debt and other liabilities converted to common stock
on the consolidated statements of operations.
Pursuant
to ASC 825-10-25-1, Fair Value Option, the Company made an irrevocable election at the time of issuance to report the Bridge Notes
at fair value, with changes in fair value recorded through the Company’s condensed consolidated statements of operations
as other income (expense) in each reporting period. The estimated fair value of the remaining outstanding Bridge Notes as of December
31, 2020 and 2019 was $3,598,000 and $2,981,000 (see Note 8 – Fair Value Measurement), and the principal amount
due was $836,878 and $2,801,908, respectively. During the year ended December 31, 2020 and 2019, the change in fair
value resulted in a (loss) gain of $(3,170,236) and $1,057,877, respectively, which is presented as change in fair
value of convertible bridge notes on the consolidated statements of operations (see Note 8 - Fair Value
Measurement).
Paycheck
Protection Program
On
April 14, 2020, the Company received $142,942 under the Paycheck Protection Program (PPP) overseen by the U.S. Small Business
Administration. The loan has an annual interest rate of 1% with loan payments being deferred six months from the date of the loan
with a maturity date of April 14, 2022. The Company used these funds for payroll costs only and will apply for forgiveness of
the loan under the program once the U.S. Small Business Administration starts accepting the forgiveness applications. As of December
31, 2020, the amount due on the loan of $142,929. Under the terms of the PPP, principal payments are due as follows: $34,163
in 2021 and $108,779 in 2022. PPP.
Notes Payable
Between
June and November 2020, the Company received a total of $171,000 under a promissory note with an unrelated third party
with multiple tranches with interest payable at 8% annually. All outstanding principal and interest accrued and unpaid on the
note was due and payable twelve (12) months after the respective tranche date. As of December 31, 2020, the full
balance of $171,000 plus $5,611 in interest was converted into 93,686 of shares of common stock and 156 shares
of the Company’s Series B Preferred stock. The Company recorded a loss of $27,169 on these notes payable converted to
equity.
See Note 6 –
Related Party Transactions for additional notes payable with related parties.
NOTE
8 – FAIR VALUE MEASUREMENT
The
Company measures fair value in accordance with a fair value hierarchy that prioritizes the inputs to valuation techniques used
to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets
or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels
of the fair value hierarchy are described below:
|
Level
1
|
Unadjusted
quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
|
|
|
|
|
Level
2
|
Quoted
prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the
full term of the asset or liability; and
|
|
|
|
|
Level
3
|
Prices
or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported
by little or no market activity).
|
As
disclosed in Note 7, the Bridge Notes are reported at fair value, with changes in fair value recorded through the Company’s
consolidated statements of operations as other income (expense) in each reporting period.
The
following tables set forth the Company’s consolidated financial assets and liabilities measured at fair value by level within
the fair value hierarchy at December 31, 2020 and 2019. Assets and liabilities are classified in their entirety based on the lowest
level of input that is significant to the fair value measurement.
|
|
Fair
value at
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2020
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Convertible
Bridge Notes
|
|
$
|
3,598,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
|
|
Total
|
|
$
|
3,598,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
|
|
|
|
Fair
value at
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2019
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Convertible
Bridge Notes
|
|
$
|
2,473,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,473,000
|
|
Total
|
|
$
|
2,473,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,473,000
|
|
The
following tables present a reconciliation of the beginning and ending balances of items measured at fair value on a recurring
basis that use significant unobservable inputs (Level 3) and the related realized and unrealized gains (losses) recorded in the
consolidated statement of operations during the periods.
|
|
Year
Ended December 31, 2020
|
|
Fair value, December 31,
2019
|
|
$
|
2,473,000
|
|
Accrued interest
|
|
|
485,336
|
|
Conversions of debt and accrued interest to
shares of common stock
|
|
|
(2,530,572
|
)
|
Amortization of debt issuance costs
|
|
|
-
|
|
Net unrealized loss on convertible bridge
notes
|
|
|
3,170,236
|
|
Fair value, December 31, 2020
|
|
$
|
3,598,000
|
|
|
|
Year
Ended
December
31, 2019
|
|
Fair value, December 31, 2018
|
|
$
|
2,960,000
|
|
Issuances of debt
|
|
|
30,000
|
|
Accrued interest
|
|
|
535,877
|
|
Amortization of debt issuance costs
|
|
|
5,000
|
|
Net unrealized
gain on convertible bridge notes
|
|
|
(1,057,877
|
)
|
Fair value, December 31, 2019
|
|
$
|
2,473,000
|
|
The
Company’s convertible Bridge Notes are valued by using Monte Carlo Simulation methods and discounted future cash flow models.
Where possible, the Company verifies the values produced by its pricing models to market prices. Valuation models require a variety
of inputs, including contractual terms, market prices, yield curves, credit spreads, measures of volatility and correlations of
such inputs. These convertible Bridge Notes do not trade in liquid markets, and as such, model inputs cannot generally be verified
and do involve significant management judgment. Such instruments are typically classified within Level 3 of the fair value hierarchy.
The following assumptions were used to value the Company’s convertible Bridge Notes at December 31, 2020: dividend yield
of -0-%, volatility of 66.7%, risk free rate of 0.09% and an expected term of 0.25 years. The fair value
of the Bridge Note was estimated based on the present value expected future cash flows using a discount rate of 20%. The following
assumptions were used to value the Company’s convertible Bridge Notes at December 31, 2019: dividend yield of -0-%, volatility
of 160.8%, risk free rate of 1.55% and an expected term of .25 years. The fair value of the Bridge Note was estimated based on
the present value expected future cash flows using a discount rate of 20%.
NOTE
9 – DISCONTINUED OPERATIONS
On
November 6, 2020, the Company executed a Separation Agreement (see Note 4 – Separation Agreement), whereby
the Company transferred its Legacy Business and the related assets and liabilities to EPH, a related party and equity method investee.
ASC
205-20 “Discontinued Operations” establishes that the disposal or abandonment of a component of an entity or a group
of components of an entity should be reported in discontinued operations if the disposal represents a strategic shift that has
(or will have) a major effect on an entity’s operations and financial results. As a result, the component’s results
of operations have been reclassified as discontinued operations on a retrospective basis for all periods presented. Accordingly,
the liabilities forgiven or assumed by EPH in connection with the Separation Agreement separately reported as “liabilities
held for disposal” as of December 31, 2019. As of December 31, 2020, there were no assets held associated with this business.
The results of operations of this component, for all periods, are separately reported as “discontinued operations”
on the consolidated statements of operations.
As
disclosed in Note 5, the Company retained its equity interest in EPH as of December 31, 2020. This equity interest
has been accounted for as an equity method investment for all periods. There have been no transactions between the Company and
EPH since the Separation Agreement.
A
reconciliation of the major classes of line items constituting the income (loss) from discontinued operations, net of income
taxes as is presented in the consolidated statements of operations for the years ended December 31, 2020, and 2019 are
summarized below:
Reconciliation
of liabilities included in current liabilities held for disposal on the consolidated balance sheet:
|
|
Year
ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Carrying amounts
of major classes of liabilities included as part of liabilities held for disposal
|
|
|
|
|
|
|
|
|
Accounts payable and
accrued expenses
|
|
$
|
-
|
|
|
$
|
15,000
|
|
Accrued interest - related parties
|
|
|
-
|
|
|
|
15,426
|
|
Notes payable
- related parties
|
|
|
-
|
|
|
|
788,500
|
|
Total liabilities
included in the liabilities held for disposal
|
|
$
|
-
|
|
|
$
|
818,926
|
|
Reconciliation
of revenue and expense items in discontinued operations on the consolidated statement of operations:
|
|
Year
ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
541,200
|
|
|
$
|
916,667
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
Payroll and related
expenses
|
|
|
515,741
|
|
|
|
835,183
|
|
Professional
fees
|
|
|
-
|
|
|
|
7,500
|
|
General
and administrative
|
|
|
53,398
|
|
|
|
106,256
|
|
Total Operating
Expenses
|
|
|
569,139
|
|
|
|
948,939
|
|
Financing costs
including interest
|
|
|
46,967
|
|
|
|
15,426
|
|
Gain
on debt extinguishment
|
|
|
(1,032,160
|
)
|
|
|
-
|
|
INCOME (LOSS)
FROM DISCONTINUED OPERATIONS
|
|
$
|
957,254
|
|
|
$
|
(47,698
|
)
|
Reconciliation
of cash flows from operating activities and financing activities on the consolidated statement of cash flow:
|
|
Year
ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net Income (Loss) from Discontinued
Operations
|
|
$
|
957,254
|
|
|
$
|
(47,698
|
)
|
Adjustments to reconcile net
loss to net cash provided by discontinued operations:
|
|
|
|
|
|
|
|
|
Gain on forgiveness or assumption
of promissory notes and accrued expenses
|
|
|
(1,032,160
|
)
|
|
|
-
|
|
Changes in operating assets
and liabilities
|
|
|
|
|
|
|
|
|
Increase in accounts payable
and accrued expenses
|
|
|
22,500
|
|
|
|
15,000
|
|
Increase in contract liabilities
- related party
|
|
|
-
|
|
|
|
(117,667
|
)
|
Increase in accrued interest
- related party
|
|
|
46,967
|
|
|
|
15,426
|
|
Net cash used in operating activities
|
|
|
(5,439
|
)
|
|
|
(134,939
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds from promissory notes
- related parties
|
|
|
338,373
|
|
|
|
788,500
|
|
Repayments on promissory notes
- related parties
|
|
|
(1,590
|
)
|
|
|
-
|
|
Net cash provided by financing activities
|
|
|
336,783
|
|
|
|
788,500
|
|
|
|
|
|
|
|
|
|
|
Net cash
provided by discontinued operations
|
|
$
|
331,344
|
|
|
$
|
653,561
|
|
NOTE
10 – COMMON STOCK, PREFERRED STOCK AND WARRANTS
Common
Stock
In
2020, the Company issued 17,392,343 shares of common stock as follows:
Stock
based compensation for services
|
|
|
1,750,000
|
|
Conversions of
debentures and notes with unrelated parties
|
|
|
218,686
|
|
Conversion of Bridge
Notes
|
|
|
13,312,175
|
|
Conversion of
accrued salary and bonus, directors’ fees and notes with related parties
|
|
|
2,111,482
|
|
|
|
|
|
|
Total Common Shares
issued in 2020
|
|
|
17,392,343
|
|
In
total, $3,441,401 of obligations were converted into shares of common stock in 2020 at a price of $0.22 per share. Due to the
timing of the conversions and the Company’s stock price at that time of conversion, the Company recorded the following
losses from liability conversions in 2020: $495,320 from the conversion of Bridge Notes including accrued interest, $68,373
from the conversion of a debenture and note payable with unrelated parties, and $271,210 from the conversion of accrued
salary, bonus, directors’ fees and notes payable with related parties. During the year ended December 31, 2020, the
Company recorded a loss $834,903 on these obligations converted into shares of common stock as presented on the consolidated
statements of operations.
In
2020, the Company also effected a 25:1 reverse stock split and all share numbers herein have been adjusted for that change.
The
Company did not issue any common shares in 2019.
For
the years ended December 31, 2020 and 2019, the Company recognized $258,667 and $115,714 of compensation expense
for several service agreements.
Series
A Redeemable Convertible Preferred Stock
The
Company has 600 shares of Preferred Stock issued and outstanding as of December 31, 2020, which currently are convertible at $0.16
per share of the Company’s common stock (the “Conversion Price”), which was adjusted to match the conversion
price of the Company’s Series B Preferred Stock. The Preferred Stock bears a 6% dividend per annum, calculable and payable
per quarter in cash or additional shares of common stock as determined in the Certificate of Designation. The Preferred Stock
has no voting rights until converted to common stock and has a liquidation preference equal to the aggregate purchase price of
$600,000 plus accrued dividends. The Preferred Stock is currently in default, and the Company is negotiating a modification with
the holders, including the conversion of these shares into common stock. Each share of Preferred Stock received warrants, of which
all but 46,154 warrants expired in 2020.
The
Preferred Stock has price protection provisions in the case that the Company issues any shares of stock not pursuant to an “Exempt
Issuance” at a price below the Conversion Price. Exempt Issuances include: (i) shares of Common Stock or common stock equivalents
issued pursuant to the original merger of the company or any funding contemplated by that transaction; (ii) any common stock or
convertible securities outstanding as of the date of closing; (iii) common stock or common stock equivalents issued in connection
with strategic acquisitions; (iv) shares of common stock or equivalents issued to employees, directors or consultants pursuant
to a plan, subject to limitations in amount and price; and (v) other similar transactions. The Certificate of Designation contains
restrictive covenants not to incur certain debt, repurchase shares of common stock, pay dividends or enter into certain transactions
with affiliates without consent of holders of 67% of the Preferred Stock.
Management
has determined that the Preferred Stock is more akin to a debt security than equity primarily because it contains a mandatory
2-year redemption at the option of the holder, which only occurs if the Preferred Stock is not converted to common stock. Therefore,
management has presented the Preferred Stock outside of permanent equity as mezzanine equity, which does not factor into the totals
of either liabilities or equity.
The
Preferred Stock carries a 6% per annum dividend calculated on the stated value of the stock and is cumulative and payable quarterly
beginning July 1, 2016. These dividends are accrued at each reporting period. They add to the redemption value of the stock; however,
as the Company shows an accumulated deficit, the charge has been recognized in additional paid-in capital.
Series
B Preferred Stock
On
December 29, 2020, the Company filed an amendment to its Articles of Incorporation to authorize the issuance of up to 2,500 shares
of Series B Convertible Preferred Stock (the “Series B Stock”), par value $0.001 per share, pursuant to a Certificate
of Designation. The Series B Preferred Shares provide the holders a 10% annual paid-in-kind dividend, a liquidation preference
equal to the purchase price of the shares ($1,000 per share) followed by the right to participate with the common stockholders
in the instance of a liquidation or other exit event, and provide the holders the right to vote along with the common holders
based on the common conversion amount of their holdings. The Series B Preferred Shares are convertible into common stock at a
price of $0.16 per share, subject to anti-dilution protections in the case of certain issuances of securities below that conversion
price. The Series B Preferred Shares are not redeemable.
In
December 2020, the Company commenced a private offering of its Series B Stock for $1,000 per share. As of December 31,
2020, 281 shares of Series B Stock were issued and outstanding in connection with the issuance of 156 shares
upon the conversion of a note payable in the amount $156,000, inclusive of unpaid and accrued interest and the sale of
125 shares for total prices of $125,000, $25,000 of which was received in 2021 and recorded as a subscription receivable as
of December 31, 2020. There was no gain or loss recognized on the conversion of the notes payable into Series B Stock as the
conversion rate was equal to the Series B per share purchase price.
Series
E-1 Preferred Stock
On
December 3, 2020 the Company filed an amendment to its Articles of Incorporation to authorize the issuance of up to 8,500 shares
of Series E-1 Preferred Stock (the “Series E-1 Stock”) pursuant to a Certificate of Designation. The shares of Series
E-1 Stock are incentive-based, vesting and forfeitable securities that provide the holders the right in the aggregate to receive
an “earnout” equal to 20% of the total consideration received by the Company in the instance of a sale or sub-license
of its core licensed radiopharmaceutical Technology, or sale or merger of the Company, which is paid on a priority, senior basis.
In addition, the holders of the Series E-1 Stock can convert their vested preferred stock at anytime or after an event
resulting in an earnout payment, such as an acquisition of the Company, into an aggregate of 8.5 million common
shares. The holders of the Series E-1 Stock have the right to vote along with the common stockholders based on the common conversion
amount of their holdings, and have the right to nominate two members of the Board of Directors. On December 30,
2020, 7,650 shares of Series E-1 Stock had been issued to five individuals, including the Company’s Executive Chairman,
CEO and General Counsel which vest starting in July 2021 through January 2023 and are forfeitable by the holders prior to vesting.
Upon these shares of Series E-1 preferred stock becoming fully vested, they are convertible in the aggregate into 7,650,000 shares
of common stock which had a value of approximately $3.9 million as of December 31, 2020. The Company computed the
grant date fair value of the Series E-1 Stock to be approximately $5.34 million using an option pricing model and the following
assumptions: expected term of four years, dividend yield of -0-%, volatility of 96.12%, and a risk-free rate of .27%, which will
be recognized as stock-based compensation expense over the vesting period through January 2023. Since the vesting period began
on December 30, 2020, compensation expense as of December 31, 2020 was not significant. As of December 31, 2020, all 7,650 Series
E-1 Stock issued remains unvested.
Warrants
During
the year ended December 31, 2020, the Company issued no warrants and 80,000 warrants expired. During the year ended December 31,
2019, the Company did not issue any warrants and 81,340 warrants expired. The following is a summary of all outstanding common
stock warrants as of December 31, 2020:
|
|
Number
of
Warrants
|
|
|
Exercise
price
per share
|
|
|
Average
remaining
term in years
|
|
Warrants issued in connection
with issuance of Series A Preferred Stock
|
|
|
46,154
|
|
|
$
|
0.22
|
|
|
|
0.005
|
|
During
the year ended December 31, 2018, the Company committed to issuing warrants to purchase 6,000 shares of common stock at
$1.00 per share and expiring in five years. These warrants are provisional and are not considered outstanding or granted
as of December 31, 2020.
NOTE
11 – STOCK OPTIONS AND RESTRICTED STOCK UNITS
In 2016 to compensate officers, directors and other key service providers with equity grants, the Board approved the 2016 Omnibus
Equity Incentive Plan (“2016 Plan”), which initially allowed for 160,000 shares of common stock, stock options, stock
rights (restricted stock units), or stock appreciation rights to be granted by the Board in its discretion. This authorized amount
was increased to 400,000 shares by Board resolution and amendment in 2017.
The
Company issued 128,000 stock options in 2020, 40,000 each to two of the Company’s independent directors, 20,000 each to
one other independent director and one Board observer, and 8,000 to a new director. The options issued to the directors and Board
observer were fully vested upon issuance, are exercisable at a price of $0.50 per share, and expire ten years after issuance.
The 8,000 options to the new director vest half in 12 months and the balance in 24 months, expire in five years, and are exercisable
at $0.50 per share. The options were valued at $18,023 (pursuant to the Black Scholes valuation model see below), based on an
exercise price of $0.50 per share and estimated expected term of 5.0 years. This has been classified in general and administrative
expense in the unaudited condensed consolidated statements of operations.
Option
Repricing
On
January 6, 2020, the compensation committee of the Company’s Board of Directors, approved a one-time stock option repricing
program (the “Option Repricing”) to permit the Company to reprice certain options to purchase the Company’s
Common Stock held by its current directors, officers and employees (the “Eligible Options”), which actions became
effective on January 6, 2020. Under the Option Repricing, Eligible Options with an exercise price at or above $2.50 per share
(representing an aggregate of 252,440 options, or 54% of the total outstanding) were amended to reduce such exercise price to
$0.50.
The
impact of the Option Repricing was a one-time incremental non-cash charge of $6,304, which was recorded as stock option expense
in the first quarter of 2020 which is included in general and administrative expenses on the unaudited condensed consolidated
statement of operations.
Total
stock-based compensation for stock options issued and the one-time incremental charge for the Option Repricing for the year ended
December 31, 2020 was $24,327. There was no stock-based compensation recognized in 2019 related to stock options.
A
summary of the common stock options issued under the 2016 Plan and prior stock option plans for the year ended December 31, 2020
is as follows (shares and prices have been adjusted to account for a 25:1 reverse split):
|
|
Number
Outstanding
|
|
|
Weighted
Avg.
Exercise
Price
|
|
|
Weighted
Avg.
Remaining
Contractual
Life
(Years)
|
|
Balance, December 31, 2019
|
|
|
340,619
|
|
|
$
|
3.00
|
|
|
|
3.9
|
|
Options issued
|
|
|
128,000
|
|
|
|
0.50
|
|
|
|
8.9
|
|
Balance, December 31, 2020
|
|
|
468,619
|
|
|
|
1.75
|
|
|
|
5.6
|
|
The
vested and exercisable options at period end follows:
|
|
Exercisable/
Vested
Options
Outstanding
|
|
|
Weighted
Avg.
Exercise
Price
|
|
|
Weighted
Avg.
Remaining
Contractual
Life
(Years)
|
|
Balance, December 31,
2020
|
|
|
464,619
|
|
|
$
|
1.75
|
|
|
|
5.6
|
|
The
fair value of new stock options granted and repriced stock options using the Black-Scholes option pricing model was calculated
using the following assumptions for the year ended December 31, 2020:
|
|
Year
Ended
December
31, 2020
|
|
Risk
free interest rate
|
|
|
1.610
|
%
|
Expected volatility
|
|
|
149.67
|
%
|
Expected dividend
yield
|
|
|
-
|
%
|
Expected term
in years
|
|
|
5.0
|
|
Expected
volatility is based on historical volatility of a group of 4 comparable companies, due to the low trading volume of the Company’s
own stock. Short Term U.S. Treasury rates were utilized as the risk-free interest rate. The expected term of the options was calculated
using the alternative simplified method codified as ASC 718 “Accounting for Stock Based Compensation,” which
defines the expected life as the average of the contractual term of the options and the weighted average vesting period for all
issuances.
NOTE
12 – INCOME TAXES
A
reconciliation of the differences between the effective income tax rates and the statutory federal tax rates for the years ended
December 31, 2020 and 2019 (computed by applying the U.S. Federal corporate tax rate of 21 percent to the loss before taxes) is
as follows:
|
|
2020
|
|
|
2019
|
|
Tax benefit at U.S. statutory
rate
|
|
$
|
(1,021,163
|
)
|
|
$
|
143,216
|
|
State taxes, net of federal benefit
|
|
|
(260,154
|
)
|
|
|
35,189
|
|
Change in fair value of convertible
bridge notes and derivatives
|
|
|
792,877
|
|
|
|
222,129
|
|
Other permanent differences
|
|
|
60,941
|
|
|
|
37,509
|
|
Change in
valuation allowance
|
|
|
427,499
|
|
|
|
(438,042
|
)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The
tax effect of temporary differences that give rise to significant portions of the deferred tax assets and liabilities for the
years ended December 31, 2020 and 2019 consisted of the following:
|
|
2020
|
|
|
2019
|
|
Net operating loss carry-forward
|
|
$
|
2,657,931
|
|
|
$
|
2,229,303
|
|
Accrued expenses
|
|
|
80,676
|
|
|
|
87,888
|
|
Stock based compensation
|
|
|
50,944
|
|
|
|
44,861
|
|
Deferred revenue
|
|
|
-
|
|
|
|
—
|
|
Depreciation
expense
|
|
|
-
|
|
|
|
—
|
|
Net deferred tax assets
|
|
|
2,789,552
|
|
|
|
2,362,052
|
|
Valuation
allowance
|
|
|
(2,789,552
|
)
|
|
|
(2,362,052
|
)
|
Total net
deferred tax asset
|
|
$
|
—
|
|
|
$
|
—
|
|
At December 31, 2020
and 2019, the Company had net deferred tax assets of $2,789,552 and $2,362,052 principally arising from net operating loss carry-forwards
for income tax purposes (“NOLs”). As management of the Company cannot determine that it is more likely than not that
the Company will realize the benefit of the net deferred tax asset, a valuation allowance equal to the net deferred tax asset
has been established at December 31, 2020 and 2019. At December 31, 2020, the Company has net operating loss carry forwards totaling
approximately $10,487,000. The potential tax benefit arising from NOLs generated of approximately $5,474,000 prior to 2018 effective
date will begin to expire in 2034. The potential tax benefit arising from the net operating loss carryforward of approximately
$5,013,005 generated after 2018 can be carried forward indefinitely within the annual usage limitations. The Company is delinquent
in filing its federal tax returns for several of the previous year periods since inception. Therefore, all tax years since the
Company’s inception remain open for examination. Management expects to retain a tax professional to assist in bringing these
filings current.
The
Company’s NOL and tax credit carryovers may be significantly limited under the Internal Revenue Code (“IRC”).
NOL and tax credit carryovers are limited under Section 382 when there is a significant “ownership change” as defined
in the IRC. During the year ended December 31, 2020 and in prior years, the Company may have experienced such ownership changes,
which could impose such limitations.
The
limitations imposed by the IRC would place an annual limitation on the amount of NOL and tax credit carryovers that can be utilized.
When the Company completes the necessary studies, the amount of NOL carryovers available may be reduced significantly. However,
since the valuation allowance fully reserves for all available carryovers, the effect of the reduction would be offset by a reduction
in the valuation allowance.
NOTE
13 – COMMITMENTS AND CONTINGENCIES
The
employment agreements for the Company’s new Executive Chairman and CEO each contain termination provisions whereby if they
are terminated without cause or following a material change, as defined therein, they will receive salary through the date of
termination plus an additional 12 months, bonus that would be earned during the full year when the termination became effective
(or a lump sum of 50% of the full target bonus), all stock options shall vest and healthcare benefits will continue for 12 months.
The
Company’s General Counsel’s employment agreement contains a 12 month severance payment in the instance of a termination
without cause, as defined therein.
The
QSAM License Agreement requires multiple milestone-based payments including: $60,000 and other expense reimbursements within 60
days of signing, which have been paid, up to $150,000 as the Technology advances through multiple stages of clinical trials, and
$1.5 million upon commercialization. IGL will also receive equity in the form of a warrant in QSAM equal to 5% of the company
to be issued within 60 days of signing, which has not yet been issued. Upon commercialization, IGL will receive an on-going royalty
equal to 4.5% of Net Sales, as defined in the License Agreement, and up to 50% of any Sublicense Consideration received by QSAM,
as defined in the License Agreement. QSAM will also pay for ongoing patent filing and maintenance fees, and has certain requirements
to defend the patents against infringement claims. As of December 31, 2020, the Company has paid $60,000 under the QSAM License
Agreement representing the full upfront license fee, as well $60,000 in expense reimbursements required under that agreement.
Total costs of $120,000 paid under and in connection with this license, as well as an additional $86,943 in drug development costs
paid to service providers, have been reflected as research and development expenses on the unaudited condensed consolidated statements
of operations.
Pursuant
to a services agreement signed in 2018, an additional 6,000 warrants with a five-year term and exercisable at 1.00 per share are
issuable to the provider but have not formally been issued as of December 31, 2020 and are not considered outstanding.
NOTE
14 - SUBSEQUENT EVENTS
On
January 8, 2021, the Company approved a modification of the Series B convertible preferred stock offering (the “Series
B Offering”) to provide investors in that offering (other than the lead investor) non-registered warrants to
purchase an aggregate of up to 6.27 million shares of common stock at $0.35 per share, expiring on July 8, 2021 (six months).
This was fully authorized by the Company’s Board on February 1, 2021. In addition, the lead investor earned and received
in January 2021 a warrant for 475,000 shares priced at $0.45 per share exercisable until January 15, 2022, for the full
performance of its obligations in the offering. The shares of Series B convertible preferred stock and the warrants
issued under this private placement were not registered under the Securities Act, 1933, as amended, but were issued in reliance
on an exemption from registration set forth in Section 4(a)(2) of the Securities Act and/or Regulation D thereunder.
On
January 27, 2021, the Company closed the Series B Offering and issued a total of 2,500 shares at a price of $1,000 per share,
raising an aggregate amount of $2.5 million inclusive of $156,000 in debt conversion. The Company also issued the warrants
described above. The offering was led by Checkmate Capital Group, LLC, a California based investment firm that previously
held a significant portion of the Company’s Bridge Notes which were converted into common shares as of December 31, 2020.
In connection with the closing, two of the Company’s officers and directors converted a total of $23,000 of short-term
notes payable into 23 shares of Series B preferred stock and received a total of 143,750 warrants.
On
January 27, 2021, one institutional investor converted its remaining portion of the Debenture in the amount of $72,500 into 329,545
shares of common stock at a rate of $0.22 per share, and as a result that Debenture has been retired. On February 9, 2021,
the other institutional investor converted $30,000 of its Debenture into 187,541 shares of common stock at a rate of $0.16
per share.
On
February 1, 2021, the Board of Directors increased the number of stock options and other incentive shares allowed to be issued
under the Company’s 2016 Omnibus Equity Incentive Plan, as amended, from 400,000 to 1 million shares.
On February 1, 2021,
the Company entered into a financial services consulting agreement providing for payment by the Company of cash compensation of
$21,000 per month for eight months and warrants to purchase 750,000 shares of common stock at $0.22 prior to August 1, 2021. On
March 1, 2021, this agreement was amended to provide an additional 250,000 shares of common stock, which was earned immediately
upon issuance.
On
February 8 and 16, 2021, one institutional investor converted a total of $120,000 of its Series A Preferred stock into 750,000
shares of common stock.
On
February 15, 2021, the Company appointed Charles J. Link Jr., M.D. to the Company’s Board of Directors. Dr. Link also agreed
to serve the Company in a part-time, non-executive role as Medical Director. For his services, Dr. Link received 850 shares of
Series E-1 Incentive Preferred Stock, which vest in two equal instalments 12 months and 24 months after issuance. Concurrently
with the appointment, the Company accepted the resignation of Scott W. Whitney, a Board member since 2016.
Between
January 1, 2021 and March 22, 2021, the holders of the Company’s Bridge Notes converted the remaining $1,447,312 in principal
and interest under their notes into 6,578,702 shares of common stock. As of the end of the first quarter of 2021, no Bridge Notes
remained outstanding.
On
March 23, 2021, the Company sold its common subordinated equity interests in EPH, its equity method investee, to an unaffiliated
party for $100,000.