NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2022
(Unaudited)
Note
1 – Organization and Business Operations
Adhera
Therapeutics, Inc. and its wholly-owned subsidiaries, MDRNA Research, Inc. (“MDRNA”), Cequent Pharmaceuticals, Inc. (“Cequent”),
Atossa Healthcare, Inc. (“Atossa”), and IThenaPharma, Inc. (“IThena”) (collectively “Adhera,” or
the “Company”), is an emerging specialty biotech company that, to the extent that resources and opportunities become available,
is strategically evaluating its focus including a return to a drug discovery and development company.
On
July 28, 2021, we as licensee and Melior Pharmaceuticals II, LLC (“Melior II”) entered into an exclusive license
agreement for the development, commercialization and exclusive license of MLR-1019. MLR-1019 is being developed as a new class of
therapeutic for Parkinson’s disease (PD) and is, to the best of our knowledge, the only drug candidate today to address both
movement and non-movement aspects of PD. Under the Agreement, we were granted an exclusive license to use the Melior II Patents and
know-how to develop products in consideration for cash payments upon meeting certain performance milestones as well as a royalty of
5% of gross sales.
On
August 20, 2021, we as licensee entered into an exclusive license agreement with Melior Pharmaceuticals I, Inc. (“Melior
I”) for the development, commercialization and exclusive license of MLR-1023. MLR-1023 is being developed as a novel
therapeutic for Type 1 diabetes.
On
October 20, 2021, we as licensee expanded the exclusive licensing agreement with Melior I to include two additional
clinical indications for Non-Alcoholic Steatohepatitis (NASH) and pulmonary inflammation.
To
the extent that resources have been available, the Company has continued to work with its advisors in an effort to restructure our company
and to identify potential strategic transactions to enhance the value of our company as such opportunities arise, including potential
transactions and capital raising initiatives involving the assets relating to our legacy RNA interference programs, as well as business
combination transactions with operating companies. There can be no assurance that the Company will be successful at identifying any such
transactions, that it will continue to have sufficient resources to actively attempt to identify such transactions, or that such transactions
will be available upon terms acceptable to us or at all. If the Company does not complete any significant strategic transactions, or
raise substantial additional capital, in the near future, it is likely that the Company will discontinue all operations and seek bankruptcy
protection.
ADHERA
THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2022
(Unaudited)
Note
2 – Summary of Significant Accounting Policies
Basis
of Presentation
The
accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial information and in accordance with the instructions pursuant to the rules and regulations
of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and note disclosures
required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. This quarterly
report should be read in conjunction with the consolidated financial statements in the Company’s Annual Report on Form 10-K for
the year ended December 31, 2021. The information furnished in this Report reflects all adjustments (consisting of normal recurring adjustments),
which are, in the opinion of management, necessary for a fair presentation of our financial position, results of operations and cash
flows for each period presented. The results of operations for the six months ended June 30, 2022, are not necessarily indicative of
the results for the year ending December 31, 2022 or for any future period.
Principles
of Consolidation
The
consolidated financial statements include the accounts of Adhera Therapeutics, Inc. and the wholly-owned subsidiaries, Ithena, Cequent,
MDRNA, and Atossa, and eliminate any inter-company balances and transactions. All wholly-owned subsidiaries of Adhera Therapeutics, Inc.
are inactive.
Going
Concern and Management’s Liquidity Plans
The
accompanying consolidated financial statements have been prepared on the basis that the Company will continue as a going concern, which
contemplates realization of assets and the satisfaction of liabilities in the normal course of business. As of June 30, 2022, the Company
had cash and cash equivalents of approximately $849,000 and has negative working capital of approximately $20.0 million.
The
Company has incurred recurring losses and negative cash flows from operations since inception and has funded its operating losses
through the sale of common stock, preferred stock, warrants to purchase common stock, convertible notes and secured promissory
notes. The Company recognized net income of approximately $25,000
for the six months ended June 30, 2022 and used cash in operating activities of approximately $690,000.
The Company had an accumulated deficit of approximately $53.6
million as of June 30, 2022.
In
addition, to the extent that the Company continues its business operations, the Company anticipates that it will continue to have negative
cash flows from operations, at least into the near future. However, the Company cannot be certain that it will be able to obtain such
funds required for its our operations at terms acceptable to the Company or at all. General market conditions, as well as market conditions
for companies in the Company’s financial and business position, as well as the ongoing issues arising from the COVID-19 pandemic,
the Ukraine war and inflation and the Federal Reserve interest rate increases in response, may make it difficult for the Company to seek
financing from the capital markets, and the terms of any financing may adversely affect the holdings or the rights of its stockholders.
If the Company is unable to obtain additional financing in the future, there may be a negative impact on the financial viability of the
Company. The Company plans to increase working capital by managing its cash flows and expenses, divesting development assets and raising
additional capital through private or public equity or debt financing. There can be no assurance that such financing or partnerships
will be available on terms which are favorable to the Company or at all. While management of the Company believes that it has a plan
to fund ongoing operations, there is no assurance that its plan will be successfully implemented. Failure to raise additional capital
through one or more financings, divesting development assets or reducing discretionary spending could have a material adverse effect
on the Company’s ability to achieve its intended business objectives. 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. The consolidated financial
statements do not contain any adjustments that might result from the resolution of any of the above uncertainties.
Summary
of Significant Accounting Policies
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with maturities of six months or less at the time of purchase to be cash equivalents.
As of June 30, 2022, the Company had approximately $849,000 in cash.
The
Company deposits its cash with major financial institutions that may at times exceed the federally insured limit. As of June 30, 2022 the Company had $599,000 of cash in excess of the federally insured limit of $250,000.
ADHERA
THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2022
(Unaudited)
Use
of Estimates
The
preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported period. Significant areas requiring the use of management
estimates include accruals related to our operating activity including legal and other consulting expenses, the fair value of non-cash
equity-based issuances, the fair value of derivative liabilities, and the valuation allowance on deferred tax assets. Actual results
could differ materially from such estimates under different assumptions or circumstances.
Fair
Value of Financial Instruments
The
Company considers the fair value of cash, accounts payable, debt, and accrued expenses not to be materially different from their carrying
value. These financial instruments have short-term maturities. We follow authoritative guidance with respect to fair value reporting
issued by the Financial Accounting Standards Board (“FASB”) for financial assets and liabilities, which defines fair value,
provides guidance for measuring fair value and requires certain disclosures. The guidance does not apply to measurements related to share-based
payments. The guidance discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present
value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The
guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into six broad
levels. The following is a brief description of those six levels:
| Level 1: |
Observable inputs such
as quoted prices (unadjusted) in active markets for identical assets or liabilities. |
| |
|
| Level 2: |
Inputs other than quoted
prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets
or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. |
| |
|
| Level 3: |
Unobservable inputs in
which little or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that
a market participant would use. |
As
of June 30, 2022, the Company measured conversion features on outstanding convertible notes and warrants as a derivative liability using
significant unobservable prices that are based on little or no verifiable market data, which is Level 3 in the fair value hierarchy,
resulting in a fair value estimate of approximately $7.1 million. The value of the derivative liability as of June 30, 2022, was determined
by using the binomial lattice model using the following inputs: risk free rate of 2.80% to 3.01%, volatility of 206.01% to 317.47% and
time to maturity of zero to 1.07 years. There were no liabilities or assets measured at fair value on a non-recurring basis as of June
30, 2022.
Schedule
of Fair Value Measurements
| (in thousands) | |
(Level
1) | | |
(Level
2) | | |
(Level
3) | | |
Total | |
| | |
Fair Value Measurements at June 30, 2022 | |
| | |
Quoted
Prices in
Active
Markets for
Identical
Assets | | |
Other
Observable
Inputs | | |
Significant
Unobservable
Inputs | | |
| |
| (in thousands) | |
| (Level 1) | | |
| (Level 2) | | |
| (Level 3) | | |
| Total | |
| Derivative liability | |
$ | - | | |
$ | - | | |
$ | 7,098 | | |
$ | 7,098 | |
| Total | |
$ | - | | |
$ | - | | |
$ | 7,098 | | |
$ | 7,098 | |
ADHERA
THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2022
(Unaudited)
A
roll forward of the level 3 valuation financial instruments is as follows:
Schedule
of Roll Forward of Level 3 Financial Instruments
| (In
thousands) | |
Warrants | | |
Notes | | |
Total | |
| | |
Six-Months Ended June 30, 2022 | |
| (In thousands) | |
Warrants | | |
Notes | | |
Total | |
| Balance at December 31, 2021 | |
$ | 5,336 | | |
$ | 2,361 | | |
$ | 7,697 | |
| Initial valuation of derivative liabilities included in debt discount | |
| 1,151 | | |
| 163 | | |
| 1,314 | |
| Initial valuation of derivative liabilities included in derivative expense | |
| — | | |
| 108 | | |
| 108 | |
| Reclassification of derivative liabilities loss to gain on debt extinguishment | |
| — | | |
| (233 | ) | |
| (233 | ) |
| Change in fair value included in derivative expense | |
| (617 | ) | |
| (1,171 | ) | |
| (1,788 | ) |
| Balance at June 30, 2022 | |
$ | 5,870 | | |
$ | 1,228 | | |
$ | 7,098 | |
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
equity instruments.
Convertible
Debt and Warrant Accounting
Debt
with warrants
In
accordance with ASC Topic 470-20-25, when the Company issues debt with warrants, the Company treats the relative fair value of the warrants
as a debt discount, recorded as a contra-liability against the debt, and amortizes the balance over the life of the underlying debt as
amortization of debt discount expense in the consolidated statements of operations. The offset to the contra-liability is recorded as
additional paid in capital in the Company’s consolidated balance sheets if the warrants are not treated as a derivative. The Company
determines the fair value of the warrants using the Black-Scholes Option Pricing Model (“Black-Scholes”), the binomial model
or the Monte Carlo Method based upon the underlying conversion features of the debt and then computes and records the relative fair value
as a debt discount. If the debt is retired early, the associated debt discount is then recognized immediately as amortization of debt
discount expense in the consolidated statements of operations.
Convertible
debt – derivative treatment
When
the Company issues debt with a conversion feature, it first assesses whether the conversion feature meets the requirements to be accounted
for as stock settled debt. If it does not meet those requirements then it is assessed on whether the conversion feature should be bifurcated
and treated as a derivative liability, as follows: a) one or more underlyings, typically the price of our common stock; b) one or more
notional amounts or payment provisions or both, generally the number of shares upon conversion; c) no initial net investment, which typically
excludes the amount borrowed; and d) net settlement provisions, which in the case of convertible debt generally means the stock received
upon conversion can be readily sold for cash. An embedded equity-linked component that meets the definition of a derivative does not
have to be separated from the host instrument if the component qualifies for the scope exception for certain contracts involving an issuer’s
own equity. The scope exception applies if the contract is both a) indexed to its own stock; and b) classified in stockholders’
equity in its statement of financial position.
Convertible
debt – beneficial conversion feature
Prior
to the Company’s adoption of ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives
and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts
in an Entity’s Own Equity (“ASU 2020-06”) on January 1, 2021, if the conversion feature was not treated as a derivative,
the Company assessed whether it is a beneficial conversion feature (“BCF”). A BCF exists if the effective conversion price
of the convertible debt instrument is less than the stock price on the commitment date. This typically occurs when the conversion price
is less than the fair value of the stock on the date the instrument was issued. The value of a BCF is equal to the intrinsic value of
the feature, the difference between the conversion price and the common stock into which it is convertible and is recorded as additional
paid in capital and as a debt discount in the consolidated balance sheets. The Company amortizes the balance over the life of the underlying
debt as amortization of debt discount expense in the consolidated statements of operations. If the debt is retired early, the associated
debt discount is then recognized immediately as amortization of debt discount expense in the consolidated statements of operations.
ADHERA
THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2022
(Unaudited)
If
the conversion feature does not qualify for derivative treatment, the convertible debt is treated as traditional
debt.
Recently
Issued Accounting Pronouncements
Recently
Adopted
In
January 2017, the FASB issued Accounting Standards Update (“ASU”) No. 2017-04, Intangibles-Goodwill and Other (Topic 350)
(“ASU 2017-04”), which will simplify the goodwill impairment calculation by eliminating Step 2 from the current goodwill
impairment test. The new standard does not change how a goodwill impairment is identified. The Company will continue to perform its quantitative
goodwill impairment test by comparing the fair value of its reporting unit to its carrying amount, but if the Company is required to
recognize a goodwill impairment charge, under the new standard, the amount of the charge will be calculated by subtracting the reporting
unit’s fair value from its carrying amount. Under the current standard, if the Company is required to recognize a goodwill impairment
charge, Step 2 requires it to calculate the implied value of goodwill by assigning the fair value of a reporting unit to all of its assets
and liabilities as if that reporting unit had been acquired in a business combination and the amount of the charge is calculated by subtracting
the reporting unit’s implied fair value of goodwill from the goodwill carrying amount. The standard was effective January 1, 2020.
The adoption of ASU 2017-04 did not have a material impact on the Company’s historical consolidated financial statements.
In
August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and
Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s
Own Equity (“ASU 2020-06”), which will simplify the accounting for certain financial instruments with characteristics of
liabilities and equity, including certain convertible instruments and contracts on an entity’s own equity. Specifically, the new
standard will remove the separation models required for convertible debt with cash conversion features and convertible instruments with
beneficial conversion features. It will also remove certain settlement conditions that are currently required for equity contracts to
qualify for the derivative scope exception and will simplify the diluted earnings per share calculation for convertible instruments.
ASU 2020-06 will be effective January 1, 2022, for the Company and may be applied using a full or modified retrospective approach. Early
adoption is permitted, but no earlier than January 1, 2021, for the Company. The Company adopted ASU No. 2020-06 on January 1, 2021.
Management determined such adoption did not have a material impact on the overall stockholders’ equity (deficit) in the Company’s
consolidated financial statements.
In
May 2021, FASB issued ASU 2021-04: Earnings Per Share (Topic 260), Debt— Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock
Compensation (Topic 718), and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40), to clarify and
reduce diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options
(for example, warrants) that remain equity classified after modification or exchange. The amendments in ASU 2021-04 provide the following
guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another
Topic:
| 1. |
An entity should treat
a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains equity
classified after modification or exchange as an exchange of the original instrument for a new instrument. |
| |
|
| 2. |
An entity should measure
the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified
after modification or exchange as follows: |
| |
a. |
For a modification or an
exchange that is a part of or directly related to a modification or an exchange of an existing debt instrument or line-of-credit
or revolving-debt arrangements (hereinafter, referred to as a “debt” or “debt instrument”), as the difference
between the fair value of the modified or exchanged written call option and the fair value of that written call option immediately
before it is modified or exchanged. Specifically, an entity should consider: |
| |
|
i. |
An increase or a decrease
in the fair value of the modified or exchanged written call option in applying the 10 percent cash flow test and/or calculating the
fees between debtor and creditor in accordance with Subtopic 470-50, Debt—Modifications and Extinguishments. |
ADHERA
THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2022
(Unaudited)
| |
|
ii. |
An increase (but not a
decrease) in the fair value of the modified or exchanged written call option in calculating the third-party costs in accordance with
Subtopic 470-50. |
| |
b. |
For all other modifications
or exchanges, as the excess, if any, of the fair value of the modified or exchanged written call option over the fair value of that
written call option immediately before it is modified or exchanged. |
| 3. |
An entity should recognize the effect of a modification
or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange
on the basis of the substance of the transaction, in the same manner as if cash had been paid as consideration, as follows: |
| |
a. |
A financing transaction
to raise equity. The effect should be recognized as an equity issuance cost in accordance with the guidance in Topic 340, Other Assets
and Deferred Costs. |
| |
|
|
| |
b. |
A financing transaction
to raise or modify debt. The effect should be recognized as a cost in accordance with the guidance in Topic 470, Debt, and Topic
835, Interest. |
| |
|
|
| |
c. |
Other modifications or
exchanges that are not related to financings or compensation for goods or services or other exchange transactions within the scope
of another Topic. The effect should be recognized as a dividend. For entities that present EPS in accordance with Topic 260, that
dividend should be an adjustment to net income (or net loss) in the basic EPS calculation. |
An
entity should recognize the effect of a modification or an exchange of a freestanding equity-classified written call option to compensate
for goods or services in accordance with the guidance in Topic 718, Compensation—Stock Compensation. In a multiple-element transaction
(for example, one that includes both debt financing and equity financing), the total effect of the modification should be allocated to
the respective elements in the transaction.
The
amendments in ASU 2021-04 are effective for all entities for fiscal years beginning after December 15, 2021, including interim periods
within those fiscal years. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the
effective date of the amendments. Early adoption is permitted for all entities, including adoption in an interim period. If an entity
elects to early adopt the amendments in ASU 2021-04 in an interim period, the guidance should be applied as of the beginning of the fiscal
year. The adoption by the Company as of January 1, 2022 did not have a significant impact on its financial statements.
Other
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.
Net
Loss per Common Share
Basic
net loss per share is calculated by dividing the net loss by the weighted average number of common shares outstanding during the period.
Diluted net loss per share is computed by dividing the net loss by the weighted average number of common shares and common stock equivalents
outstanding for the period. Common stock equivalents are only included when their effect is dilutive. Potentially dilutive securities
which include outstanding warrants, stock options, convertible notes and preferred stock have been excluded from the computation of diluted
net loss per share as their effect would be anti-dilutive. For all periods presented, basic and diluted net loss were the same.
ADHERA
THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2022
(Unaudited)
The
following table presents the computation of net loss per share (in thousands), except share and per share data):
Schedule
of Earnings Per Share, Basic and Diluted
| | |
| | | |
| | | |
| | | |
| | |
| | |
Three Months Ended | | |
Six Months Ended | |
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| Numerator | |
| | | |
| | | |
| | | |
| | |
| Net income (loss) | |
$ | 99 | | |
$ | (514 | ) | |
$ | 25 | | |
$ | (942 | ) |
Accrued and deemed dividends | |
| (406 | ) | |
| (392 | ) | |
| (566 | ) | |
| (1,274 | ) |
| Net Loss allocable to common stockholders | |
$ | (307 | ) | |
$ | (906 | ) | |
$ | (541 | ) | |
$ | (2,216 | ) |
| Denominator | |
| | | |
| | | |
| | | |
| | |
| Weighted average common shares outstanding used to compute net loss per share, basic and diluted | |
| 22,801,669 | | |
| 11,669,779 | | |
| 40,078,424 | | |
| 11,270,044 | |
| Net loss per share of common stock, basic and diluted | |
| | | |
| | | |
| | | |
| | |
| Net loss per share | |
$ | (0.01 | ) | |
$ | (0.08 | ) | |
$ | (0.01 | ) | |
$ | (0.20 | ) |
The
following number of shares have been excluded from diluted net (loss) since such inclusion would be anti-dilutive:
Schedule
of Antidilutive Securities Excluded from Computation of Earnings Per Share
| | |
| | | |
| | |
| | |
Six-Months Ended June 30, | |
| | |
2022 | | |
2021 | |
| Stock options outstanding | |
| 380,000 | | |
| 387,550 | |
| Convertible notes | |
| 48,802,730 | | |
| 20,952,683 | |
| Warrants | |
| 102,655,674 | | |
| 59,836,767 | |
| Series C Preferred Stock | |
| 66,667 | | |
| 66,667 | |
| Series D Preferred Stock | |
| 50,000 | | |
| 50,000 | |
| Series E Preferred Stock | |
| 3,559,229 | | |
| 43,325700 | |
| Series F Preferred Stock | |
| — | | |
| 4,446,980 | |
| Total | |
| 155,514,300 | | |
| 129,066,417 | |
As
of June 30, 2022, the Company’s fully diluted common stock and equivalents exceeded the 180,000,000
shares currently authorized.
Stock-Based
Compensation
The
Company applies the provisions of ASC 718, Compensation—Stock Compensation (“ASC 718”), which requires the measurement
and recognition of compensation expense for all stock-based awards made to employees and non-employees, including stock options, in the
statements of operations.
For
stock options issued, the Company estimates the grant date fair value of each option using the Black-Scholes option pricing model. The
use of the Black-Scholes option pricing model requires management to make assumptions with respect to the expected term of the option,
the expected volatility of the common stock consistent with the expected life of the option, risk-free interest rates and expected dividend
yields of the common stock. For awards subject to service-based vesting conditions, including those with a graded vesting schedule, the
Company recognizes stock-based compensation expense equal to the grant date fair value of stock options on a straight-line basis over
the requisite service period, which is generally the vesting term. Forfeitures are recorded as they are incurred as opposed to being
estimated at the time of grant and revised if and when a forfeiture becomes probable.
ADHERA
THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2022
(Unaudited)
Income
Taxes
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. Deferred tax assets, including tax loss and credit
carry forwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
The
Company accounts for income taxes using the asset and liability method to compute the differences between the tax basis of assets and
liabilities and the related financial amounts, using currently enacted tax rates.
Note
3 – Prepaid Expenses
As
of June 30, 2022, and December 31, 2021 prepaid expenses were approximately $127,000
and $120,000,
respectively and included prepaid manufacturing expenses for the Company’s clinical development candidate MLR-1019 and
prepaid insurance recorded on the accompanying balance sheet.
Note
4 – Notes Payable and Convertible Promissory Notes
The
following table summarizes the Company’s outstanding term loans:
Schedule
of Outstanding Term Loans
| (in thousands) | |
June 30,
2022 | | |
December 30,
2021 | |
| 2019 Term Loan | |
$ | 5,677 | | |
$ | 5,677 | |
| 2022 Term Loan | |
| 2,222 | | |
| - | |
| Notes payable | |
| 7,899 | | |
| 5,677 | |
| Unamortized discounts | |
| (1,592 | ) | |
| - | |
| Loans payable | |
$ | 6,307 | | |
$ | 5,677 | |
2019
Term Loans
During
2019, the Company entered into term loan subscription agreements with certain accredited investors, pursuant to which the Company issued
secured promissory notes in the aggregate principal amount of approximately $5.7 million (collectively, the “2019 Term Loans”).
The Company paid $707,000 in debt issuance costs which was recorded as a debt discount to be amortized as interest expense over the term
of the loan using the straight-line method.
The
promissory notes accrued interest at a rate of 12% per annum. Interest is payable quarterly with the first interest payment to be made
on December 28, 2019, and each subsequent payment every six months thereafter. On December 28, 2019, the Company defaulted on the initial
interest payment on the loan and the interest rate per annum increased to the default rate of 15%.
The
unpaid principal balance of the notes, plus accrued and unpaid interest thereon, matured on June 28, 2020. The notes were secured by
a first lien and security interest on all the assets of the Company and certain of its wholly owned subsidiaries. On June 28, 2020, the
Company defaulted on the maturity date principal payment.
On
June 26, 2021, the holders of the 2019 Term Loans agreed to subordinate their lien and security interest in the assets of the Company
and its subsidiaries as set forth in the Security Agreement dated June 28, 2019 to the holders of the June 2021 convertible notes.
On
April 19, 2022, a majority of the noteholders of the secured non-convertible promissory notes of the Company issued between June 18,
2019, and August 5, 2019 which matured on August 5, 2020 consented to forbear collection efforts until September 30, 2022. Accordingly,
the collateral agent for the note holders in consideration of the signed noteholder agreements agreed to forbear all notes outstanding.
ADHERA
THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2022
(Unaudited)
The
Company recognized approximately $212,000
and $422,000
in interest expense related to the Notes for both the three and six months ended June 30, 2022 and June 30, 2021. As of June 30,
2022, the debt discount and issuance costs for this term loan were fully amortized.
As
of June 30, 2022, the Company had approximately $2.4 million of accrued interest on the notes included in accrued expenses and remains
in default on the repayment of approximately $5.7 million in principal and the $2.4 million in accrued interest on the 2019 Term Loans.
2022
Term Loan
On
May 11, 2022, the Company entered into a Securities
Purchase Agreement with investors whereby the Company issued the Purchasers Original Issue Discount Promissory Notes in the aggregate
principal amount of $2,222,222, net of an original issue discount of $222,222 for a purchase price of $2,000,000 and warrants to purchase
22,222,218 shares of the Company’s common stock, pursuant to the terms and conditions of the SPA and secured by a Security Agreement
as described below. The Company received total consideration of $1,692,200 after debt issuance costs of $307,800.
The
Notes are due on the earliest to occur of (i)
the 12 month anniversary of the original issuance date of the Notes, or May 11, 2023, (ii) a financing transaction which results in
the Company’s common stock being listed on a national securities exchange, and (iii) an event of default. If an event of
default occurs before the Company’s common stock is listed on a national securities exchange, the event of default would
require a repayment of 125% of the outstanding principal, accrued interest and other amounts owing thereon unless the Company is trading on a national securities exchange in which case the repayment would be 100%. The Notes bear interest
at 8% per annum, subject to an increase to 15% in case of an event of default as provided for therein. In addition, at any time
before the 12-month anniversary of the date of issuance of the Notes, the Company may, upon five days’ prior written notice to
the Purchaser, prepay all of the then outstanding principal amount of the Notes for cash in an amount equal to the sum of 105% of
all amounts due and owing hereunder, including all accrued and unpaid interest.
The
Warrants are exercisable for a 66 month period (five years and six months) ending November 11, 2027, at an exercise price of $0.04 per
share, subject to certain adjustments.
The
Company recorded a total debt discount of $1,693.000 including
an original issue discount of $222,222,
a discount related to issuance costs of $307,800,
a discount related to the issuance of common stock of $11,820,
and a $1,151,000 discount related to the initial warrant derivative liability. The discounts are being amortized over the life of the
note.
The
Company’s obligations under the Notes are secured by a first priority lien on all of the assets of the Company and its wholly-owned
subsidiaries pursuant to a Security Agreement, dated May 11, 2022 and among the Company, its wholly-owned subsidiaries, the Purchasers,
and the lead investor as the collateral agent.
For
the three and six months ended June 30, 2022, the Company recognized approximately $100,640
related to the amortization of debt discounts and fees and approximately $25,100
in interest expense related to the note that was deemed earned as of the date of issuance. No interest expense or debt discount was
recognized for the same period of 2021.
At
June 30, 2022, the Company has recorded $2,222,222
of outstanding principal $25,100
of accrued interest and approximately $1,592,000
of unamortized discount and issuance expenses.
Convertible
Promissory Notes
The
following table summarizes the Company’s outstanding convertible notes as of June 30, 2022, and December 31, 2021:
Schedule of Convertible Promissory Notes
| (in thousands) | |
June 30, 2022 | | |
December 31, 2021 | |
| Convertible Notes | |
$ | 1,431 | | |
$ | 1,516 | |
| Unamortized discounts and fees | |
| (392 | ) | |
| (530 | ) |
| Convertible notes payable, net | |
$ | 1,039 | | |
$ | 986 | |
Ten
convertible notes with outstanding principal of approximately $1.2 million were in default as of June 30, 2022.
ADHERA
THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2022
(Unaudited)
Secured
Convertible Promissory Note – February 2020
On
February 5, 2020, the Company entered into a Securities Purchase Agreement with accredited investors and issued the investors, (i) original
issue discount Convertible Promissory Notes with a principal of $550,500 issued at a 10% original issue discount, for a total purchase
price of $499,950, and (ii) warrants to purchase up to such number of shares of the common stock of the Company as is equal to the product
obtained by multiplying 1.75 by the quotient obtained by dividing (A) the principal amount of the Notes by (B) the then applicable conversion
price of the Notes. This results in a variable quantity of warrants at any point in time due to the variable conversion price of the
Notes. (See Note 7).
The
Convertible Notes matured on August 5, 2020. Prior to default, interest accrued to the Holders on the aggregate unconverted and then
outstanding principal amount of the Notes at the rate of 10% per annum, calculated on the basis of a 360-day year and accrues daily.
On June 15, 2020, the Company defaulted on certain covenants in the 2020 term loan and the interest rate reset to the default rate of
18%.
Until
the Convertible Notes are no longer outstanding, the Convertible Notes are convertible, in whole or in part, at any time, and from time
to time, into shares of Common Stock at the option of the noteholder. The conversion price is the lower of: (i) $0.50 per share of Common
Stock and (ii) 70% of the volume weighted average price of the Common Stock on the trading market on which the Common Stock is then listed
or quoted for trading for the prior ten (10) trading days (as adjusted for stock splits, stock combinations and similar events); provided,
that if the Notes are not prepaid on or before May 5, 2020, then the conversion price shall be the lower of (x) 60% of the conversion
price as calculated above or (y) $0.05 (as adjusted for stock splits, stock combinations and similar events). The conversion price of
the Convertible Notes shall also be adjusted as a result of subsequent equity sales by the Company, with customary exceptions.
The
exercise price of the Warrants shall be equal to the conversion price of the Convertible Notes, provided, that on the date that the Convertible
Notes are no longer outstanding, the exercise price shall be fixed at the conversion price of the Convertible Notes on such date, with
the exercise price of the Warrants thereafter (and the number of shares of Common Stock issuable upon the exercise thereof) being subject
to adjustment as set forth in the Warrants. The warrants have a 5-year term.
The
Company recorded a discount related to the Warrants of approximately $322,000, which includes an allocation of original issue discount
(“OID”) and issue costs of $30,000 and $53,000 based on the relative fair value of the instruments as determined by using
the Monte-Carlo simulation model. The Company also recorded the remaining debt discount related to the convertible debt OID of approximately
$21,000 and debt issuance costs of $38,000 using the relative fair value method to be amortized as interest expense over the term of
the loan using the straight-line method. Total discounts recorded were approximately $381,000.
On
March 19, 2021, the holder of the Convertible Note converted $25,900 of interest into 518,000 shares of common stock.
On
July 29, 2021, the holder of the Convertible Note converted $27,500 of interest into 550,000 shares of common stock.
On
August 16, 2021, the holder of the Convertible Note converted $25,000 of principal and interest into 500,000 shares of common stock.
On
September 13, 2021, the holder of the Convertible Note converted $32,500 of principal and interest into 650,000 shares of common stock.
On
October 4, 2021, the holder of the Convertible Note converted $26,250 of principal and interest into 525,000 shares of common stock.
On
November 29, 2021, the holder of the Convertible Note converted $31,150 of principal and interest into 623,012 shares of common stock.
ADHERA
THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2022
(Unaudited)
The
total note principal and interest converted during the year ended December 31, 2021, was $168,300 and 3,366,012 common shares issued
were valued at fair value based on the quoted trading prices on the conversion dates aggregating approximately $554,000 resulting in
a loss on debt extinguishment of $386,000. In addition, derivative fair value of $245,000 relating to the portion of the Note converted
was settled resulting in gain on extinguishment of approximately $245,000. The net loss on extinguishment was approximately $141,000.
On
January 27, 2022, the conversion price of the notes and warrants was adjusted to be the lower of (x) 60% of the conversion price as calculated
above or (y) $0.039 as a result of issuance of common stock for a convertible note conversion.
For
the three and six months ended June 30, 2022, the Company recognized approximately $21,000 and $46,000 in interest expense related to
the note, respectively. The Company recognized $25,000 and $50,000 in interest expense related to the notes for the three and six months
ended June 30, 2021, respectively.
As
of June 30, 2022, the Company had accrued interest on the February 2020 Convertible Note of approximately $147,000.
As
of June 30, 2022, the Company remains in default on the repayment of remaining principal of $457,359 and accrued interest on the February
2020 Convertible Notes. Upon demand for repayment at the election of the holder, the holder of the Convertible Note is due 140% of the
aggregate of outstanding principal, interest, and other expenses due in respect of this Convertible Note. The 40% premium will be recorded
once a demand occurs.
Secured
Convertible Promissory Note – June 2020
On
June 26, 2020, the Company issued to an existing investor in the Company a 10% original issue discount Senior Secured Convertible Promissory
Note with a principal of $58,055, for a purchase price of $52,500, net of the original issue discount of $5,555. The Convertible Note
matured on December 26, 2020. Prior to default, interest accrued on the aggregate unconverted and then outstanding principal amount of
the Note at the rate of 10% per annum, calculated on the basis of a 360-day year. The Company incurred approximately $14,000 in debt
issuance costs. On August 5, 2020, the Company defaulted on certain covenants in the loan and the interest rate reset to the default
rate of 18%.
The
Note is convertible, in whole or in part, into shares of common stock of the Company at the option of the noteholder at a conversion
price of $0.02 (as adjusted for stock splits, stock combinations and similar events); provided, that if an event of default has occurred
under the Note, then the conversion price shall be 65% of the lowest closing bid price of the Company’s common stock as reported
on its principal trading market for the twenty consecutive trading day period ending on (and including) the trading day immediately preceding
the date on which the conversion notice was delivered. The conversion price shall also be adjusted for subsequent equity sales by the
Company. Because the share price on the commitment date was in excess of the conversion price, the Company recorded a beneficial conversion
feature of $50,000 related to this note that was credited to additional paid in capital and reduced the carrying amount. At the commitment
date, the actual intrinsic value of the beneficial conversion feature was approximately $203,000. The discount recorded is being amortized
to interest expense over the life of the loan using the straight-line method.
The
obligations of the Company under the Note are secured by a senior lien and security interest in all of the assets of the Company and
certain of its wholly-owned subsidiaries pursuant to the terms and conditions of a Security Agreement dated June 26, 2020 by the Company
in favor of the noteholder. In connection with the issuance of the Note, the holders of the secured promissory notes that the Company
issued to select accredited investors between June 28, 2019 and August 5, 2019 in the aggregate principal amount of approximately $5.7
million agreed to subordinate their lien and security interest in the assets of the Company and its subsidiaries as set forth in the
Security Agreement dated June 28, 2019 that such holders entered into with the Company and its subsidiaries to the security interest
granted to the holder of the Note.
On
January 27, 2022, the conversion price of the note was adjusted to the lower of 65% of the lowest closing bid price of the Company’s
common stock as reported on its principal trading market for the twenty consecutive trading day period ending on (and including) the
trading day immediately preceding the date on which the conversion notice was delivered or $0.039 as a result of issuance of common shares
for a convertible note conversion.
ADHERA
THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2022
(Unaudited)
For
the three six-month period ended June 30, 2022 and June 30, 2021 the Company recognized approximately $2,600 and
$5,300 in
interest related to the note. As of June 30, 2022, the debt discount and issuance costs for the note were fully
amortized.
As
of June 30, 2022, the Company remains in default on the repayment of principal of $58,055 and approximately $21,000 in accrued interest
on the notes. Upon demand for repayment at the election of the holder, the holder of the note is due 140% of the aggregate of outstanding
principal, interest, and other expenses due in respect of this Note. The 40% premium will be recorded once a demand occurs.
Secured
Convertible Promissory Note – October 2020
On
October 30, 2020, the Company issued to an existing investor in and lender to the Company a 10% original issue discount senior secured
convertible promissory note with a principal of $111,111, for a purchase price of $100,000. The note is convertible into shares of common
stock of the Company at the option of the noteholder at a conversion price of $0.07 (as adjusted for stock splits, stock combinations
and similar events); provided, that if an event of default has occurred under the Note, then the conversion price shall be 70% of then
conversion price. The conversion price of the notes is subject to anti-dilution price protection and on March 19, 2021, the conversion
price of the notes was adjusted to $0.05 per share as a result of subsequent equity sales by the Company.
The
obligations of the Company under the note are secured by a senior lien and security interest in all of the assets of the Company.
The
Company recorded approximately $9,000 in debt issuance cost to be amortized over the life of the loan using the straight-line method.
The
interest rate on the note was 10% per annum, calculated on the basis of a 360-day year. On April 30, 2021, the note matured and the Company
defaulted on the note and the interest rate on the loan reset to 18%.
Additionally,
the Company issued the noteholder 1,587,301 warrants to purchase the Company’s common stock at $0.08 per share subject to certain
adjustments as defined in the agreement. Until the Notes are no longer outstanding, the warrants have full-ratchet protection, are exercisable
for a period of five years, and contain customary exercise limitations. On March 19, 2021, the exercise price of the warrants was adjusted
to $0.05 and the Company issued an additional 952,379 warrants to the note holder. The Company recorded approximately $57,000 as a deemed
dividend upon the repricing based upon the change in fair value of the warrants using a binomial valuation model. The Company used a
risk-free rate of 0.16%, volatility of 262.27%, and expected term of 0.92 years in calculating the fair value of the warrants.
The
Company recorded a discount related to the warrants of approximately $66,000, including a discount of $6,000 and issuance costs of $5,000
based on the relative fair value of the instruments as determined by using the Black-Scholes valuation model. The Company recorded a
beneficial conversion feature of $45,000 related to the note that was credited to additional paid in capital and reduced the carrying
amount. The discount recorded is being amortized to interest expense over the life of the loan using the straight-line method. At the
commitment date, the actual intrinsic value of the beneficial conversion feature was approximately $69,000. The Company also recorded
a debt discount related to the convertible debt of approximately $5,000 and debt issuance cost of $4,000 using the relative fair value
method to be amortized as interest expense over the term of the loan using the straight-line method.
On
January 27, 2022, the exercise price of the notes and warrants was adjusted from the default conversion price of $0.049 to $0.039 as
a result of a convertible note exercise and the Company issued an additional 716,320 warrants to the note holder.
For
the three and six months ended June 30, 2022, the Company recognized approximately $5,000 and $10,000 in interest expense for the note,
respectively. For the three and six-month periods ended
June 30, 2021, the Company recognized approximately $5,000 and $9,700 in interest expense including $1,000 and $2,600 related to the
amortization of debt issuance costs, respectively. For the three and six-month period ended June 30, 2021, the Company recognized $20,000
and $79,000 and related to the amortization of debt discount. As of June 30, 2022, the debt discount and issuance costs for the note
were fully amortized.
ADHERA
THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2022
(Unaudited)
As
of June 30, 2022, the Company has outstanding principal of $111,111 and accrued interest on the note of approximately $29,000.
As
of June 30, 2022, the Company remains in default on the repayment of principal and interest on the notes. Upon demand for repayment at
the election of the holder, the holder of the note is due 125% of the aggregate of outstanding principal, interest, and other expenses
due in respect of this Note. The 25% premium will be recorded once a demand occurs.
Secured
Convertible Promissory Note – January 2021
On
January 31, 2021, the Company issued to an existing investor in and lender to the Company a 10% original issue discounted Senior Secured
Convertible Promissory Note with a principal of $52,778, for a purchase price of $47,500, net of original issue discount of $5,278. The
Note is convertible into shares of common stock of the Company at the option of the noteholder at a conversion price of $0.07 (as adjusted
for stock splits, stock combinations and similar events); provided, that if an event of default has occurred under the Note, then the
conversion price shall be 70% of the then conversion price. The conversion price of the notes is subject to anti-dilution price protection
and will be adjusted upon subsequent equity sales by the Company.
The
obligations of the Company under the Note are secured by a senior lien and security interest in all assets of the Company.
Additionally,
the Company issued to the investor 753,968 warrants to purchase the Company’s common stock at an exercise price of $0.08 per share
subject to certain adjustments as defined in the agreement. Until the Notes are no longer outstanding, the warrants have full-ratchet
protection, are exercisable for a period of five years, and contain customary exercise limitations. On March 19, 2021, the exercise price
of the warrants was adjusted to $0.05 and the Company issued an additional 452,372 warrants to the note holder. The Company recorded
approximately $27,000 as a deemed dividend upon the repricing based upon the change in fair value of the warrants using a binomial valuation
model. The Company used a risk-free rate of 0.16%, volatility of 262.27%, and expected term of 0.97 years in calculating the fair value
of the warrants.
The
Company recorded approximately $2,000 in debt issuance cost to be amortized over the life of the loan using the straight-line method.
The
interest rate on the note was 10% per annum, calculated on the basis of a 360-day year. On July 31, 2021, the note matured and the Company
defaulted on the note and the interest rate on the loan reset to the default rate of 18% per annum.
The
Company recorded a discount related to the warrants of approximately $32,000, which includes an allocated original issue discount, of
$3,000 and allocated issuance costs of $1,000 based on the relative fair value of the instruments as determined by using the Black-Scholes
valuation model. The assumptions used in the Black-Scholes model were a risk-free rate of 0.45%, volatility of 240.83%, and an expected
term of one year in calculating the fair value of the warrants.
The
Company also recorded a debt discount related to the convertible debt of approximately $2,000 remaining original issue discount and remaining
debt issuance cost of $1,000 using the relative fair value method to be amortized as interest expense over the term of the loan using
the straight-line method.
Total
discounts recorded including the original issue discount were approximately $35,000.
On
January 27, 2022, the exercise price of the notes and warrants was adjusted from the default conversion price of $0.049 to $0.039, as
a result of a convertible note exercise and the Company issued an additional 340,250 warrants to the note holder.
For
the three and six months ended June 30, 2022, the Company recognized approximately $2,400 and $4,800 in interest expense on the note,
respectively, For the three and six-month periods ended
June 30, 2021, the Company recognized approximately $1,700 and $2,900 in interest expense including approximately $400 and $700 related
to the amortization of debt issuance costs, respectively. For the three and six-month period ended June 30, 2021, the Company recognized
$11,000 and $29,000 related to the amortization of debt discount. As of June 30, 2022, the debt discount and issuance costs on the note
were fully amortized.
ADHERA
THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2022
(Unaudited)
As
of June 30, 2022, the Company has outstanding principal of $52,778 on the note and has recorded approximately $11,500 of accrued interest
included in accrued expenses on the accompanying balance sheet.
As
of June 30, 2022, the Company remains in default on the repayment of principal and accrued interest on the notes. Upon demand for repayment
at the election of the holder, the holder of the note is due 125% of the aggregate of outstanding principal, interest, and other expenses
due in respect of this Note. The 25% premium will be recorded once a demand occurs.
Secured
Convertible Promissory Note – April 2021
On
April 12, 2021, the Company issued to an accredited investor in and lender to the Company a 10% original issue discounted Senior Secured
Convertible Promissory Note with a principal amount of $66,667, for a purchase price of $60,000 net of an original discount of $6,667.
Additionally, the Company issued to the investor 800,000 five-year warrants to purchase the Company’s common stock at an exercise
price of $0.095 per share. The warrants have full ratchet protection.
The
note matured on October 12, 2021, Prior to default, interest accrued on the aggregate unconverted and then outstanding principal amount
of the note at the rate of 10% per annum, calculated on-the-basis of a 360-day year. On October 12, 2021, the Company defaulted on the
note and the interest rate on the note reset to 18% per annum.
The
Note is convertible, in whole or in part, at any time, and from time to time, into shares of the common stock of the Company at the option
of the noteholder at a conversion price of $0.075 (as adjusted for stock splits, stock combinations and similar events); provided, that
if an event of default has occurred under the Note, then the conversion price shall be 70% of the then conversion price. The conversion
price shall also be adjusted upon subsequent equity sales by the Company. The obligations of the Company under the Note are secured by
a senior lien and security interest in all assets of the Company.
The
Company recorded a discount related to the warrants of approximately $34,000, which includes approximately $3,700 of OID discount allocated
under the relative fair value method, and a remaining discount related to the OID of $3,000 based on the relative fair value of the instruments.
The fair value of the warrants on which the relative fair value is based was determined by using the Black-Scholes valuation model. The
assumptions used in the Black-Scholes model were a risk-free rate of 0.89%, volatility of 240.64%, and an expected term of one year in
calculating the fair value of the warrants.
On
June 25, 2021, the exercise price of the warrants was adjusted to $0.075 and the Company issued an additional 213,333 warrants to the
note holder. The Company recorded approximately $11,000 as a deemed dividend upon the repricing based upon the change in fair value of
the warrants using a binomial valuation model. The Company used a risk-free rate of 0.92%, volatility of 247.52%, and expected term of
0.96 years in calculating the fair value of the warrants.
On
November 4, 2021, the Company issued 153,227 shares of common stock upon a cashless exercise of 250,000 warrants issued with the April
2021 Convertible Note.
On
November 30, 2021, the exercise price of the warrants was adjusted to $0.05 based on a note conversion at $0.05 and the Company issued
an additional 131,667 warrants to the note holder.
On
January 27, 2022, the exercise price of the note and warrants was adjusted from the default conversion price of $0.0525 to $0.039 based
on a convertible note conversion at $0.039 and the Company issued an additional 322,949 warrants to the note holder.
For
the three and six months ended June 30, 2022, the Company recognized approximately $3,000 and $6,000 in interest expense for the notes.
For the three and six-month periods ended June 30, 2021, the Company recognized approximately $1,500 in interest expense. For the three
and six-month period ended June 30, 2021, the Company recognized $16,000 related to the amortization of debt discount. As of June 30,
2022, the debt discounts and issuance costs on the note were fully amortized.
ADHERA
THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2022
(Unaudited)
As
of June 30, 2022, the Company has recorded $66,667 of principal and approximately $12,100 of accrued interest for the note on the accompanying
balance sheet.
As
of June 30, 2022, the Company remains in default on the repayment of principal and accrued interest on the notes. Upon demand for repayment
at the election of the holder, the holder of the note is due 125% of the aggregate of outstanding principal, interest, and other expenses
due in respect of this Note. The 25% premium will be recorded once a demand occurs.
Secured
Convertible Promissory Note – June 2021
On
June 25, 2021, the Company issued to an accredited investor in and lender to the Company a 5% original issue discounted Senior Secured
Convertible Promissory Note with a principal amount of $66,500, for a purchase price of $63,000, net of an original issue discount of
$3,500. Additionally, the Company issued to the investor 800,000 six-year warrants to purchase the Company’s common stock at an
exercise price of $0.095 per share. Upon subsequent down-round equity sales by the Company, the number of shares issuable upon exercise
of the Warrant shall be proportionately adjusted such that the aggregate exercise price of this Warrant shall remain $76,000 which is
a full ratchet price protection provision.
The
note matured on June
25, 2022. Interest accrues on the aggregate unconverted and then outstanding principal amount of the note at the rate of 10%
per annum, calculated on the basis of a 365-day year.
The
Note is convertible, in whole or in part, at any time, and from time to time, into shares of the common stock of the Company at the
option of the noteholder at a conversion price of $0.075 (as adjusted for stock splits, stock combinations and similar events); provided,
however that in the event, the Company’s Common Stock trades below $0.08 per share for more than three [confirm] consecutive trading days,
the holder of this Note is entitled, at its option, to convert all or any amount of the principal face amount of this Note then outstanding
into shares of the Company’s common stock at a price for each share of Common Stock equal to 65% of the lowest trading price of
the Common Stock for the twenty prior trading days including the day upon which a Notice of Conversion is received. The conversion discount,
look back period and other terms of the Note will be adjusted on a ratchet basis if the Company offers a more favorable conversion discount,
prepayment rate, interest rate, (whether through a straight discount or in combination with an original issue discount), look back period
or other more favorable term to another party for any financings while this Note is in effect.
The
obligations of the Company under the Note are secured by a senior lien and security interest in all assets of the Company.
The
Company incurred approximately $9,300 in debt issuance costs.
The
Company also issued 47,547 shares of common stock as a commission fee to the investment banker. The fair value of the common stock which
was approximately $5,040 was recorded as debt issuance expense.
Due
to the variability in the conversion price of the Note the embedded conversion option has been bifurcated and reflected as a derivative
liability with an initial fair value of $102,823 with $87,039 charged to derivative expense and $15,784 recorded as a debt discount.
Total
discounts recorded were $66,500. The Company recorded an original issue discount of $3,500, a discount of $9,300 for issuance costs,
a discount related to the warrants of approximately $37,916 and a discount related to the derivative of $15,784 based on the relative
fair value of the instruments. The warrant fair value on which the relative fair value was based was determined by using a simple binomial
lattice model. The assumptions used in the model were a risk-free rate of 0.48%, volatility of 302.11%, and an expected term of 0.60
years in calculating the fair value of the warrants.
On
August 11, 2021, the exercise price of the warrants was adjusted to $0.075 and the Company issued an additional 213,333 warrants to the
note holder. The Company recorded approximately $25,000 as a deemed dividend upon the repricing based upon the change in fair value of
the warrants using a binomial valuation model. The Company used a risk-free rate of 0.81, volatility of 209%, and expected term of 0.57
years in calculating the fair value of the warrants.
ADHERA
THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2022
(Unaudited)
On
October 27, 2021, the Company and the institutional investor who holds the convertible promissory note agreed to extend the maturity
date of the note by six months to December 25, 2022 for no consideration.
On
November 30, 2021, the exercise price of the warrants was adjusted to $0.05 based on a note conversion at $0.05 and the Company issued
an additional 506,667 warrants to the note holder.
On
January 27, 2022, the holder of the June 25, 2021, convertible note converted $9,500 of principal and $421 of interest at $0.039 per
share into 254,401 shares of common stock that were valued at fair value based on the quoted trading prices on the conversion dates aggregating
approximately $28,000 resulting in a loss on debt extinguishment of $18,000. In addition, derivative fair value of $23,000 relating to
the portion of the Note converted was settled resulting in a gain on extinguishment of approximately $23,000. The net gain on extinguishment
was approximately $5,000. In addition, the conversion price of the warrants issued with the notes were adjusted to $0.039 per share and
the Company issued an additional 428,718 warrants to the holder of the note.
For
the three and six months ended June 30, 2022, the Company recognized approximately $9,900 and $19,600 related to the amortization of
debt discounts and approximately $3,400 and $7,000 in interest expense related to the note. The Company recorded $100.00 in interest
and $4,400 for the amortization of debt discount for the period ended June 30, 2021.
As
of June 30, 2022, the Company has recorded $57,000 of outstanding principal and approximately $12,200 of accrued interest and $19,000
of unamortized discount and issuance expenses.
Convertible
Promissory Note – August 11, 2021
On
August 11, 2021, the Company entered into a Securities Purchase Agreement with an accredited institutional investor pursuant to which
the Company issued to the investor its Original Issue Discount Secured Convertible Promissory Note in the principal amount of $220,500
and warrants to purchase 800,000 shares of the common stock of the Company for which the Company received consideration of $210,000 net
of an original issue discount of $10,500. In addition, the Company entered into a Registration Rights Agreement with the investor and
issued the investor 100,000 common shares as a commitment fee.
The
note matured on August 11, 2022 and absent an event of default provides for an interest rate of 10% per annum, payable at maturity,
and is convertible into common stock of the Company at a price of $0.075 per share, subject to anti-dilution adjustments in the event
of certain corporate events as set forth in the Note, provided that if the average closing price of the Company’s common stock
during any six consecutive trading days is below $0.08, the conversion price shall be reduced to 65% of the lowest trading price during
the 20 consecutive trading days immediately preceding the conversion date. On November 9, 2021, the Company defaulted on certain covenants
in the note and the interest rate on the note reset to 24% per annum.
ADHERA
THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2022
(Unaudited)
In
addition to customary anti-dilution adjustments the Note provides, subject to certain limited exceptions, that if the Company issues
any common stock or common stock equivalents, as defined in the Note, at a per share price lower than the conversion price then in effect,
the conversion price will be reduced to the per share price at which such shares or common share equivalents were sold.
The
warrants are initially exercisable for a period of six years at a price of $0.095 per share, subject to customary anti-dilution adjustments
upon the occurrence of certain corporate events as set forth in the warrant.
The
Company incurred approximately $30,000 in debt issuance costs.
The
Company also issued 140,000 shares of common stock to the investment banker as a commission on the note.
Due
to the variability in the conversion price of the Note the embedded conversion option has been bifurcated and reflected as a derivative
liability with an initial fair value of $340,893 with $234,388 charged to derivative expense and $106,505 recorded as a debt discount.
The
Company recorded a total debt discount of $220,500 including an original issue discount of $10,500, a discount related to the warrants
of approximately $56,454 a discount related to issuance costs of $30,000 and a discount related to the issuance of common stock of approximately
$17,041, and a $106,505 discount related to the initial derivative value of the embedded conversion feature on the note all based on
the relative fair value of the instruments.
The
fair value of the warrants on which the relative fair value was based was determined by using a simple binomial lattice model. The assumptions
used in the model were a risk-free rate of 0.81%, volatility of 253%, and an expected term of one year in calculating the fair value
of the warrants. The discounts are being amortized over the term of the convertible note.
On
November 30, 2021, the exercise price of the warrants was adjusted to $0.05 based on a note conversion at $0.05 and the Company issued
an additional 720,000 warrants to the note holder.
On
January 27, 2022, the conversion price of the notes was adjusted to the lower of $0.039 per share, or provided that if the average closing
price of the Company’s common stock during any six consecutive trading days is below $0.08, the conversion price shall be reduced
to 65% of the lowest trading price during the 20 consecutive trading days immediately preceding the conversion date. In addition, the
exercise price of the warrant was adjusted to $0.039 per share and the Company issued an additional 428,718 warrants to the holder of
the note. Both the conversion price of the note and warrants were adjusted as a result of a convertible note exercise at $0.039 per share.
On
May 12, 2022, the Company repaid $135,695
of principal and $64,305
of interest including $54,278
of interest due as a result of early redemption on the note. In addition, the holder of the note extended the maturity date on the
note to September
30, 2022 when the outstanding balance of principal and interest of $128,502
is due on the note. The Company recorded a $45,200 gain on debt extinguishment as a result of repayment of the note.
For
the three and six months ended June 30, 2022, the Company recognized approximately $40,000
and $94,000
related to the amortization of debt discount and approximately $73,000
and $85,400
in interest expense related to the note. Interest expense for the three months ended June 30, 2022, included approximately $67,000
in additional interest accrued due to penalties incurred for early redemption of the note. No interest expense or debt discount was
recognized for the same periods of 2021.
As
of June 30, 2022, the Company has remaining $85,000 of outstanding principal and approximately $37,000 of accrued interest and $40,000
of unamortized discount.
Convertible
Promissory Note – August 17, 2021
On
August 17, 2021, the Company entered into a Securities Purchase Agreement with an accredited institutional investor pursuant to which
the Company issued to the investor its Original Issue Discount Secured Convertible Promissory Note in the principal amount of $220,500
and warrants to purchase 800,000 shares of the common stock of the Company for which the Company received consideration of $210,000 net
of original discount of $10,500. In addition, the Company entered into a Registration Rights Agreement with the investor and issued the
investor 100,000 common shares as a commitment fee.
ADHERA
THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2022
(Unaudited)
The
note matures on August 17, 2022 and provides for an interest rate of 10% per annum, payable at maturity, and is convertible into
common stock of the Company at a price of $0.075 per share, subject to anti-dilution adjustments in the event of certain corporate events
as set forth in the Note, provided that if the average closing price of the Company’s common stock during any six consecutive trading
days is below $0.08, the conversion price shall be reduced to 65% of the lowest trading price during the 20 consecutive trading days
immediately preceding the conversion date. The embedded conversion option will be treated as a bifurcated derivative liability.
In
addition to customary anti-dilution adjustments the Note provides, subject to certain limited exceptions, that if the Company issues
any common stock or common stock equivalents, as defined in the Note, at a per share price lower than the conversion price then in effect,
the conversion price will be reduced to the per share price at which such shares or common share equivalents were sold.
The
Warrants are initially exercisable for a period of six years at a price of $0.095 per share, subject to customary anti-dilution adjustments
upon the occurrence of certain corporate events as set forth in the Warrant.
The
Company incurred approximately $30,000 in debt issuance costs. The Company also issued 112,601 shares of common stock to the investment
banker as a commission on the note.
Due
to the variability in the conversion price of the Note, the embedded conversion option has been bifurcated and reflected as a derivative
liability with an initial fair value of $398,404 with $297,833 charged to derivative expense and $100,571 recorded as a debt discount.
The
Company recorded a total debt discount of $220,500 including an original issue discount of $10,500, a discount related to the warrants
of approximately $62,220 a discount related to issuance costs of $30,000 a discount related to the issuance of common stock of approximately
$17,209, and a $100,571 discount related to the initial derivative value of the embedded conversion feature on the Note all based on
the relative fair value of the instruments.
The
fair value of the warrants on which the relative fair value was based was determined by using a simple binomial lattice model. The assumptions
used in the model were a risk-free rate of 0.77%, volatility of 254%, and an expected term of one year in calculating the fair value
of the warrants. The discounts are being amortized over the life of the convertible note.
On
October 27, 2021, the Company and the institutional investor who holds the promissory note agreed to extend the maturity date the notes
by six months to February 17, 2023 for no consideration.
On
November 15, 2021, the Company defaulted on certain covenants in the note and the interest rate on the note reset to 24% per annum.
On
November 30, 2021, the exercise price of the warrants was adjusted to $0.05 based on a note conversion at $0.05 and the Company issued
an additional 720,000 warrants to the note holder.
On
January 27, 2022, the conversion price of the notes was adjusted to the lower of $0.039 per share, or provided that if the average closing
price of the Company’s common stock during any six consecutive trading days is below $0.08, the conversion price shall be reduced
to 65% of the lowest trading price during the 20 consecutive trading days immediately preceding the conversion date. In addition, the
exercise price of the warrant was adjusted to $0.039 per share and the Company issued an additional 428,718 warrants to the holder of
the note. Both the conversion price of the note and warrants were adjusted as a result of a convertible note exercise at $0.039 per share.
For
the three and six months ended June 30, 2022, the Company recognized approximately $35,000 and $69,700 related to the amortization of
debt discount and $12,600 and $25,000 in interest expense related to the note, respectively. No interest expense or debt discount was
recognized for the same period of 2021.
As
of June 30, 2022, the Company has recorded $220,500 of outstanding principal and approximately $40,400 of accrued interest and $88,200
of unamortized discount and issuance expenses.
ADHERA
THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2022
(Unaudited)
Convertible
Promissory Note – October 4, 2021
On
October 4, 2021, the Company entered into a Securities Purchase Agreement (“SPA”) with an institutional investor pursuant
to which the Company issued the Buyer a 10% Convertible Redeemable Note in the principal amount of $131,250 and a six-year warrant to
purchase 476,190 shares of common stock of the Company for which the Company received proceeds of $110,000. In addition, the Company
entered into a Registration Rights Agreement with the investor and issued the investor 59,523 common shares as a commitment fee.
The
Note is due October 4, 2022. The Note provides for interest at the rate of 10% per annum, payable in seven equal monthly payments beginning
on August 15, 2022 through the maturity date. The Note is convertible into shares of common stock at any time following the date of cash
payment at the Buyer’s option at a conversion price of $0.075 per share, subject to certain adjustments.
The
Warrants are exercisable for three-years from October 4, 2021, at an exercise price of $0.095 per share, subject to certain adjustments,
which exercise price may be paid on a cashless basis. The aggregate exercise price is $45,238.
The
Company incurred approximately $15,000 in debt issuance costs. The Company also issued 43,459 shares of common stock to the investment
banker as a commission on the note.
Due
to the lack of authorized shares, the embedded conversion option has been bifurcated and reflected as a derivative liability with an
initial fair value of $564,943 with $487,052 charged to derivative expense and $77,891 recorded as a debt discount.
The
Company recorded a total debt discount of $131,250 including an original issue discount of $6,250, a discount related to issuance costs
of $15,000, a discount related to the issuance of common stock of $32,109, and a $77,891 discount related to the initial derivative value
of the embedded conversion feature on the Note all based on the relative fair value of the instruments. The discounts are being amortized
over the life of the convertible note.
On
January 2, 2022, the Company defaulted on certain covenants contained in the October 4, 2021, convertible note and the interest rate
reset to 16%.
On
January 27, 2022, the exercise price of the note was adjusted to $0.039 based on a convertible note conversion at $0.039.
On
May 12, 2022 the Company repaid $83,500
of principal on the note and repurchased 59,523
shares of common stock issued to the holder as an original commitment fee on the note for $1,000.
The repurchase was recorded at cost as treasury stock on the accompanying balance sheet. In addition, the Company repaid an
additional $11,571
of principal and $8,428
of interest on the note during the three-month period ended June 30, 2022. The Company recorded approximately $81,700
gain on debt extinguishment resulting from the settlement of the derivative as a result of repayment of the note.
For
the three and six months ended June 30, 2022, the Company recognized approximately $32,700 and $65,000 related to the amortization of
debt discount and approximately $244 and $5,200 in interest expense related to the note, respectively. No interest expense or debt discount
was recognized for the same period of 2021.
As
of June 30, 2022, the Company has recorded $36,200 of outstanding principal and $34,200 of unamortized discount and issuance expenses.
No interest on the note was due as of June 30, 2022.
Convertible
Promissory Note – October 7, 2021
On
October 7, 2021, the Company entered into a Securities Purchase Agreement (“SPA”) with an institutional investor pursuant
to which the Company issued the investor a 10% Convertible Redeemable Note in the principal amount of $131,250 and a six-year warrant
to purchase 476,190 shares of common stock of the Company for which the Company received proceeds of $110,000. In addition, the Company
entered into a Registration Rights Agreement with the investor and issued the investor 59,523 common shares as a commitment fee and an
additional 52,632 shares as a commission to the broker.
The
Note is due October 7, 2022. The Note provides for interest at the rate of 10% per annum, payable at maturity. The Note is convertible
into shares of common stock at any time following the date of cash payment at the investor’s option at a conversion price of $0.075
per share, subject to certain adjustments.
ADHERA
THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2022
(Unaudited)
The
Warrants are exercisable for six-years from October 7, 2021, at an exercise price of $0.095 per share, subject to certain adjustments,
which exercise price may be paid on a cashless basis. The aggregate exercise price is $45,238.
The
Company incurred approximately $15,000 in debt issuance costs.
Due
to the lack of authorized shares, the embedded conversion option has been bifurcated and reflected as a derivative liability with an
initial fair value of $564,184 with $487,667 charged to derivative expense and $76,517 recorded as a debt discount.
The
Company recorded a total debt discount of $131,250 including an original issue discount of $6,250, a discount related to issuance costs
of $15,000, a discount related to the issuance of common stock of approximately $33,483, and a $76,517 discount related to the initial
derivative value of the embedded conversion feature on the Note all based on the relative fair value of the instruments. The discounts
are being amortized over the life of the convertible note.
On
January 5, 2022, the Company defaulted on certain covenants contained in the October 7, 2021, convertible note and the interest rate
reset to 16%.
On
January 27, 2022, the exercise price of the note was adjusted to $0.039 based on a convertible note conversion at $0.039.
On
May 12, 2022, the Company repaid $83,500
of principal on the note and repurchased 59,523
shares of common stock issued to the holder as an original commitment fee on the note for $1,000.
The repurchase was recorded at cost as treasury stock on the accompanying balance sheet. In addition, the Company repaid an
additional $11,571
of principal and $8,428
of interest on the note during the three-month period ended June 30, 2022. The Company recorded approximately $82,900
gain on debt extinguishment related to the settlement of the derivative liability as a result of repayment of the note.
For
the three and six months ended June 30, 2022, the Company recognized approximately $32,700 and $65,100 related to the amortization of
debt discounts and approximately $295 and $5,300 in interest expense related to the note. No interest expense or debt discount was recognized
for the same period of 2021.
As
of June 30, 2022, the Company has recorded $36,200 of outstanding principal and $35,200 of unamortized discount and issuance expenses.
No interest on the note was due as of June 30, 2022.
Convertible
Promissory Note – March 15, 2022
On
March 15, 2022, the Company entered into a Securities Purchase Agreement (“SPA”) with an institutional investor pursuant
to which the Company issued the investor a 10% Convertible Note in the principal amount of $250,000 for a purchase price of $200,000
reflecting a $50,000 original issue discount. The Company received total consideration of $180,000 after debt issuance costs of $20,000.
In addition, the Company issued 50,000 shares of common stock as a commitment fee to the investor. The Company also issued 200,000 shares
to the broker as a commission on the sale.
The
Note provides for guaranteed interest at the rate of 10% per annum for the 12 months from and after the original issue date of the Note
for an aggregate guaranteed interest of $25,000, all of which guaranteed interest shall be deemed earned as of the date of the note.
The principal amount and the guaranteed interest shall be due and payable in seven equal monthly payments each, $39,285.71, commencing
on August 15, 2022, and continuing on the 15th day of each month until paid in full not later than March 15, 2023, the maturity date.
The
Note is convertible into shares of common stock at any time following any event of default at the investor’s option at a conversion
price of ninety percent (90%) per share of the lowest per-share trading price of the Company; stock during the ten trading day periods
before the conversion, subject to certain adjustments.
The
Company recorded a total debt discount of $250,000 including an original issue discount of $50,000, a discount related to issuance costs
of $34,384, a discount related to the issuance of common stock of approximately $3,596, and a $162,020 discount related to the initial
derivative value of the embedded conversion feature on the Note all based on the relative fair value of the instruments. The discounts
are being amortized over the life of the convertible note.
For
the three and six months ended June 30, 2022, the Company recognized approximately $62,300
and $74,000
related to the amortization of debt discounts
and approximately $25,000
in interest expense related to the note that
was deemed earned as of the date of issuance.
ADHERA
THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2022
(Unaudited)
At
June 30, 2022, the Company has recorded $250,000 of outstanding principal $25,000 of accrued interest and $176,000 of unamortized discount
and issuance expenses.
Derivative
Liabilities Pursuant to Convertible Notes and Warrants
In
connection with the issuance of the unrelated party convertible notes (collectively referred to as “Notes”) and warrants
(collectively referred to as “Warrants”), discussed above, the Company determined that the terms of certain Notes and
Warrants contain an embedded conversion options to be accounted for as derivative liabilities due to the holder having the potential
to gain value upon conversion and provisions which includes events not within the control of the Company. Due to the fact that the
number of shares of common stock potentially issuable exceed the Company’s authorized share limit as of June 30, 2022, the
equity environment was tainted and all convertible debentures and warrants were included in the value of the derivative. In
accordance with ASC 815-40 –Derivatives and Hedging – Contracts in an Entity’s Own Stock, the embedded
conversion options contained in the Notes and the Warrants were accounted for as derivative liabilities at the date of issuance or
on the reclassification date and shall be adjusted to fair value through earnings at each reporting date. The fair value of the
embedded conversion options and the warrants was determined using the Binomial Lattice valuation model. At the end of each period
and on note conversion date or repayment or on the warrant exercise date, the Company revalues the derivative liabilities resulting
from the embedded option.
For
the six-month period ended June 30, 2022, in connection with the issuance of the Notes and warrants, on the initial measurement dates,
the fair values of the embedded conversion option of approximately $1,422,000 was recorded as derivative liabilities of which $1,314,000
was allocated as a debt discount and $108,000 as derivative expense.
At
the end of the period, the Company revalued the embedded conversion option derivative liabilities. In connection with the initial valuations
and these revaluations, the Company recorded a gain from the initial and change in the derivative liabilities fair value of approximately
$1,789 for the six-month period ended June 30, 2022.
During
the six months period ended June 30, 2022, the fair value of the derivative liabilities was estimated at issuance and at June 30, 2022,
using the Binomial Lattice valuation model with the following assumptions:
Schedule of Fair Value of Derivative Liabilities Estimated Issuance and Valuation Mode
| Dividend rate | |
| — | % |
| Term (in years) | |
| 0.0 to 1.07 year | |
| Volatility | |
| 206% to 317.47 | % |
| Risk-free interest rate | |
| 1.28% to 3.01 | % |
Other
than the effect on the derivative valuation recognized in operations, there was no accounting effect to the ratchet adjustments of certain
convertible notes to reduce the conversion price to $0.039 in January 2022 since all of the embedded conversion options in the convertible
notes were treated as derivatives.
Note
5 - Licensing Agreements
License
of DiLA2 Assets
On
March 16, 2018, the Company entered into an exclusive sublicensing agreement for certain intellectual property rights to its DiLA2 delivery
system. The agreement included an upfront payment of $200,000 and future additional consideration for sales and development milestones.
The upfront fee was contingent upon the Company obtaining a third-party consent to the agreement within ninety days of execution. As
of June 30, 2022, the Company had not obtained consent for the sublicense and has classified the upfront payment it had previously recorded
as an accrued liability on its consolidated balance sheet.
ADHERA
THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2022
(Unaudited)
Note
6 - Related Party Transactions
Due
to Related Party
The
Company and other related entities have had a commonality of ownership and/or management control, and as a result, the reported operating
results and/or financial position of the Company could significantly differ from what would have been obtained if such entities were
autonomous.
The
Company had a Master Services Agreement (“MSA”) with Autotelic Inc., a related party that is partly owned by one of the Company’s
former Board members and executive officers, namely Vuong Trieu, Ph.D., effective November 15, 2016. The MSA stated that Autotelic Inc.
would provide business functions and services to the Company and allowed Autotelic Inc. to charge the Company for these expenses paid
on its behalf. Dr. Trieu resigned as a director of our company effective October 1, 2018. The Company and Autotelic Inc. agreed to terminate
the MSA effective October 31, 2018. An unpaid balance for previous years services performed under the agreement of approximately
$4,000 is included in due to related party in the accompanying consolidated balance sheets at June 30, 2022, and December 31, 2021.
In
addition, as of June 30, 2022, and December 31, 2021, the Company owed various officers and directors approximately $42,000 for services
rendered which is included as due to related party on the accompanying consolidated balance sheet.
Note
7 - Stockholders’ Equity
Preferred
Stock
Adhera
has authorized 100,000 shares of preferred stock for issuance and has designated 1,000 shares as Series B Preferred Stock (“Series
B Preferred”) and 90,000 shares as Series A Junior Participating Preferred Stock (“Series A Preferred”). No shares
of Series A Preferred or Series B Preferred are outstanding. In March 2014, Adhera designated 1,200 shares as Series C Convertible Preferred
Stock (“Series C Preferred”). In August 2015, Adhera designated 220 shares as Series D Convertible Preferred Stock (“Series
D Preferred”). In April 2018, Adhera designated 3,500 shares of Series E Convertible Preferred Stock (“Series E Preferred”).
In July 2018, Adhera designated 2,200 shares of Series F Convertible Preferred Stock (“Series F Preferred”). In December
2019, Adhera designated 6,000 shares of Series G Convertible Preferred Stock (“Series G Preferred”). The Company plans to
file a certificate of elimination with respect to the Series A Preferred and Series B Preferred and a certificate of decrease with respect
to each of its Series C, D and F Preferred stock. As of June 30, 2022, the Company had not filed the certificate of elimination. Each
subsequent designated series of preferred stock has liquidation preference over the previous series.
Series
C Preferred
Each
share of Series C Preferred has a stated value of $5,000 per share, has a $5,100 liquidation preference per share, has voting rights
of 666.67 votes per share, and is convertible into shares of common stock at a conversion price of $7.50 per share.
As
of June 30, 2022, and December 31, 2021, 100 shares of Series C Preferred were outstanding.
Series
D Preferred
Each
share of Series D Preferred has a stated value of $5,000 per share, has a liquidation preference of $300 per share, has voting rights
of 1,250 votes per share and is convertible into shares of common stock at a conversion price of $4.00 per share. The Series D Preferred
has a 5% stated dividend rate when, and if declared by the Board of Directors, is not redeemable and has voting rights on an as-converted
basis.
As
of June 30, 2022, and December 31, 2021, 40 shares of Series D Preferred were outstanding.
ADHERA
THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2022
(Unaudited)
Series
E Convertible Preferred Stock and Warrants
The
Series E Preferred Stock has a stated value of $5,000 per share and accrues 8% dividends per annum that are payable in cash or stock
at the Company’s discretion. The Series E Preferred has voting rights, dividend rights, liquidation preferences, conversion rights
at the option of the holder and anti-dilution rights. Series E Preferred stock is convertible into shares of common stock at $0.50. Anti-dilution
price protection on Series E Preferred stock expired on February 10, 2020. Warrants issued with Series E Convertible Preferred Stock
have anti-dilution price protection, are exercisable for a period of five years, and contain customary exercise limitations.
On
March 19, 2021, the exercise price of the Series E warrants was adjusted from $0.50 to $0.05 per share upon the conversion of $25,900
debt for 518,000 shares common stock. The Company recorded approximately $390,000 as a deemed dividend based upon the change in fair
value of the Series E Preferred stock warrants using a binomial valuation model. The Company used a risk-free rate of 0.16%, volatility
of 262.27%, and expected term of .41 to .43 years in calculating the fair value of the warrants.
As
of May 17, 2021, the six-year anniversary of the closing of the Series E Preferred stock offering, all outstanding Series E Preferred
stock may be converted by the Company into common stock upon written notification being provided by the Company to stockholders. As of
June 30, 2022, the Company has not provided notice of conversion to the holders of the Series E Preferred stock.
On
June 8, 2021, an investor converted 8 shares of Series E Preferred and accrued dividends of approximately $10,000 into 101,010 shares
of common stock. In addition, the Company issued 53,571 shares of common stock to the investor for a cashless exercise of 75,000 warrants.
On
July 30, 2021, an investor converted 50 shares of Series E Preferred stock with a state value of $250,000 into 500,000 shares of common
stock.
On
October 4, 2021, the Company issued 255,540 shares of common stock upon the conversion of 20 shares Series E Preferred stock including
accrued dividends of $27,770.
On
October 5, 2021, the Company issued 385,414 shares of common stock upon the conversion of 30 shares of Series E Preferred stock including
accrued dividends of $42,707.
On
October 8, 2021, the Company issued 51,414 shares of common stock upon the conversion of 4 shares of Series E Preferred stock including
accrued dividends of $5,707.
On
October 12, 2021, the Company issued 64,312 shares of common stock upon the conversion of 5 shares of Series E Preferred stock including
accrued dividends of $7,156.
On
November 23, 2021, the Company issued 193,299 shares of common stock upon the conversion of 15 shares of Series E Preferred stock including
accrued dividends of $21,649.
On
January 27, 2022, the exercise price of the Series E warrants was adjusted to $0.039 per share as a result of a convertible note exercise
at $0.039 per share.
On
May 17, 2022, the Company effected the conversion of 3,059
shares of Series E Preferred stock and accrued dividends of approximately $5.1
million into 40,706,120
shares of unregistered common stock at a conversion price of $0.50
per share in accordance with the conversion provisions of the certificate of designation.
As
of June 30, 2022, the Company had a total of 30,405,600 warrants issued with Series E Preferred stock outstanding. The warrants expire
in 2023 and have an exercise price of $0.039.
The
Company had accrued dividends on the Series E Preferred stock of approximately $445,000 and $5.0 million, as of June 30, 2022, and December
31, 2021, respectively.
As
of June 30, 2022, and December 31, 2021, there were 267 and 3,326 Series E shares outstanding, respectively.
Series
F Convertible Preferred Shares and Warrants
The
Series F Preferred Stock has a stated value of $5,000 per share and accrues 8% dividends per annum that are payable in cash or stock
at the Company’s discretion. The Series F Preferred has voting rights, dividend rights, liquidation preferences, conversion rights
at the holders option and anti-dilution rights. Series F Preferred stock is convertible into shares of common stock at $0.50. Anti-dilution
price protection on Series F Preferred stock expired on February 10, 2020. Warrants issued with Series F Convertible Preferred Stock
have anti-dilution price protection, are exercisable for a period of five years, and contain customary exercise limitations.
ADHERA
THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2022
(Unaudited)
On
October 30, 2019, the Company repurchased 20 shares of Series F Convertible Preferred Stock including accrued and unpaid dividends and
warrants to purchase 150,000 shares of common stock for $100,000 from our former CEO pursuant to an amendment to the settlement agreement
dated April 4, 2019. The Company also committed to purchase from such officer the remaining Series F Convertible Preferred Stock and
related warrants held by such officer for $100,000 by not later than March 1, 2020. As of December 31, 2021, the Company had not repurchased
the remaining shares.
On
March 19, 2021, the exercise price of the Series F warrants was adjusted from $0.50 to $0.05 upon the conversion of $25,900 of debt for
518,000 shares of common stock. The Company recorded approximately $31,000 as a deemed dividend based upon the change in fair value of
the Series F Preferred stock using a binomial valuation model. The Company used a risk-free rate of 0.16%, volatility of 262.27%, and
an expected term of .46 to .53 years in calculating the fair value of the warrants.
On
October 15, 2021, the Company issued 37,043 shares of common stock upon the conversion of 3 shares of Series F Preferred stock and including
total accrued dividends of $3,521.
As
of November 9, 2021, the six-year anniversary of the closing of the Series F Preferred stock offering, all outstanding Series F Preferred
stock may be converted by the Company into common stock upon written notification being provided by the Company to stockholders. As of
December 31, 2021, the Company has not provided notice of conversion to the holders of the Series F Preferred stock.
As
of December 31, 2021, the Company had a total of 3,088,500 Series F Preferred stock warrants outstanding. The warrants expire in 2023.
On
May 17, 2022, the Company effected the conversion of 358
shares of Series F Preferred stock and accrued
dividends of approximately $541,000
into 4,662,524
shares of unregistered common stock at a conversion
rate of $0.50
per share in accordance with the conversion
provisions of the certificate of designation.
The
Company had accrued dividends on the Series F Preferred stock of approximately $448,000,
as of December 31, 2021. No
dividends were accrued as of June 30, 2022.
At
June 30, 2022 and December 31, 2021, there were zero shares and 358
Series F Preferred shares outstanding, respectively.
Series
G Convertible Preferred Shares
The
Series G Preferred Stock has a stated value of $5,000 per share and accrues 8% dividends per annum that are payable in cash or stock
at the Company’s discretion. The Series G Preferred has voting rights, dividend rights, liquidation preferences, conversion rights
and anti-dilution rights. Series G Preferred stock is convertible into shares of common stock at $0.50.
As
of June 30, 2022, no Series G Preferred Stock has been issued by the Company.
Common
Stock
On
June 8, 2021, an investor converted 8 shares of Series E Preferred and accrued dividends of approximately $10,000 into 101,010 shares
of common stock.
On
June 8, 2021, the Company issued 53,571 shares of common stock to the investor for a cashless exercise of 75,000 warrants.
On
July 30, 2021, and investor converted 50 shares of Series E Preferred stock with a stated value of $250,000 into 500,000 shares of common
stock.
On
August 11, 2021, the Company issued 100,000 shares of common stock to a convertible note investor as a commitment fee which was valued
at its relative fair value of $56,464.
ADHERA
THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2022
(Unaudited)
On
August 18, 2021, the Company issued 100,000 shares of common stock to a convertible note investor as a commitment fee which was valued
at its relative fair value of $62,220.
On
September 22, 2021, the Company issued 300,148 shares of common stock to an investment banker for commissions due under a banking agreement.
The shares were recorded at their relative fair value of approximately $39,290.
On
October 4, 2021, the Company issued 255,540 shares of common stock upon the conversion of 20 shares Series E Preferred stock including
accrued dividends of $27,770.
On
October 4, 2021, the Company issued 59,523 shares of common stock to a convertible note investor as a commitment fee which was valued
at its relative fair value of $10,859.
On
October 5, 2021, the Company issued 385,414 shares of common stock upon the conversion of 30 shares of Series E Preferred stock including
accrued dividends of $42,707.
On
October 8, 2021, the Company issued 51,414 shares of common stock upon the conversion of 4 shares of Series E Preferred stock including
accrued dividends of $5,707.
On
October 8, 2021, the Company issued 59,523 shares of common stock to a convertible note investor as a commitment fee which was valued
at its relative fair value of $12,233.
On
October 15, 2021, the Company issued 37,043 shares of common stock upon the conversion of 3 shares of Series F Preferred stock including
accrued dividends of $3,521
On
November 4, 2021, the Company issued 153,227 shares of common stock upon a cashless exercise of 250,000 warrants issued with the April
2021 Convertible Note.
On
December 6, 2021, the Company issued 96,091 shares of common stock to an investment banker for commissions due under a banking agreement.
The shares were recorded at their relative fair value of approximately $18,745.
During
the twelve-month period ending December 31, 2021, the company issued 3,366,012 million common shares upon the conversion of $98,141 principal
and $70,160 of accrued interest on the February 2020 convertible note. The common shares issued upon conversions of the note for the
period ended December 31, 2021 were valued at fair value based on the quoted trading prices on the conversion dates aggregating approximately
$554,000 resulting in a loss on debt extinguishment of approximately $386,000.
On
January 27, 2022, the Company issued 254,401 shares of common stock upon the conversion of $9,500 principal and $422 of interest on the
June 2021 convertible note that were valued at fair value based on the quoted trading prices on the conversion dates aggregating approximately
$28,000 resulting in a loss on debt extinguishment of $18,000. In addition, derivative fair value of $23,000 relating to the portion
of the Note converted was settled resulting in a gain on extinguishment of approximately $23,000. The net gain on extinguishment was
approximately $5,000.
On
March 15, 2022, the Company issued 50,000 shares of common stock to a convertible note investor as a commitment fee which was valued
at its relative fair value of $3,596.
On
March 15, 2022, the Company issued 200,000 shares of common stock to an investment banker for commissions due under a banking agreement
for issuance of a convertible note. The shares were recorded at their fair value of approximately $14,384.
On
May 17, 2022, the Company effected the conversion of 3,059 shares of Series E Preferred stock and accrued dividends of approximately $5.1 million into
40,706,120 shares of unregistered common stock at a conversion rate of $0.50 per share.
On
May 17, 2022, the Company effected the conversion of 358
shares of Series F Preferred stock and accrued dividends of approximately $541,000
into 4,662,524
shares of unregistered common stock at a conversion rate of $0.50
per share in accordance with the conversion provisions in the certificate of designation.
Treasury
Stock
On
May 12, 2022, the Company repurchased 119,046
shares of common stock issued to the holders of outstanding notes as an original commitment fee on the notes for $2,000.
The repurchase was recorded at cost as treasury stock on the accompanying consolidated balance sheet.
ADHERA
THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2022
(Unaudited)
Warrants
As
of June 30, 2022, there were 102,665,674 common stock warrants outstanding, with a weighted average exercise price of $0.04 per share,
with annual expirations as follows:
Schedule
of Stockholders’ Equity Note, Warrants or Rights
| | |
Shares | | |
2023 | | |
2024 | | |
2025 | | |
2026 | | |
2027 | |
| Series E Preferred Stock | |
| 30,405,600 | | |
| 30,405,600 | | |
| | | |
| | | |
| | | |
| | |
| Series F Preferred Stock | |
| 3,088,500 | | |
| 3,088,500 | | |
| | | |
| | | |
| | | |
| | |
| Bridge Loan | |
| 22,222,218 | | |
| | | |
| | | |
| | | |
| | | |
| 22,222,218 | |
| Convertible Notes (CVN) | |
| 46,590,623 | | |
| | | |
| 2,901,098 | | |
| 36,777,552 | | |
| 6,911,974 | | |
| | |
| Other | |
| 348,733 | | |
| 10,080 | | |
| 335,452 | | |
| 3,201 | | |
| | | |
| | |
| Total Warrants | |
| 102,655,674 | | |
| 33,504,180 | | |
| 3,236,550 | | |
| 36,780,753 | | |
| 6,911,974 | | |
| 22,222,218 | |
Schedule of Warrants
| | |
Shares | |
| Warrants as of December 31, 2021 | |
| 74,625,139 | |
| Issued as a result of price adjustments on CVN | |
| 2,665,672 | |
| Variable quantity of warrants related to February 2020 note | |
| 3,142,645 | |
| Warrants issued with 2022 Bridge Note | |
| 22,222,218 | |
| Warrants as of June 30, 2022 | |
| 102,665,674 | |
Warrants
outstanding as of June 30, 2022, included 101,354,561 price adjustable warrants.
The
intrinsic value of 102,665,674 warrants as of June 30, 2022, was approximately $2.0 million.
As
discussed in Note 2 above, the Company has issued convertible notes and warrants with variable conversion provisions. The conversion
terms of the convertible notes are variable based on certain factors, such as the future price of the Company’s common stock
and various default provisions related to the payment of the notes in Company stock. The number of shares of common stock to be
issued under the convertible notes and warrants is based on the future price of the Company’s common stock. The number of
shares of common stock potentially issuable upon conversion of the promissory notes are therefore, indeterminate. Due to the fact
that the number of shares of common stock potentially issuable exceed the Company’s authorized share limit as of June 30,
2022, the equity environment was tainted and all convertible debentures and warrants were included in the value of the derivative as
of that date. Pursuant to ASC 815-15 Embedded Derivatives, the fair values of the warrants were recorded as derivative liabilities.
On June 30, 2022, the Company evaluated all outstanding warrants and due to reasons discussed above, all warrants outstanding were considered tainted and were
therefore, accounted for as derivative liabilities.
Other
than the effect on the derivative valuation recognized in operations, there was no accounting effect to the ratchet adjustments of certain
warrants to reduce the conversion price to $0.039 in January 2022 since all of the embedded conversion options in the warrants were treated
as derivatives.
NOTE
8 - Stock Incentive Plans
Stock
Options
The
following table summarizes stock option activity for the six-month period ended June 30, 2022:
Schedule
of Share Based Payments Arrangement, Option Activity
| | |
Options Outstanding | |
| | |
Shares | | |
Weighted Average Exercise Price | |
| Outstanding, December 31, 2021 | |
| 384,050 | | |
$ | 0.97 | |
| Options expired / forfeited | |
| (4,050 | ) | |
| 1.70 | |
| Outstanding, June 30, 2022 | |
| 380,000 | | |
| 0.98 | |
| Exercisable, June 30, 2022 | |
| 380,000 | | |
$ | 0.98 | |
No
stock options were granted during the six-month period ended June 30, 2022.
The
following table summarizes additional information on the Company’s stock options outstanding at June 30, 2022:
Schedule
of Share Based Payment Arrangement, Option, Exercise Price Range
| | |
Options Outstanding | | |
Options Exercisable | |
|
Exercise
Price | |
Number Outstanding | | |
Weighted- Average Remaining Contractual Life (Years) | | |
Weighted Average Exercise Price | | |
Number Exercisable | | |
Weighted Average Exercise Price | |
| $0.98 | |
| 380,000 | | |
| 0.84 | | |
$ | 0.98 | | |
| 380,000 | | |
$ | 0.98 | |
| Totals | |
| 380,000 | | |
| 0.84 | | |
$ | 0.98 | | |
| 380,000 | | |
$ | 0.98 | |
ADHERA
THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2022
(Unaudited)
As
of June 30, 2022, the Company had no unrecognized compensation expense related to unvested stock options. No stock based
compensation expenses was recognized for the three or six-month periods ended June 30, 2022 or 2021.
As
of June 30, 2022, the intrinsic value of options outstanding or exercisable was zero there were no options outstanding with an exercise
price less than $0.07, the per share closing market price of our common stock at that date.
NOTE
9 - Commitments and Contingencies
Litigation
Because
of the nature of the Company’s business, it is subject to claims and/or threatened legal actions, which arise out of the normal
course of business. As of the date of this filing, the Company is not aware of any pending lawsuits against it, its officers or directors.
Leases
The
Company does not own or lease any real property or facilities that are material to its current business operations. If the Company continues
its business operations, the Company may seek to lease facilities in order to support its operational and administrative needs.
Share
Repurchase Agreement
On
October 30, 2019, the Company repurchased 20 shares of Series F Convertible Preferred Stock including accrued and unpaid dividends and
warrants to purchase 150,000 shares of common stock for $100,000 from our former CEO pursuant to an amendment to the settlement agreement
dated April 4, 2019. The Company also committed to purchase from such officer the remaining Series F Convertible Preferred Stock and
related warrants held by such officer for $100,000 by not later than March 1, 2020. As of June 30, 2022, the Company had not repurchased
the remaining shares.
Licensing
Agreement – MLR 1019
On
July 28, 2021, the Company and Melior II entered into an exclusive license agreement for the
development, commercialization and exclusive license of MLR-1019. MLR-1019 is being developed as a new class of therapeutic for Parkinson’s
disease (PD) and is, to the best of the Company’s knowledge, the only drug candidate today to address both movement and non-movement
aspects of PD. Under the Agreement, the Company was granted an exclusive license to use Melior II’s Patents and know-how to develop products
in consideration for cash payments up to approximately $21.8 million upon meeting certain performance milestones, as well as a royalty
of 5% of gross sales.
The
license terminates upon the last expiration of the patents licensed by the Company, which is presently 2034 subject extensions and renewals
of any of such patents. If the Company fails to have its common stock listed on Nasdaq or the NYSE (an “Uplisting Event”)
within 12 months after the Company receives a Clinical Trial Authorization from the European Medicines Agency, then the Company’s
commercial license and rights for using Melior II’s data shall terminate. Additionally, if the Company has completed the necessary steps
to effect an Uplisting Event, the Company will have the option to purchase all rights held by Melior II on the MLR-1019 licensed products in
consideration for 10% of the outstanding shares of the Company’s common stock (immediately post Uplisting Event) and 2.5% royalty
of future gross product sales.
As
of June 30, 2022, no performance milestones had been met under the agreement.
ADHERA
THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2022
(Unaudited)
Licensing
Agreement – MLR 1023
On
August 24, 2021, the Company as licensee entered into an exclusive license agreement with Melior I for the development,
commercialization and exclusive license of Melior I’s MLR-1023. MLR-1023 is being developed as a novel therapeutic for Type 1 diabetes.
Under
the Agreement, the Company was granted an exclusive license to use the Melior I’s Patents and know-how to develop products in consideration for
cash payments up to approximately $21.8 million upon meeting certain performance milestones, as well as a tiered royalty of 8-12% of
gross sales.
Under
the original terms of the agreement if the Company failed to raise $4.0 million dollars within 120 days of the Effective Date then the
License would immediately terminate unless, by 120 Days Adhera was in the process of completing transactions to complete the fundraising
then an additional 30 Days would be provided to allow for the completion of the raise.
On
October 20, 2021, the Company expanded the exclusive licensing agreement with Melior I to include two additional
clinical indications for Non-Alcoholic Steatohepatitis (NASH) and pulmonary inflammation.
On
November 17, 2021, Melior I extended the Company’s timeline from 120 days to 180 days from the effective
of the agreement for the Company to raise $4.0 million dollars unless, by 180 Days Adhera is in the process of completing transactions
to complete the fundraising then an additional 30 Days shall be provided to allow for the completion of required fundraising.
On
February 16, 2022, an addendum to the licensing agreement dated August 4, 2021, was executed by the Company and Melior I, extending the requirement by the Company to raise $4.0 million dollars to June 16, 2022.
As
of June 30, 2022, no performance milestones had been met under the agreement.
NOTE
10 - Subsequent Events
Licensing
Agreement – MLR 1023
On
July 20, 2022, the Company entered into an addendum to the License Agreement for MLR-1023 with Melior I pursuant to which Melior I
extended the license to February 1, 2023 in exchange for a $136,921
licensing payment. In addition, the Company was required to hire and retain a Chief Scientific Officer, and raise an additional
$500,000
in capital in addition to other requirements set forth in the addendum and the License Agreement.