NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
QSAM
Biosciences Inc. (hereinafter the “Company”, “we”, “our”, “us”), incorporated in Delaware
on August 26, 2004, is currently engaged in the business of developing a novel radiopharmaceutical drug candidate for the treatment of
bone cancer. This business line commenced in earnest in the fourth fiscal quarter of 2020 as a result of the separation and transfer
pursuant to an Omnibus Separation Agreement dated November 6, 2020 (the “Separation Agreement”) of the Company’s prior
business of managing compost and soil manufacturing facilities (the “Legacy Business”) through an unconsolidated investee
entity called Earth Property Holdings LLC, a Delaware limited liability company (“EPH”). Pursuant to the Separation Agreement,
the Company transferred to EPH all assets and related liabilities in connection with the Legacy Business in return for a forgiveness
of debt. The financial statements presented herein have been adjusted to account for the Legacy Business as discontinued operations (see
Note 4 – Separation Agreement and Note 9 – Discontinued Operations). The Company sold its entire equity interest in EPH to
a third party in the first quarter of 2021 for $100,000, and currently holds no ownership in EPH.
In
April 2020, the Company established QSAM Therapeutics Inc. (“QSAM”) as a wholly-owned subsidiary incorporated in the state
of Texas, and through QSAM, executed a Patent and Technology License Agreement and Trademark Assignment (the “License Agreement”)
with IGL Pharma, Inc. (“IGL”). The License Agreement, as amended in November 2021, provides QSAM with exclusive, worldwide
and sub-licensable rights to all of IGL’s patents, product data and knowhow with respect to Samaium-153 DOTMP aka CycloSam®
(the “Technology”), a clinical stage novel radiopharmaceutical meant to treat different types of bone cancer and related
diseases.
In
connection with the transition to the biosciences sector, the Company changed its name to QSAM Biosciences Inc. on September 4, 2020,
and subsequently changed its stock symbol to QSAM, to better reflect its business moving forward.
On
September 4, 2020, the Company completed a 25:1 reverse stock split of its common shares.
All shares and share prices set forth in this report have been adjusted to account for this reverse stock split as if it had occurred
at the beginning of the earliest period presented.
Prior
to 2017, the Company owned and licensed technology that converts waste fuels and heat to power, which it sold to a licensee in August
of that year. Much of these operations were conducted through a wholly-owned subsidiary of the Company called Q2Power Corp. (“Q2P”),
which still exists but has no current operations.
The
recent outbreak of the novel coronavirus (COVID-19) is impacting worldwide economic activity. COVID-19 poses the risk that we or our
employees and our other partners may be prevented from conducting business activities for an indefinite period of time, including due
to the spread of the disease or shutdowns that may be requested or mandated by governmental authorities. While it is not possible at
this time to estimate the full impact that COVID-19 could have on our business, the continued spread of COVID-19 could disrupt our research
and development of CycloSam and other related activities, which could have a material adverse effect on our business, financial condition
and results of operations. In addition, a severe or prolonged economic downturn could result in a variety of risks to the business. While
we have not yet experienced any material disruptions in our business or other material negative consequences relating to COVID-19, the
extent to which the COVID-19 pandemic impacts our results will depend on future developments that are highly uncertain and cannot be
predicted.
NOTE
2 – BASIS OF PRESENTATION AND GOING CONCERN
For
the year ended December 31, 2021, the Company used net cash in operating activities for its continuing operations of $1,768,803
and incurred a loss from its
continuing operations of $.
As of December 31, 2021, the Company’s accumulated deficit is $29,281,674
and has cash of $1,499,866.
As of December 31, 2021, the Company’s has working capital of $276,916.
These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
The
Company’s convertible debentures of $35,000
and $480,000
of redeemable convertible preferred
stock were both in default as of December 31, 2021. At the end of 2021, management was in discussions with the holders
of these debt and equity securities to reach an agreement to convert the outstanding balances into common stock or otherwise amend the
respective maturity and redemption. On February 22, 2022, the holder of the debenture converted the full balance of $35,000 into 218,750
shares of common stock at $0.16 per share, and the balance on the convertible debenture is currently $0 (see Note 14 - Subsequent Events).
The
Company has supported operations through the issuance of common stock, preferred stock and debt over the last 12 months. This includes
the $2.5
million Series B preferred stock offering in
the first quarter of 2021, the recent exercise of approximately $470,000
in warrants issued in connection
with the Series B offering, and also a convertible debt offering in the amount of $605,000
conducted in the fourth quarter
of 2021. With respect to the convertible notes, they are convertible into common stock prior to the maturity date of December 31, 2023,
or automatically upon the Company completing a qualified offering in the amount of $5
million or uplisting its common
shares to NASDAQ; and bear interest at the rate of 6%
per annum, with all interest and principal due at maturity, unless earlier converted. The note holders also received a total of 1,008,334
common stock warrants. See Notes 7 and
10 for further discussion.
Management
expects expenses to increase in 2022 as our drug technology enters into clinical trials, and as a result, we will need to raise additional
capital to support these operations. Management believes that it can do so through equity raises in 2022, and in December 2021, filed
an initial S-1 registration statement with the Securities Exchange Commission to raise additional equity capital in an offering
underwritten by an investment bank. There is no guarantee, however, that such offering will be successful. If the Company is not
successful in raising additional capital, it may need to delay clinical trials, reduce overhead, or in the most extreme scenario,
shut down operations.
There is no guarantee whether the
Company will be able to generate revenue and/or raise capital sufficient to support its continuing operations. The ability of the Company
to continue as a going concern is dependent on management’s plans which include implementation of its business model to develop
and commercialize its drug candidate, seek strategic partnerships to advance clinical trials and other research endeavors which could
provide additional capital to the Company, and continue to raise funds for the Company through equity or debt offerings. There is no
assurance, however, that the Company will be successful in raising the needed capital and, if funding is available, that it will be available
on terms acceptable to the Company. The consolidated financial statements do not include any adjustments that might result from the outcome
of these uncertainties.
NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The
consolidated financial statements include the accounts of QSAM Biosciences Inc. and its wholly-owned subsidiaries QSAM Therapeutics
Inc and Q2Power Corp (currently inactive). All significant inter-company transactions and balances have been eliminated in consolidation.
References herein to the Company include the Company and its Subsidiaries unless the context otherwise requires.
Cash
and Cash Equivalents
The
Company considers cash, short-term deposits, and other investments with original maturities of no more than ninety days when acquired
to be cash and cash equivalents for the purposes of the statement of cash flows. The Company maintains cash balances at one financial
institution and has experienced no losses with respect to amounts on deposit. The Company held no cash equivalents as of December 31,
2021 and 2020.
Revenue
Recognition
The
Company recognizes revenue in accordance with ASC Topic 606, “Revenue from Contracts with Customers (“ASC 606”) and
all the related amendments.
The
core principle of ASC 606 requires that an entity recognize revenue to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASC
606 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required
within the revenue recognition process than previously required under U.S. GAAP, including identifying performance obligations in the
contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to
each separate performance obligation.
The
Company had no revenue in 2021 and 2020 from continuing operations.
Stock
Based Compensation
The
Company applies the fair value method of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) 718, “Share Based Payment”, in accounting for its stock-based compensation with employees and
non-employees. This standard states that compensation cost is measured at the grant date based on the fair value of the award and is
recognized over the service period, which is usually the vesting period. The Company values stock-based compensation at the market price
for the Company’s common stock and other pertinent factors at the grant date.
The
Black-Scholes option pricing valuation method is used to determine fair value of stock options consistent with ASC 718, “Share
Based Payment”. Use of this method requires that the Company make assumptions regarding stock volatility, dividend yields,
expected term of the awards and risk-free interest rates.
Research
and Development
Research
and development costs are expensed as incurred. Research and development costs were $647,302 for the year ended December 31, 2021, and
are a result of the Company’s activities to commence clinical trials of its drug Technology, as secured by the Company under a
License Agreement executed in the second quarter of 2020. Research and development costs were $362,456 for the year ended December 31,
2020, and are also a result of the License Agreement as well as expenses incurred on the Technology prior to the signing of the License
Agreement (see Note 13 – Commitments and Contingencies).
Fair
Value Measurement
The
Company measures fair value in accordance with a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure
fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities
(Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The Company’s convertible Bridge
Notes are valued by using Monte Carlo Simulation methods and discounted future cash flow models. Where possible, the Company verifies
the values produced by its pricing models to market prices. Valuation models require a variety of inputs, including contractual terms,
market prices, yield curves, credit spreads, measures of volatility and correlations of such inputs. These convertible Bridge Notes do
not trade in liquid markets, and as such, model inputs cannot generally be verified and do involve significant management judgment. Such
instruments are typically classified within Level 3 of the fair value hierarchy.
Equity
Method Investment
Investments
in partnerships, joint ventures and less-than majority-owned subsidiaries in which we have significant influence are accounted for under
the equity method. The Company’s consolidated net income includes the Company’s proportionate share of the net income or
loss of our equity method investee. When we record our proportionate share of net income, it increases income (loss) — net in our
consolidated statements of operations and our carrying value in that investment. Conversely, when we record our proportionate share of
a net loss, it decreases income (loss) — net in our consolidated statements of income and our carrying value in that investment.
The Company’s proportionate share of the net income or loss of our equity method investees includes significant operating and nonoperating
items recorded by our equity method investee. These items can have a significant impact on the amount of income (loss) — net in
our consolidated statements of operations and our carrying value in those investments. The Company divested its investment in its equity
method investee in March 2021.
Discontinued
Operations
In
accordance with ASC 205-20 Presentation of Financial Statements: Discontinued Operations, a disposal of a component of an entity
or a group of components of an entity is required to be reported as discontinued operations if the disposal represents a strategic shift
that has (or will have) a major effect on an entity’s operations and financial results when the components of an entity meets the
criteria in paragraph 205-20-45-10. In the period in which the component meets held-for-sale or discontinued operations criteria the
major current assets, other assets, current liabilities, and noncurrent liabilities shall be reported as components of total assets and
liabilities separate from those balances of the continuing operations. At the same time, the results of all discontinued operations,
less applicable income taxes (benefit), shall be reported as components of net income (loss) separate from the net income (loss) of continuing
operations.
The
Company disposed of a component of its business pursuant to a Separation Agreement in November 2020, which met the definition of a discontinued
operation. Accordingly, the operating results of the business disposed are reported as income (loss) from discontinued operations in
the accompanying consolidated statements of operations for the years ended December 31, 2021 and 2020. For additional information, see
Note 4 – Separation Agreement and Note 9 - Discontinued Operations.
Income
Taxes
Income
taxes are accounted for under the asset and liability method as stipulated by FASB ASC 740, “Income Taxes” (“ASC
740”). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit
carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled. Under ASC 740, the effect on deferred tax assets and liabilities
or a change in tax rate is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced to estimated
amounts to be realized by the use of a valuation allowance. A valuation allowance is applied when in management’s view it is more
likely than not (50%) that such deferred tax will not be utilized.
In
the event that an uncertain tax position exists in which the Company could incur income taxes, the Company would evaluate whether there
is a probability that the uncertain tax position taken would be sustained upon examination by the taxing authorities. Reserves for uncertain
tax positions would be recorded if the Company determined it is probable that a position would not be sustained upon examination or if
payment would have to be made to a taxing authority and the amount is reasonably estimated. As of December 31, 2021, the Company does
not believe it has any uncertain tax positions that would result in the Company having a liability to the taxing authorities; however,
federal returns have not been filed since the Company’s inception in 2014. Such delinquencies are being resolved by management
and a retained tax expert. Interest and penalties related to any unrecognized tax benefits is recognized in the consolidated
financial statements as a component of income taxes. The Company will need to be in compliance with the tax authorities by filing past
federal and state income tax returns.
Basic
and Diluted Loss Per Share
Net
loss per share is computed by dividing the net loss attributable to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted net loss per share is calculated by dividing the net loss attributable to common stockholders
by the weighted average number of common shares outstanding during the period plus any potentially dilutive shares related to the issuance
of stock options, shares from the issuance of stock warrants, shares issued from the conversion of redeemable convertible preferred stock
and shares issued for the conversion of convertible debt.
As
of December 31, 2021, there were the following potentially dilutive securities that were excluded from diluted net loss per share because
their effect would be anti-dilutive:
SCHEDULE OF ANTIDILUTIVE SECURITIES EXCLUDED FROM COMPUTATION OF EARNINGS PER SHARE
Shares from the conversion of Series B Preferred Stock not inclusive of accrued
dividends | |
| 9,430,963 | |
Shares from common stock options | |
| 1,112,619 | |
Shares from common stock warrants | |
| 1,483,333 | |
Shares from conversion of convertible notes not inclusive of accrued interest | |
| 3,025,000 | |
Shares from the conversion of debentures | |
| 218,750 | |
Shares from the conversion of redeemable convertible preferred stock (based upon an assumed conversion price at December 31, 2021 of $0.16 per share; inclusive of cumulative dividends which may be converted to shares of common stock under certain conditions) | |
| 4,329,250 | |
As
of December 31, 2020, there were the following potentially dilutive securities that were excluded from diluted net loss per share because
their effect would be anti-dilutive:
Shares from the conversion of Series B Preferred Stock | |
| 1,756,250 | |
Shares from the conversion of Series E-1 Preferred Stock | |
| 7,650,000 | |
Shares from common stock options | |
| 468,619 | |
Shares from common stock warrants | |
| 46,154 | |
Shares from the conversion of debentures | |
| 625,000 | |
Shares that may be converted from Bridge Notes (based upon an assumed conversion price at December 31, 2020 of $0.22 per share) | |
| 6,578,702 | |
Shares from the conversion of redeemable convertible preferred stock (based upon an assumed conversion price at December 31, 2020 of $0.22 per share; inclusive of cumulative dividends which may be converted to shares of common stock under certain conditions) | |
| 2,727,273 | |
Significant
Estimates
U.S.
Generally Accepted Accounting Principles (“GAAP”) requires the Company to make judgments, estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated
financial statements, the reported amounts of revenues and expenses, cash flows and the related footnote disclosures during the period.
On an on-going basis, the Company reviews and evaluates its estimates and assumptions, including, but not limited to, those that relate
to the fair value of stock-based compensation fair value of convertible bridge notes, and a valuation allowance on deferred tax assets
and contingencies. Actual results could differ from these estimates.
Recent
Accounting Pronouncements
In
August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06,
Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s
Own Equity (Subtopic 815-40) (“ASU 2020-06”) to simplify accounting for certain financial instruments. ASU 2020-06 eliminates
the current models that require separation of beneficial conversion and cash conversion features from convertible instruments and simplifies
the derivative scope exception guidance pertaining to equity classification of contracts in an entity’s own equity. The new standard
also introduces additional disclosures for convertible debt and freestanding instruments that are indexed to and settled in an entity’s
own equity. ASU 2020-06 amends the diluted earnings per share guidance, including the requirement to use the if-converted method for
all convertible instruments. ASU 2020-06 is effective January 1, 2022 and should be applied on a full or modified retrospective basis,
with early adoption permitted beginning on January 1, 2021. The Company adopted ASU 2020-06 effective January 1, 2021 which was applied
to convertible debt notes issued in 2021 (see Note 7). The adoption of ASU 2020-06 did not have an material impact on the
Company’s consolidated financial statements.
Management
does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect
on its consolidated financial statements.
Reclassifications
Certain
reclassifications of prior year amounts including loss on conversion of bridge notes and accrued interest, loss on conversion of
debentures and notes payable with unrelated parties, loss on
conversion of accrued salary and bonus, director fees, and notes payable with related parties, and stock based compensation on the consolidated statements of
operations have been made to conform to the 2021 presentation. These reclassifications had no effect on net loss or loss per
share as previously reported.
Concentration
of Risk
The
Company expects cash to be the asset most likely to subject the Company to concentrations of credit risk. The Company’s bank deposits
may at times exceed federally insured limits. The Company’s policy is to maintain its cash with high credit quality financial institutions
to limit its risk of loss exposure. The Company’s cash balance as of December 31, 2021, is in excess of FDIC limits in the amount
of approximately $1,249,866.
The
Company is subject to a number of risks similar to those of other companies at a clinical-stage for radiopharmaceutical drug candidates,
including dependence on key individuals; the need to develop commercially viable therapeutics; competition from other companies, many
of which are larger and better capitalized; and the need to obtain adequate additional financing to fund the development of its products.
The Company currently depends on third-party, suppliers for key materials and services used in its research and development manufacturing
process, and is subject to certain risks related to the loss of these third-party suppliers or their inability to supply the Company
with adequate materials and services.
The
Company had no revenue from its continuing operations for the year periods ended December 31, 2021 and 2020. Revenue included in discontinued
operations was generated from one related customer in the 2020 period.
Fair
Value of Financial Instruments
In
accordance with Accounting Standards Codification (“ASC”) 825, Financial Instruments, disclosures of fair value information
about financial instruments are required, whether or not recognized in the balance sheet, for which it is practicable to estimate that
value. Cash is carried fair value.
Other
financial instruments, including accounts payable, accrued liabilities and short-term debt, are carried at cost, which approximates fair
value given their short-term nature.
Deferred
Offering Cost
Costs
incurred prior to an equity offering are capitalized until the offering occurs. Upon the equity offering, all accumulated costs are charged
against proceeds. If the Company determines that the equity offering will not occur, the accumulated costs are charged to operations.
Segment
Reporting
Operating
segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation
by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. To date, the Company
views its operations and manages its business as one segment.
NOTE
4 – SEPARATION AGREEMENT
On
November 6, 2020, the Company entered into the Separation Agreement with its unconsolidated investee, EPH. The Company’s board
of directors approved the Separation Agreement in support of the Company’s previously disclosed plan to secure new technologies
and business opportunities in the broader biosciences sector, and to significantly reduce debt and liabilities of the Company and eliminate
under-performing assets and agreements. The Separation Agreement resulted in the discontinuance of the Company’s management of
businesses and assets focused on compost and soil manufacturing to focus solely on the development of its exclusively licensed pharmaceutical
Technology, as well as other drug candidates that it may license or otherwise secure in the future. Pursuant to the Separation Agreement:
|
● |
The
Management Agreement, dated January 18, 2019, as amended, between EPH and the Company was terminated by mutual agreement of the parties.
Fees from this agreement constituted most of the Company’s revenue over the prior two years. |
|
● |
In
lieu of any severance or other termination payments due under the Management Agreement, EPH released the Company from a total of
$993,985 in liabilities, inclusive of advanced management fees and multiple promissory notes, including accrued and unpaid interest.
An additional $114,700 in promissory notes owed to an affiliate of EPH were converted into Company common stock at a price of $0.22
per share. |
|
|
|
|
● |
The
Company agreed to transfer to EPH its license agreement with Agrarian Technologies LLC and Mulch Masters Inc. for the ABS soil enhancement
product and all associated knowhow, trade secrets and trademark/service marks. Accrued license fees in connection with this license
agreement were also assumed by EPH in the amount of $37,500. |
|
|
|
|
● |
The
prior officers and employees of the Company engaged in the Legacy Business were released from any non-competition, non-solicitation
or other restricted covenant pursuant to their respective employment agreements. Effective October 1, 2020, several of these employees
had already separated from the Company. |
Pursuant
to ASC 205-20 Presentation of Financial Statements: Discontinued Operations and amended by ASU No. 2014-08, management has determined
that the Separation Agreement results in the disposal of a component that represents a strategic shift in the Company’s business
operations that will have a major effect on the Company’s operations and financial results. Therefore, the net income (loss) generated
from this disposed component have been presented as discontinued operations for the period ended December 31, 2020 on the statement of
operations, including any gains or losses resulting from the forgiveness of liabilities and conversion liabilities to equity.
NOTE
5 – EQUITY METHOD INVESTMENT
During
November 2018, the Company invested $50,000 for a 19.9% Class B limited liability membership interest in EPH and recorded this transaction
as an equity method investment due to the Company’s ability to exercise significant influence over EPH. The carrying value of the
investment at December 31, 2020 was zero due to continued losses incurred by EPH. In the first quarter of 2021, the Company sold this
equity interest to an unrelated third party for $100,000. There were no distributions received from the equity method investment in 2021
or 2020. See Note 4 for discussion of the Separation Agreement with our equity method investment in November 2020.
Our
prior Chairman and CEO of the Company who resigned in 2020, also serves as President of EPH; and Christopher Nelson, General Counsel
and Director of the Company, also serves as General Counsel and Secretary of EPH. See Note 6 – Related Party Transactions for transactions
with our equity method investment during the years ended December 31, 2021 and 2020.
NOTE
6 – RELATED PARTY TRANSACTIONS
The
Company currently has a License Agreement with IGL Pharma, Inc., an entity in which the Company’s Executive Chairman serves as
President. Effective November 17, 2021, the Company amended the license agreement with IGL Pharma, Inc which adjusted milestone payment
amounts during the course of the agreement term. Additionally, the Company issued 500,000
shares of the Company to
IGL Pharma, Inc (see Note 12). The
associated expense of $140,000 was recorded in Professional Fees.
The
Company currently maintains an executive office in Florida, which is leased by an investment firm in which the Company’s General
Counsel serves as an officer but does not hold any equity or voting rights. The Company has no formal agreement for this space and pays
no rent.
During
the year ended December 31, 2020, the Company received $250,000
from its equity method investee,
EPH, as management fee revenue. The Company did not receive any revenue from EPH for any period in 2021. Due to the Separation Agreement
disclosed in Note 4, management fee revenues received during 2020 have been presented on the statement of operations as discontinued
operations (see Note 9 – Discontinued Operations). Management fee revenues were the Company’s primary source of revenue during
the prior year.
In
2021, the Company paid to EPH $34,136 arising from notes payable and accrued interest which was included in notes payable-related parties
in prior periods in the consolidated balance sheet.
During
the year ended December 31, 2020, the Company received $45,500
of proceeds from short-term notes
payable with officers and directors of the Company bearing interest at 10%.
As of December 31, 2021, $7,500
of principal remains outstanding
on certain of these short-term notes payable. During 2021, $23,000
of these short-term notes payable
were converted into 23
shares of the Company’s Series
B preferred stock at a conversion ratio of $1,000
per share and warrants to purchase
65,714
shares of common stock at an exercise
price of $0.35
per share, which resulted in no
gain or loss on conversion (see Note 9).
During
the year ended December 31, 2021, the Company incurred $77,064
in legal fees with a law firm in
which the Company’s audit committee chair is an employee. During the year ended December 31, 2020, the Company incurred $67,147
of legal services with this related
party. As of December 31, 2021 and 2020, accounts payable and accrued expenses include $195,000
and $32,716
for legal fees due to the law firm
for services, respectively.
NOTE
7 – DEBENTURES, CONVERTIBLE BRIDGE NOTES, AND NOTES PAYABLE
Debentures
The
Company has Original Issue Discount Senior Secured Convertible Debentures (the “Debentures”) in the aggregate amount of
$35,000 and $137,500 outstanding
as of December 31, 2021 and 2020, respectively. All assets of the Company are secured under the Debentures. The Debentures contain
certain anti-dilutive protection provisions in the instance that the Company issues stock at a price below the conversion price of
the Debentures, as adjusted from time to time, as well as other standard protections for the holder. There is no interest on these
notes. On December 28, 2020, $27,500 of
these Debentures was converted into common stock at a price of $0.22 per
share resulting in the issuance of 125,000 shares
of common stock and the recognition of a loss on conversion of $41,250 which
is included in loss on convertible debt and other liabilities converted to common stock on the consolidated statements of
operations. In the first quarter
of 2021, the two institutional holders of the debentures converted an aggregate of $102,500 into 517,086 shares
of common stock, and the Company recognized a loss on the two debenture conversions of $356,454 which
is included in loss on debentures and accrued expenses converted to common stock on the consolidated statements of
operations. As of December 31,
2021, the outstanding amount of $35,000 was
in default. On February 22, 2022, the holder of the debenture converted the full balance of $35,000 into 218,750 shares of common
stock at $0.16 per share, and the balance on the convertible debenture is currently $0 (see Note 14 - Subsequent
Events).
Convertible
Bridge Notes
In
2017, 2018 and 2019, the Company issued a total of $2,801,908
in a convertible promissory note
(the “Bridge Notes”) offering, which included three of the Company’s directors converting $156,368
and one shareholder converting
$11,784
of prior notes and cash advances,
including interest thereon, into the offering. In 2020, $2.9
million of the Bridge Notes, inclusive
of principal and accrued and capitalized interest, was converted into 13,312,175
shares of common stock at $0.22
per share. The Company recorded
a loss on extinguishment of these Bridge Notes of $495,320, which is included in the loss on conversion of bridge notes and accrued interest.
As of March 31, 2021, all remaining Bridge Notes inclusive of principal and accrued and capitalized interest, were settled with the
holders of these notes converting their debt into a total of 6,627,692
shares of common stock of the Company
with a fair value of $4,378,488
based on the stock price of the
Company on the date of conversion. The Company recorded a loss on extinguishment of these Bridge Notes of $744,205
for the year ended December 31,
2021, which is included in loss on conversion of bridge notes and accrued interest, as other income expenses in the statements of operations.
Pursuant
to ASC 825-10-25-1, Fair Value Option, the Company made an irrevocable election at the time of issuance to report the Bridge Notes at
fair value, with changes in fair value recorded through the Company’s condensed consolidated statements of operations as other
income (expense) in each reporting period. The estimated fair value of the remaining outstanding Bridge Notes as of December 31, 2021
and 2020 was $0
and $3,598,000
(see Note 8 – Fair Value
Measurement), respectively. During 2020, the change in fair value resulted in a loss of $3,170,236,
which is presented as change in fair value of convertible bridge notes on the consolidated statements of operations (see Note
8 - Fair Value Measurement).
Convertible
Promissory Notes
In
the fourth quarter of 2021, the Company issued a total of $605,000 in
convertible notes payable. The convertible notes mature on December
31, 2023, and include a 6%
simple interest rate per annum payable upon maturity. The notes are convertible, at the option of the holder, anything prior to
maturity at a conversion price of $.20. Each of the convertible notes have an automatic conversion feature in the event that the
Company completes an equity offering resulting in gross proceeds to the Company of at least $5,000,000
or lists its equity securities on NASDAQ or NYSE. The conversion of notes will be at $0.20
per share and adjusted for stock splits, stock dividends or other recapitalizations. In addition to the notes payable, each holder
received a warrant for the purchase of shares of common stock with a purchase price of $0.60
per share. The exercise period for the warrant holder expires on October 31, 2022. In accordance with accounting standards, the
warrant was valued using a Black Scholes Model and the relative fair value of the warrant was applied against the convertible note
for a debt discount of $72,600
for a net Convertible note liability on the balance sheet of $532,400.
Paycheck
Protection Program
On
April 14, 2020, the Company received $142,942
under the Paycheck Protection Program
(PPP) overseen by the U.S. Small Business Administration. The loan has an annual interest rate of 1%
with loan payments being deferred six months from the date of the loan with a maturity date of April
2022. On July 14, 2021, the Company’s
PPP loan was forgiven, resulting in $142,492
gain on forgiveness of debt which
is included as other income (expense) in the consolidated statements of operations.
NOTE
8 – FAIR VALUE MEASUREMENT
The
Company measures fair value in accordance with a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure
fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities
(Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy
are described below:
|
Level
1 |
Unadjusted
quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; |
|
|
|
|
Level
2 |
Quoted
prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term
of the asset or liability; and |
|
|
|
|
Level
3 |
Prices
or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by
little or no market activity). |
As
disclosed in Note 7, the Bridge Notes are reported at fair value, with changes in fair value recorded through the Company’s consolidated
statements of operations as a component of other income (expense) in each reporting period. All Bridge Notes were converted to shares
of common stock as of December 31, 2021.
The
following tables set forth the Company’s financial assets and liabilities measured at fair value by level within the
fair value hierarchy as of December 31, 2021 and December 31, 2020. Assets and liabilities are classified in their entirety based on
the lowest level of input that is significant to the fair value measurement.
SCHEDULE OF LIABILITIES MEASURED AT FAIR VALUE
| |
Total | | |
Level 1 | | |
Level 2 | | |
Level 3 | |
Convertible Bridge Notes | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
Fair value as of December 31 2021 | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
| |
Total | | |
Level 1 | | |
Level 2 | | |
Level 3 | |
Convertible Bridge Notes | |
$ | 3,598,000 | | |
$ | - | | |
$ | - | | |
$ | 3,598,000 | |
Fair value as of December 31, 2020 | |
$ | 3,598,000 | | |
$ | - | | |
$ | - | | |
$ | 3,598,000 | |
The
following tables present a reconciliation of the beginning and ending balances of items measured at fair value on a recurring basis that
use significant unobservable inputs (Level 3) that has been recorded in the condensed consolidated balance sheets which is as follows:
SCHEDULE OF RECONCILIATION OF LEVEL 3 CONVERSION OPTION LIABILITY
Fair value, December 31, 2020 | |
$ | 3,598,000 | |
Accrued interest | |
| 35,983 | |
Conversion to shares of common stock | |
| (3,633,983 | ) |
Fair value, December 31, 2021 | |
$ | - | |
NOTE
9 – DISCONTINUED OPERATIONS
On
November 6, 2020, the Company executed a Separation Agreement (see Note 4 – Separation Agreement), whereby the Company transferred
its Legacy Business and the related assets and liabilities to EPH, a related party and equity method investee.
ASC
205-20 “Discontinued Operations” establishes that the disposal or abandonment of a component of an entity or a group of components
of an entity should be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major
effect on an entity’s operations and financial results. As a result, the component’s results of operations have
been reclassified as discontinued operations on a retrospective basis for the period ended December 31, 2020. There were no results of
operations from the component in the current period. As of December 31, 2021, there were no assets or liabilities held associated with
this business. The results of operations of this component, for all periods, are separately reported as “discontinued operations”
on the consolidated statements of operations.
As
disclosed in Note 4 – Separation Agreement, the Company sold its equity interest in EPH as of March 31, 2021. There have been no
transactions between the Company and EPH since the Separation Agreement.
A
reconciliation of the major classes of line items constituting the income (loss) from discontinued operations, net of income taxes as
is presented in the consolidated statements of operations for the year ended December 31, 2020, are summarized below:
Reconciliation
of revenue and expense items in discontinued operations in the consolidated statements of operations:
SCHEDULE OF DISCONTINUED OPERATION
| |
Year Ended | |
| |
December 31, | |
| |
2020 | |
| |
| |
REVENUES | |
$ | 541,200 | |
| |
| | |
OPERATING EXPENSES | |
| | |
Payroll and related expenses | |
| 515,741 | |
General and administrative | |
| 53,398 | |
Total operating expenses | |
| 569,139 | |
Financing costs including interest | |
| 46,967 | |
Gain on debt extinguishment | |
| (1,032,160 | ) |
INCOME FROM DISCONTINUED OPERATIONS | |
$ | 957,254 | |
Reconciliation
of cash flows from operating activities and financing activities on the statements of cash flows:
| |
Year Ended | |
| |
December 31, | |
| |
2020 | |
CASH FLOWS FROM OPERATING ACTIVITIES | |
| | |
Net income from discontinued operations | |
$ | 957,254 | |
Adjustments to reconcile net income to net cash provided by discontinued operations: | |
| | |
Gain on forgiveness or assumption of promissory notes and accrued expenses | |
| (1,032,160 | ) |
Changes in operating assets and liabilities | |
| | |
Increase in accounts payable and accrued expenses | |
| 22,500 | |
Increase in accrued interest - related party | |
| 46,967 | |
Net cash provided by operating activities | |
| (5,439 | ) |
| |
| | |
CASH FLOWS FROM FINANCING ACTIVITIES | |
| | |
Proceeds from promissory notes - related parties | |
| 338,373 | |
Repayments on promissory notes – related parties | |
| (1,590 | ) |
Net cash provided by financing activities | |
| 336,783 | |
| |
| | |
Net cash provided by discontinued operations | |
$ | 331,344 | |
NOTE
10 – PREFERRED STOCK, COMMON STOCK, AND WARRANTS
Series
A Redeemable Convertible Preferred Stock (“Series A Stock”)
As
of December 31, 2021 and
2020, the Company has 480
and 600 shares of Series
A Stock issued and outstanding , respectively. During the year ended December 31, 2020, the Company converted 120
shares of Series A Stock
with a stated value of $120,000
into 750,000
shares of common stock with
a fair value of $662,425 at a conversion ratio of $0.16. A deemed dividend was recognized in the amount of $542,500 for the difference
between the value of the common shares using the market price on the date of conversion and the $120,000 stated value of the Series
A Stock upon conversion into common stock, which has been presented as an increase to the net loss available to common stockholders
in the consolidated statement of operations.
The
remaining outstanding shares of Series A Stock are convertible at $0.16
per share of the Company’s
common stock (the “Conversion Price”), which was adjusted to match the conversion price of the Company’s Series B Preferred
Stock. The Series A Stock bears a 6%
dividend per annum, calculable and payable per quarter in cash or additional shares of common stock as determined in the Certificate
of Designation. The Series A Stock has no voting rights until converted to common stock and has a liquidation preference equal
to the aggregate purchase price of $480,000
plus accrued dividends. The Series
A Stock was in default at the end of 2021, and the Company is negotiating a modification with the holders, including the conversion
of these shares into common stock. Each share of Series A Stock received warrants, all of which had expired as of the first quarter
of 2021.
The
Series A Stock has price protection provisions in the case that the Company issues any shares of stock not pursuant to an “Exempt
Issuance” at a price below the Conversion Price. Exempt Issuances include: (i) shares of common stock or common stock equivalents
issued pursuant to the original merger of the company or any funding contemplated by that transaction; (ii) any common stock or convertible
securities outstanding as of the date of closing; (iii) common stock or common stock equivalents issued in connection with strategic
acquisitions; (iv) shares of common stock or equivalents issued to employees, directors or consultants pursuant to a plan, subject to
limitations in amount and price; and (v) other similar transactions. The Certificate of Designation contains restrictive covenants not
to incur certain debt, repurchase shares of common stock, pay dividends or enter into certain transactions with affiliates without consent
of holders of 67%
of the Series A Stock.
Management
has determined that the Series A Stock is more akin to a debt security than equity primarily because it contains a mandatory 2-year
redemption at the option of the holder, which only occurs if the Series A Stock is not converted to common stock. Therefore, management
has presented the Series A Stock outside of permanent equity as mezzanine equity, which does not factor into the totals of either
liabilities or equity.
The
Series A Stock carries a 6%
per annum dividend calculated on the stated value of the stock and is cumulative and payable quarterly beginning July 1, 2016. These
dividends are accrued at each reporting period and are added to the redemption value of the stock; however, since the Company
as an accumulated deficit, the charge has been recognized in additional paid-in capital. The accrued dividends are $213,580
and $184,044 as of December 31, 2021 and 2020, respectively.
Series
B Convertible Preferred Stock (“Series B Stock”)
In
December 2020, the Company filed an amendment to its Articles of Incorporation to authorize the issuance of up to 2,500
shares of Series B Stock, par value
$0.001
per share, pursuant to a Certificate
of Designation. The Series B Stock provides the holders a 10%
annual paid-in-kind dividend, a liquidation preference equal to the purchase price of the shares ($1,000
per share) followed by the right
to participate with the common stockholders in the instance of a liquidation or other exit event, and provide the holders the right to
vote along with the common holders based on the common conversion amount of their holdings. The Series B Stock is convertible
into common stock at a ratio of $0.16
per share, subject to anti-dilution
protections in the case of certain issuances of securities below that conversion price. The Series B Stock is not redeemable.
In
January 2021, the Company closed a private offering of its Series B Stock for $1,000
per share, raising a total of $2,500,000,
inclusive of $156,000
in prior debt conversion and $23,000
of notes payable with directors
converted to shares of Series B Stock and warrants. Between July 27 and August 24, 2021, 15 holders of an aggregate of 991
shares of Series B Stock
converted their preferred shares into 6,525,378
shares of common stock, which included
$53,061
of accrued dividends. As of December
31, 2021, 1,509 shares
of Series B Stock were issued and outstanding. The accrued dividends are $153,757 and $0 as of December 31, 2021 and 2020, respectively.
Series
E-1 Preferred Stock (“Series E-1 Stock”)
On
December 3, 2020, the Company filed an amendment to its Articles of Incorporation to authorize the issuance of up to 8,500 shares of
Series E-1 Stock pursuant to a Certificate of Designation. The shares of Series E-1 Stock
are incentive-based, vesting and forfeitable securities that provide the holders the right in the aggregate to receive an “earnout”
equal to 20% of the total consideration received by the Company in the instance of a sale or sub-license of its core licensed radiopharmaceutical
technology, or sale or merger of the Company, which is paid on a priority, senior basis. In addition, the holders of the Series E-1 Stock
can convert their vested preferred stock at anytime or after an event resulting in an earnout payment, such as an acquisition of the
Company, into an aggregate of 8.5 million common shares. The holders of the Series E-1 Stock have the right to vote along with the common
stockholders based on the common conversion amount of their holdings, and have the right to nominate two members of the Board of Directors.
On
December 30, 2020, 7,650 shares of Series E-1 Stock were issued to five individuals, including the Company’s Executive Chairman,
CEO and General Counsel which vest starting in July 2021 through January 2023 and are forfeitable by the holders prior to vesting. In
February 2021, the remaining 850 shares of Series E-1 Stock were issued to one newly-appointed director, vesting half in February 2022
and the balance in February 2023.
The
Company computed the total grant date fair value of the Series E-1 Stock to be approximately $6,528,000
using an option pricing model and
the following assumptions: (1) with respect to the shares granted in 2020: expected term of four
years, dividend yield of -0-%,
volatility of 96.12%,
and a risk-free rate of .27%;
and (2) with respect to the shares granted in 2021: expected term of four
years, dividend yield of 0%,
volatility of 90.78%,
and a risk-free rate of 0.29%.
On
December 6, 2021, the Company entered into an Exchange Agreement and Plan of Reorganization (the “Exchange Agreement”)
with all E-1 Stockholders pursuant to which all shares of Series E-1 Stock were exchanged into an aggregate of 28,839,428 shares
of common stock of the Company. The fair value of the Series E-1 Stock was determined to be approximately $8.65 million
at the time of exchange, and was based upon a valuation report provided to the Board by an independent third party expert, and
approved for fairness by the independent chairman of the Compensation Committee. The common stock issued in the exchange was based
on a value of $0.30 per
share using a 30-day weighted average closing price calculation, and was issued proportionately to each holder based on their
individual holdings of Series E-1 Stock. All shares of common stock issued to the shareholders are subject to the same
vesting schedules as was originally provided in each shareholder’s Series E-1 Stock issuance agreement, meaning that
such shares of common stock are forfeitable if certain conditions of employment are not met by the holders. As of December 31,
2021, approximately 23 million common shares are fully vested and approximately 6 million common shares are unvested.
During
the year ended December 31, 2021, the Company recognized stock-based compensation to employees and directors totaling $7,751,087
related to the Series E-1 Stock, which is included in compensation and related expenses on the
consolidated statements of operations. As of December 31, 2021, approximately $0.9 million of unrecognized compensation remains
which will be recognized over a twelve-month vesting period and has been presented as deferred compensation on the consolidated
balance sheets.
Common
Stock
In
2020, the Company effected a 25:1 reverse stock split and all share numbers herein have been adjusted for that change.
In
2021 and 2020, the Company issued 44,696,923 and 17,392,343 shares of common stock, respectively, as follows:
SCHEDULE OF
ISSUED SHARES OF COMMON STOCK
| |
| | | |
| | |
| |
For
the Years Ended December 31, | |
| |
2021 | | |
2020 | |
Conversion
of bridge notes and accrued interest to common stock | |
| 6,627,692 | | |
| 13,312,175 | |
Conversion
of debentures and accrued expenses | |
| 632,995 | | |
| 218,686 | |
Conversion
of accrued salary and bonus, directors fees, and promissory notes with related parties | |
| - | | |
| 2,111,482 | |
Conversion
of Series A Stock to common stock | |
| 750,000 | | |
| - | |
Conversion
of Series B Stock to common stock | |
| 6,525,378 | | |
| - | |
Exercise
of Series B Warrants to common stock | |
| 1,871,430 | | |
| - | |
Exchange
of Series E-1 Stock to common stock | |
| 28,839,428 | | |
| - | |
Stock
based compensation for services | |
| 1,450,000 | | |
| 1,750,000 | |
Total
Common Shares issued | |
| 44,696,923 | | |
| 17,392,343 | |
During
the year ended December 31, 2021, the Company issued 6,525,378
shares of common stock in connection with the conversion of Series B Stock with an original investment amount of $911,000
plus $53,061
in accrued dividends at the original stated conversion rate of $0.16.
The Company also issued 1,450,000
shares of common stock to service providers during the period. The fair market value of the common stock was $517,500
which was recorded as stock compensation expense under Professional fees.
As
of December 31, 2021, $125,007
of debentures and accrued expenses plus
bridge notes with principal and accrued interest of $1,447,315
for an aggregate of $1,572,315
of obligations were converted into 7,260,687
shares of common stock at a price of $0.16
per share. Further, $120,000 of Series A Stock was converted into 750,000 shares of common stock at a price of $0.16
per share. Due to the timing of the conversions
and the Company’s stock price at that time of conversion, the Company recorded the following losses from liability conversions
in the twelve months ended December 31, 2021: $744,505
from the conversion of Bridge Notes including
accrued interest, and $390,068
from the conversion of a debenture and
accrued expenses. A deemed dividend was recognized in the amount of $542,500
for the difference between the value of
the common shares using market price on the date of conversion and the $120,000
stated value of the Series A Stock upon
conversion into common stock which has been presented as an increase to the net loss available to common stockholders in the consolidated
statement of operations. Further, on December 6, 2021, the Company entered into an Exchange Agreement and Plan of Reorganization
(the “Exchange Agreement”) with all E-1 Stockholders pursuant to which all shares of Series E-1 Stock were exchanged into
an aggregate of 28,839,428 shares of common stock of the Company. As part of the exchange, the Company recognized stock-based compensation
to employees and directors totaling $7,751,087 related to the Series E-1 Stock, which is included in compensation and related expenses
on the consolidated statements of operations. Further, on October 15, 2021, 1,871,431 of the Series B Warrants were exercised for proceeds
to the Company of $467,858, and the remaining Series B Warrants and the Service Warrants expired.
For
the years ended December 31, 2021 and 2020, the Company recognized $1,070,725 and $406,825 of compensation expense for several service
agreements which is included in professional fees.
For
the year ended December 31, 2020, $3,441,401
of total obligations were converted into
shares of common stock at a price of $0.22
per share. Due to the timing of the conversions and the Company’s
stock price at that time of conversion, the Company recorded the following losses from liability conversions in 2020: $495,320
from the conversion of Bridge Notes including
accrued interest, $68,373
from the conversion of a debenture and
note payable with unrelated parties, and $271,210
from the conversion of accrued salary,
bonus, directors’ fees and notes payable with related parties.
Warrants
During
the year ended December 31, 2021, the Company issued 6,743,575
warrants in connection with its
Series B Stock offering (the “Series B Warrants”), 750,000
warrants to a service provider
(the “Service Warrants”), and 1,008,334
warrants in connection with its
convertible note offering (the “Note Warrants”), see Note 7.
The
terms of the Series B Warrants and Service Warrants were modified twice in 2021 by resolution of the Company’s board of directors,
first to extend the termination date from July 8, 2021 to September 30, 2021 and then to extend the termination date to October 15, 2021.
As part of the second modification, the exercise price of the Series B Warrants was reduced from $0.35
per share to $0.25
per share. As of October 15, 2021,
1,871,431
of the Series B Warrants were exercised
for proceeds to the Company of $467,855,
and the remaining Series B Warrants and the Service Warrants expired.
A
summary of warrant activity and related information during the years ended December 31, 2021 and 2020 is as follows:
SCHEDULE
OF WARRANT ACTIVITY
| |
Warrants | | |
Weighted
Average
Exercise
Price | | |
Aggregate
Intrinsic Value | |
Outstanding as of December 31, 2019 | |
| 126,154 | | |
$ | 0.22 | | |
$ | - | |
Issued | |
| - | | |
| - | | |
| - | |
Exercised | |
| - | | |
| - | | |
| - | |
Expired | |
| 80,000 | | |
| - | | |
| - | |
Outstanding as of December 31, 2020 | |
| 46,154 | | |
$ | 0.22 | | |
$ | - | |
Issued | |
| 8,501,908 | | |
| 0.29 | | |
| - | |
Exercised | |
| 1,871,432 | | |
| 0.25 | | |
| - | |
Expired | |
| 5,193,297 | | |
| 0.25 | | |
| - | |
Outstanding as of December 31, 2021 | |
| 1,483,333 | | |
$ | 0.49 | | |
$ | - | |
The aggregate intrinsic value
of the warrants is the difference between the fair market value of the Company’s closing price of its common stock at each reporting
date, less the exercise price multiplied by the number of warrants outstanding, which was $0 at December 31, 2021.
The
following is a summary of the outstanding common stock warrants as of December 31, 2021:
SCHEDULE OF STOCKHOLDERS' EQUITY NOTE, WARRANTS OR RIGHTS
| |
Number of Warrants | | |
Exercise price per share | | |
Expiration Date |
Warrants issued in connection with issuance of Series B Stock to lead
investor | |
| 475,000 | | |
$ | 0.25 | | |
January 15, 2022 |
Warrants issued in connection with convertible notes | |
| 1,008,333 | | |
$ | 0.60 | | |
October 31, 2022 |
Total Outstanding as of December 31, 2021 | |
| 1,483,333 | | |
| | | |
|
With
respect to the Series B Warrants, the Company recognized the incremental value associated with the two modifications for
term extension and exercise price reduction as a deemed dividend charge of $850,214
within stockholders’ equity and as
a reduction of net loss available to common stockholders on the consolidated statement of operations. The incremental value associated
with these warrant modifications was determined using a Black-Scholes pricing model using the original terms of the warrants and
the modified terms and the following assumptions: expected term of 0.0-
.25
years, dividend yield of 0%,
volatility of 6.5-183.2%,
and a risk-free rate of 0.04%-0.07%.
With
respect to the Service Warrants, the Company computed the total grant date fair value of the warrants to be approximately $405,000
using a Black-Scholes option
pricing model and the following assumptions: expected term of 0.5
years, dividend yield of -0%-,
volatility of 129.81%,
and a risk-free rate of .08%.
The value of these warrants was recognized as stock-based compensation expense on the date of grant and is included in professional fees
on the consolidated statement of operations for year ended December 31, 2021, as the warrants were fully earned upon issuance. On June
17, 2021 and September 22, 2021, the term of these warrants was extended, resulting in incremental compensation expense of $109,208,
has been included in professional
fees on the consolidated statement of operations for the year ended December 31, 2021. The incremental value associated
with these modified warrants was determined using a Black-Scholes pricing model using the original terms of the warrants and the modified
terms and the following assumptions: expected term of 0.00
– 0.04 years,
dividend yield of 0%,
volatility of 106.5%
-183.2%,
and a risk-free rate of 0.05-0.07%.
With
respect to the Note Warrants, the Company computed the total grant dates fair value of the warrants to be $82,522
using a Black-Scholes option pricing
model and the following assumptions: expected term of 0.5
years, dividend yield of 0%,
volatility of 175.7%
to 184.4%
and a risk-free rate of .11%
to .14%.
The value of these warrants was recorded against the convertible notes as a debt discount using the relative fair value method
and included in additional paid- in capital.
NOTE
11 – STOCK OPTIONS AND RESTRICTED STOCK UNITS
To
compensate officers, directors and other key service providers with equity grants, the Board approved the 2016 Omnibus Equity Incentive
Plan (“2016 Plan”) in 2016, which initially allowed for 160,000
shares of common stock, stock options,
stock rights (restricted stock units), or stock appreciation rights to be granted by the Board in its discretion. This authorized amount
was increased to 400,000
shares by Board resolution and
amendment in 2017, and further increased to 1
million shares by Board resolution
in 2021. As of December 31, 2021, there are no shares available under the 2016 Plan for future issuance; however, the Board approved
an increase in the authorized shares available to 8
million by resolution on January
13, 2022, as provided under the 2016 Plan (See Note 14 – Subsequent Events).
The
Company issued 644,000 options
to purchase common stock to officers and directors of the Company during 2021. These options have a 10
year term, a vesting period of 50% six
months after issuance and the balance 12 months after issuance,
and an exercise price of $0.36 per
share.
A
summary of stock option activity and related information during the years ended December 31, 2021 and 2020 is as follows:
SUMMARY OF STOCK OPTION ACTIVITY
| |
Options | | |
Weighted Average Exercise Price | | |
Weighted Average Remaining Contractual Term | | |
Aggregate Intrinsic Value | |
Outstanding as of December 31, 2019 | |
| 340,619 | | |
$ | 3.00 | | |
| 3.9 | | |
$ | - | |
Granted | |
| 128,000 | | |
$ | 0.50 | | |
| 8.9 | | |
$ | - | |
Outstanding as of December 31, 2020 | |
| 468,619 | | |
$ | 1.75 | | |
| 5.6 | | |
$ | - | |
Granted | |
| 644,000 | | |
$ | 0.36 | | |
| 10.0 | | |
$ | - | |
Outstanding as of December 31, 2021 | |
| 1,112,619 | | |
$ | 0.76 | | |
| 7.9 | | |
$ | - | |
Exercisable as of December 31, 2021 | |
| 468,619 | | |
$ | 1.31 | | |
| 5.5 | | |
$ | - | |
The
Company recorded $75,692 and $24,327 of stock-based compensation expense and one-time incremental charge for option repricing
which is included in compensation and related expenses for the years ended December 31, 2021 and 2020, respectively, on the
consolidated statement of operations.
The
aggregate intrinsic value of options is the difference between the fair market value of the Company’s closing price of
its common stock at each reporting date, less the exercise price multiplied by the number of options granted, which was
$0 at December 31, 2021.
As
of December 31, 2021, the unrecognized stock-based compensation of $136,828 is
expected to be expensed through August 2022 based on the option vesting requirements. The weighted average fair value of
options granted was $0.36 per
share for the year ended December 31, 2021.
We
estimate the fair value of stock-based awards on the date of grant using the Black-Scholes option pricing model using the fair market
value of our common stock on the date of grant and a number of other assumptions. These assumptions include estimates regarding the expected
term of the awards, estimates of the stock volatility over a duration that approximates the expected term of the awards, estimates of
the risk-free rate, and estimates of expected dividend rates.
The
assumptions that were used in Black-Scholes option pricing model for the year ended December 31, 2021 were as follows:
SCHEDULE OF FAIR VALUE OF STOCK OPTIONS GRANTED USING THE ASSUMPTIONS
|
|
For the years ended |
|
|
|
2021 | |
|
|
2020 |
|
Expected term (years) |
|
| 5.38 | |
|
|
5.0 |
|
Expected volatility |
|
| 153.9 | % |
|
|
149.67 |
% |
Risk-free interest rate |
|
| 0.94 | % |
|
|
1.610 |
% |
Expected dividend yield |
|
| 0.0 | % |
|
|
0.0 |
% |
Option
Repricing
On
January 6, 2020, the compensation committee of the Company’s Board of Directors, approved a one-time stock option repricing program
(the “Option Repricing”) to permit the Company to reprice certain options to purchase the Company’s Common Stock held
by its current directors, officers and employees (the “Eligible Options”), which actions became effective on January 6, 2020.
Under the Option Repricing, Eligible Options with an exercise price at or above $2.50 per share (representing an aggregate of 252,440
options, or 54% of the total outstanding) were amended to reduce such exercise price to $0.50 per share.
The
impact of the Option Repricing was a one-time incremental non-cash charge of $6,304,
which was recorded as stock option expense for the year ended December 31, 2020 which was included in compensation and related expenses
on the consolidated statements of operations.
NOTE
12 – INCOME TAXES
A
reconciliation of the differences between the effective income tax rates and the statutory federal tax rates for the years ended December
31, 2021 and 2021 (computed by applying the U.S. Federal corporate tax rate of 21 percent to the loss before taxes) is as follows:
SCHEDULE
OF EFFECTIVE INCOME TAX RATES RECONCILIATION
| |
2021 | | |
2020 | |
Tax benefit at U.S. statutory rate | |
$ | (2,515,184 | ) | |
$ | (1,021,163 | ) |
State taxes, net of federal benefit | |
| (89,264 | ) | |
| (260,154 | ) |
Stock based compensation | |
| 1,875,514 | | |
| | |
Change in fair value of convertible bridge notes and derivatives | |
| - | | |
| 792,877 | |
PPP loan forgiveness | |
| (30,018 | ) | |
| - | |
Gain on extinguishment of liabilities | |
| 238,260 | | |
| - | |
Other permanent differences | |
| - | | |
| 60,941 | |
Change in valuation allowance | |
| 520,692 | | |
| 427,499 | |
Total
income tax expenses | |
$ | - | | |
$ | - | |
The
tax effect of temporary differences that give rise to significant portions of the deferred tax assets and liabilities for the years ended
December 31, 2021 and 2020 consisted of the following:
SCHEDULE
OF DEFERRED TAX ASSETS AND LIABILITIES
| |
2021 | | |
2020 | |
Net operating loss carry-forward | |
$ | 3,073,065 | | |
$ | 2,657,931 | |
Accrued expenses | |
| 166,783 | | |
| 80,676 | |
Stock based compensation | |
| 70,128 | | |
| 50,944 | |
Charitable contribution | |
| 267 | | |
| - | |
Net deferred tax assets | |
| 3,310,243 | | |
| 2,789,552 | |
Valuation allowance | |
| (3,310,243 | ) | |
| (2,789,552 | ) |
Total net deferred tax asset | |
$ | — | | |
$ | — | |
At
December 31, 2021 and 2020, the Company had net deferred tax assets of $3,310,243
and $2,789,552
principally arising from net operating
loss carry-forwards for income tax purposes (“NOLs”). As management of the Company cannot determine that it is more likely
than not that the Company will realize the benefit of the net deferred tax asset, a valuation allowance equal to the net deferred tax
asset has been established at December 31, 2021 and 2020. At December 31, 2021, the Company has net operating loss carry forwards
totaling approximately $12,125,000.
The potential tax benefit arising from NOLs generated of approximately $5,474,000
prior to 2018 effective date will
begin to expire in 2034. The potential tax benefit arising from the net operating loss carryforwards of approximately $6,651,000
generated after 2018 can be
carried forward indefinitely within the annual usage limitations. The Company is delinquent in filing its federal tax returns for several
of the previous year periods since inception. Therefore, all tax years since the Company’s inception remain open for examination.
Management expects to retain a tax professional to assist in bringing these filings current.
The
Company’s NOL and tax credit carryovers may be significantly limited under the Internal Revenue Code (“IRC”). NOL and
tax credit carryovers are limited under Section 382 when there is a significant “ownership change” as defined in the IRC.
During the year ended December 31, 2021 and in prior years, the Company may have experienced such ownership changes, which could impose
such limitations.
The
limitations imposed by the IRC would place an annual limitation on the amount of NOL and tax credit carryovers that can be utilized.
When the Company completes the necessary studies, the amount of NOL carryovers available may be reduced significantly. However, since
the valuation allowance fully reserves for all available carryovers, the effect of the reduction would be offset by a reduction in the
valuation allowance.
NOTE
13 – COMMITMENTS AND CONTINGENCIES
Employment Agreements
The
employment agreements as amended for the Company’s Executive Chairman and CEO each contain termination provisions
whereby if they are terminated without cause or following a material change, as defined therein, they will receive salary through
the date of termination plus an additional 24 months, bonus that would be earned during the full year when the termination
became effective (or a lump sum of 50% of the full target bonus), all stock options shall vest and healthcare benefits will continue
for 24 months. The Company’s General Counsel’s employment agreement, as amended, contains an
18-month severance payment in the instance of a termination without cause or following a material change, as defined
therein. Additionally, the management team are currently taking partial salary of their approved salary per their employment
agreements and the difference is being accrued starting as of December 1, 2021. As of December 31, 2021, the accrued salary for the management team was
$83,731.
The
employment agreements, as amended, for the Company’s Executive Chairman and CEO each contain a transaction bonus in the instance any of the
Company’s assets are sold or sublicensed or if the Company or its subsidiary is acquired, equal to 1.75% of the consideration received
by the Company. The employment agreement, as amended, for the Company’s General Counsel contains a similar transaction bonus equal to 0.5% of
consideration received by the Company.
License Agreement
The
Company’s License Agreement for the Technology, as amended, with IGL is for 20 years or until the expiration of the
multiple patents covered under the license and requires multiple milestone-based payments including: up to $410,000
as CycloSam®
advances through Phase 3 of clinical trials, and $2
million upon commercialization.
IGL has also received 500,000 shares of the Company as additional compensation. Upon commercialization, IGL will
receive an on-going royalty equal to 4.5%
of Net Sales, as defined in the License Agreement, and 5% of any consideration we receive pursuant to a sublicense, sale of the asset,
or sale of QSAM Therapeutics. QSAM will also pay for ongoing patent filing and maintenance fees, and has certain requirements to
defend the patents against infringement claims.
In
connection with the License Agreement, QSAM signed a two-year Consulting and Confidentiality Agreement (the “Consulting
Agreement”) with IGL, which provides IGL with payments of $8,500 per
month starting 60 days after signing through April 2022. The Consulting Agreement is to provide QSAM with additional
consulting and advisory services from the technology’s founders to assist in the clinical development of CycloSam. As of
December 31, 2021, the Company has paid $15,101 in expense reimbursements required under the agreement. As of December
31, 2020, the Company paid $60,000 under
the License Agreement representing the full upfront license fee, as well $97,999 in
expense reimbursements required under that agreement. The drug development costs to service providers including the fixed
$8,500 monthly
consulting fee, which has been reflected as research and development expense on the consolidated statement of operations was
$647,302 and $362,456 for the years ended December 31, 2021 and 2020, respectively.
NOTE
14 – SUBSEQUENT EVENTS
On
January 13, 2022, by resolution of the Board of Directors, the Company increased the authorized shares issuable under its 2016 Omnibus
Equity Incentive Plan, as amended, from 1
million to 8
million shares.
On
January 15, 2022, the Company modified the terms of the warrant issued to Checkmate Capital Group LLC under a modification agreement,
to extend the term of such warrant until January 15, 2023, in return for an agreement for the holder to sign a six-month lock-up
agreement in the instance that the Company completes an upcoming underwritten equity offering and lists its shares on NASDAQ.
On
January 15, 2022, the Company issued one of its Directors 400,000 shares of common stock for services previously rendered to the Company.
On
January 24, 2022, the Board approved a plan of compensation for independent directors, which provides: an annual retainer of $30,000;
additional annual fees of $20,000, $15,000 and $10,000 for serving as Chair of the Audit Committee, Compensation Committee and Nominating
& Governance Committee, respectively; and annual fees of $7,500, $5,000 and $3,500 for serving as members of the Audit Committee,
Compensation Committee and Nominating & Governance Committee, respectively. Upon appointment to our Board, non-employee directors
receive 250,000 stock options, exercisable for 10 years at a price equal to the closing price of our common stock on the date of appointment,
and vesting 50% in 12 months and the balance in 24 months.
On January 25, 2022, the
Company appointed Adriann Sax to the Board of Directors and issued her 250,000
stock options, exercisable at a price of $0.20,
and vesting half on January 25, 2023, and the balance on January 25, 2024. The options are exercisable for ten
years from issuance. Ms. Sax was appointed to the Audit Committee and Chair of the Nominating & Governance Committee.
On
February 21, 2022, one of the Company’s independent directors was granted 1,000,000
stock options, exercisable at a price of $0.20, and vesting on December 31, 2022. The options
are exercisable for ten years from issuance.
On
February 22, 2022, the holder of the Company’s convertible debenture converted the $35,000
principal balance of that debt
security into 218,750 shares of common stock at $0.16 per share. No convertible debentures remain outstanding.
On
February 22, 2022, one of the Company’s key employees was granted 1,000,000 stock options, exercisable at a price
of $0.20, and vesting in one-third increments over the following three years from grant. All options are exercisable for ten years from issuance.