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United States

Securities and Exchange Commission

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: June 30, 2021

 

Or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period ended:

 

QSAM Biosciences, Inc.

(Exact name of Registrant as specified in its Charter)

 

Delaware   000-55148   20-1602779

(State or Other Jurisdiction

of Incorporation)

 

(Commission

File Number)

 

(I.R.S. Employer

Identification No.)

 

9442 Capital of Texas Hwy N, Plaza 1, Suite 500

Austin, TX 78759

(Address of Principal Executive Offices)

 

(512) 343-4558

(Registrant’s Telephone Number, including area code)

 

 

(Former name or former address, if changed since last report.)

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.0001

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No

 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ☐ No ☒

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

(1) Yes ☒ No ☐; (2) Yes ☒ No ☐

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company:

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
Emerging growth company    

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:

 

August 13, 2021: Common – 33,926,885

 

Documents incorporated by reference: None.

 

 

 

 
 

 

QSAM BIOSCIENCES, INC.

 

FORM 10-Q

TABLE OF CONTENTS

 

    Page
JUMPSTART OUR BUSINESS STARTUPS ACT DISCLOSURE   3
     
PART I – FINANCIAL STATEMENTS   4
     
ITEM 1. FINANCIAL STATEMENTS   4
     
Condensed Consolidated Balance Sheets at June 30, 2021 and December 31, 2020 (unaudited)   4
     
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2021 and 2020 (unaudited)   5
     
Condensed Consolidated Statements of Stockholders’ Deficit for the three and six months ended June 30, 2021 and 2020 (unaudited)   6
     
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2021 and 2020 (unaudited)   7
     
Notes to Condensed Consolidated Financial Statements (unaudited)   8
     
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF OPERATIONS   21
     
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   26
     
ITEM 4. CONTROLS AND PROCEDURES   27
     
PART II – OTHER INFORMATION   28
     
ITEM 1. LEGAL PROCEEDINGS   28
     
ITEM 1A. RISK FACTORS   28
     
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS   28
     
ITEM 3. DEFAULTS UPON SENIOR SECURITIES   28
     
ITEM 4. MINE SAFETY DISCLOSURES   28
     
ITEM 5. OTHER INFORMATION   28
     
ITEM 6. EXHIBITS   28
     
SIGNATURES   29

 

2
 

 

JUMPSTART OUR BUSINESS STARTUPS ACT DISCLOSURE

 

We qualify as an “emerging growth company,” as defined in Section 2(a)(19) of the Securities Act by the Jumpstart Our Business Startups Act (the “JOBS Act”). An issuer qualifies as an “emerging growth company” if it has total annual gross revenues of less than $1.0 billion during its most recently completed fiscal year, and will continue to be deemed an emerging growth company until the earliest of:

 

  the last day of the fiscal year of the issuer during which it had total annual gross revenues of $1.0 billion or more;
     
  the last day of the fiscal year of the issuer following the fifth anniversary of the date of the first sale of common equity securities of the issuer pursuant to an effective registration statement;
     
  the date on which the issuer has, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or
     
  the date on which the issuer is deemed to be a “large accelerated filer,” as defined in Section 240.12b-2 of the Exchange Act.

 

As an emerging growth company, we are exempt from various reporting requirements. Specifically, we are exempt from the following provisions:

 

  Section 404(b) of the Sarbanes-Oxley Act of 2002, which requires evaluations and reporting related to an issuer’s internal controls;
     
  Section 14A(a) of the Exchange Act, which requires an issuer to seek shareholder approval of the compensation of its executives not less frequently than once every three years; and
     
  Section 14A(b) of the Exchange Act, which requires an issuer to seek shareholder approval of its so-called “golden parachute” compensation, or compensation upon termination of an employee’s employment.

 

Under the JOBS Act, emerging growth companies may delay adopting new or revised accounting standards that have different effective dates for public and private companies until such time as those standards apply to private companies.

 

Smaller Reporting Company

 

We are subject to the reporting requirements of Section 13 of the Exchange Act, and subject to the disclosure requirements of Regulation S-K of the SEC, as a “smaller reporting company.” That designation will relieve us of some of the informational requirements of Regulation S-K.

 

Sarbanes/Oxley Act

 

Except for the limitations excluded by the JOBS Act discussed under the preceding heading “Emerging Growth Company,” we are also subject to the Sarbanes-Oxley Act of 2002. The Sarbanes/Oxley Act created a strong and independent accounting oversight board to oversee the conduct of auditors of public companies and strengthens auditor independence. It also requires steps to enhance the direct responsibility of senior members of management for financial reporting and for the quality of financial disclosures made by public companies; establishes clear statutory rules to limit, and to expose to public view, possible conflicts of interest affecting securities analysts; creates guidelines for audit committee members’ appointment, compensation and oversight of the work of public companies’ auditors; management assessment of our internal controls; prohibits certain insider trading during pension fund blackout periods; requires companies and auditors to evaluate internal controls and procedures; and establishes a federal crime of securities fraud, among other provisions. Compliance with the requirements of the Sarbanes/Oxley Act will substantially increase our legal and accounting costs.

 

Exchange Act Reporting Requirements

 

Section 14(a) of the Exchange Act requires all companies with securities registered pursuant to Section 12(g) of the Exchange Act like we are to comply with the rules and regulations of the SEC regarding proxy solicitations, as outlined in Regulation 14A. Matters submitted to shareholders at a special or annual meeting thereof or pursuant to a written consent will require us to provide our shareholders with the information outlined in Schedules 14A (where proxies are solicited) or 14C (where consents in writing to the action have already been received or anticipated to be received) of Regulation 14, as applicable; and preliminary copies of this information must be submitted to the SEC at least 10 days prior to the date that definitive copies of this information are forwarded to our shareholders. We are also required to file annual reports on Form 10-K and quarterly reports on Form 10-Q with the SEC on a regular basis, and will be required to timely disclose certain material events (e.g., changes in corporate control; acquisitions or dispositions of a significant amount of assets other than in the ordinary course of business; and bankruptcy) in a Current Report on Form 8-K.

 

Reports to Security Holders

 

You may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may also find all of the reports that we have filed electronically with the SEC at their Internet site www.sec.gov.

 

3
 

 

PART I – FINANCIAL INFORMATION

 

Item 1: Financial StatementS

 

QSAM BIOSCIENCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

   June 30,   December 31, 
   2021   2020 
         
ASSETS          
           
CURRENT ASSETS          
Cash  $1,493,157   $8,304 
Prepaid expenses and other assets   25,517    12,896 
TOTAL CURRENT ASSETS   1,518,674    21,200 
           
TOTAL ASSETS  $1,518,674   $21,200 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)          
           
CURRENT LIABILITIES          
Accounts payable and accrued expenses  $215,002   $308,157 
Accrued payroll and related expenses   48,006    48,006 
Accrued interest - related parties   1,290    - 
Notes payable - related parties   7,500    63,992 
Paycheck Protection Program Loan - current portion   142,942    34,163 
Debentures   35,000    137,500 
Convertible bridge notes, at fair value   -    3,598,000 
TOTAL CURRENT LIABILITIES   449,740    4,189,818 
           
Paycheck Protection Program Loan - net of current portion   -    108,779 
           
TOTAL LIABILITIES   449,740    4,298,597 
           
Redeemable convertible preferred stock - Series A; $0.0001 par value, 1,500 designated Series A, 480 and 600 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively (liquidation preference of $679,121)   679,121    784,044 
           
STOCKHOLDERS’ EQUITY (DEFICIT)          
Preferred stock, Series B, $0.001 par value; 250,000 shares authorized, 2,500 and 281 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively   2    - 
Preferred stock, Series E-1, $0.0001 par value; 8,500 shares authorized, 8,500 and 0 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively   1    - 
Common stock, $0.0001 par value, 300,000,000 shares authorized, 27,732,928 and 19,472,241 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively   2,773    1,947 
Unearned deferred compensation   (1,702,528)   (148,333)
Subscription receivable   -    (25,000)
Additional paid-in capital   26,009,859    11,021,840 
Accumulated deficit   (23,920,294)   (15,911,895)
TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)   389,813    (5,061,441)
           
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)  $1,518,674   $21,200 

 

See notes to the condensed consolidated financial statements.

 

4
 

 

QSAM BIOSCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

                     
   For the three months ended   For the six months ended 
   June 30,   June 30, 
   2021   2020   2021   2020 
                 
REVENUES  $-   $-   $-   $- 
                     
OPERATING EXPENSES FROM CONTINUED OPERATIONS                    
Payroll and related expenses   112,950    214,839    189,548    415,117 
Professional fees   151,858    79,459    954,686    154,682 
General and administrative   2,491,043    44,428    4,871,520    104,808 
Research and development expenses   147,453    87,000    221,407    110,000 
Total Operating Expenses   2,903,304    425,726    6,237,161    784,607 
                     
LOSS FROM CONTINUING OPERATIONS   (2,903,304)   (425,726)   (6,237,161)   (784,607)
                     
OTHER INCOME (EXPENSE) FROM CONTINUING OPERATIONS                    
Financing costs including interest   (899)   (145,804)   (38,528)   (278,162)
Change in fair value of convertible bridge notes   -    (354,542)   -    (323,185)
Other miscellaneous income   -    5,000    -    5,000 
Gain on sale of equity method investment   -    -    100,000    - 
Loss on debentures and accrued expenses converted to common stock   -    -    (390,068)   - 
Loss on conversion of bridge notes and accrued interest   -    -    (744,505)   - 
Total Other Expense, net   (899)   (495,346)   (1,073,101)   (596,347)
                     
Loss from continuing operations before income taxes   (2,904,203)   (921,072)   (7,310,262)   (1,380,954)
                     
INCOME TAXES   -    -    -    - 
Loss from continuing operations   (2,904,203)   (921,072)   (7,310,262)   (1,380,954)
                     
DISCONTINUED OPERATIONS:                    
Income from discontinued operations before income taxes   -    48,427    -    70,908 
                     
INCOME TAXES   -    -    -    - 
                     
Income from discontinued operations   -    48,427    -    70,908 
                     
NET LOSS   (2,904,203)   (872,645)   (7,310,262)   (1,310,046)
                     
PREFERRED STOCK                    
Series A preferred contractual dividends and deemed dividends   (162,819)   (8,975)   (713,217)   (17,292)
                     
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS  $(3,067,022)  $(881,620)  $(8,023,479)  $(1,327,338)
                     
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS: BASIC AND DILUTED:                    
CONTINUING OPERATIONS  $(0.12)  $(0.41)  $(.32)  $(0.61)
DISCONTINUED OPERATIONS   -    0.02    -    0.03 
Earnings Per Share, Basic and Diluted  $(0.12)  $(0.39)  $(.32)  $(0.58)
                     
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: BASIC AND DILUTED   27,732,928    2,279,898    25,225,814    2,262,219 

 

See notes to the condensed consolidated financial statements.

 

5
 

 

QSAM BIOSCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2020 AND 2021

(UNAUDITED)

 

   Shares   Value   Shares   Value   Shares   Value   Compensation   Receivable   Capital   Deficit   Deficit 
   Series B Preferred Stock   Series E-1 Preferred Stock   Common Stock   Deferred Stock-based   Subscription   Additional Paid In   Accumulated   Total Stockholders’
Equity
 
   Shares   Value   Shares   Value   Shares   Value   Compensation   Receivable   Capital   Deficit   (Deficit) 
                                             
Balance, December 31, 2019   -    -    -    -    2,079,898   $5,199   $-   $-   $6,470,676   $(11,049,210)  $(4,573,335)
                                                        
Stock-based compensation for services   -    -    -    -    200,000    500    (29,167)   -    49,500    -    20,833 
                                                        
Stock-based compensation expense and stock option modification   -    -    -    -    -    -    -    -    24,327    -    24,327 
Series A, preferred stock contractual dividends   -    -    -    -    -    -    -    -    (8,317)   -    (8,317)
                                                        
Net loss period ended March 31, 2020   -    -    -    -    -    -    -    -    -    (437,402)   (437,402)
                                                        
Balance, March 31, 2020   -   -    -   -    2,279,898   5,699   (29,167)  -   6,536,186   (11,486,612)  (4,973,893)
                                                        
Stock-based compensation for services   -    -    -    -    -    -    25,000    -    -    -    25,000 
                                                        
Series A, preferred stock contractual dividends   -    -    -    -    -    -    -    -    (8,975)   -    (8,975)
                                                        
Net loss period ended June 30, 2020   -    -    -    -    -    -    -    -    -    (872,645)   (872,645)
                                                        
Balance, June 30, 2020   -   $-    -   $-    2,279,898   $5,699   $(4,167)  $-   $6,527,211   $(12,359,257)  $(5,830,513)
                                                        
Balance, December 31, 2020  281   $-   -   $-   19,472,241   $1,947   $(148,333)  $(25,000)  $11,021,840   $(15,911,895)  $(5,061,441)
                                                        
Stock-based compensation for services   -    -    -    -    250,000    25    115,000    -    537,367    -    652,392 
                                                        
Conversion of debentures and accrued expenses   -    -    -    -    632,995    64    -    -    515,004    -    515,068 
                                                        
Conversion of bridge notes and accrued interest to common stock   -    -    -    -    6,627,692    663    -    -    4,377,825    -    4,378,488 
                                                        
Conversion of Series A preferred stock to common stock   -    -    -    -    750,000    75    -    -    662,425    (542,500)   120,000 
                                                        
Series A, preferred stock contractual dividends   -    -    -    -    -    -    -    -    (7,899)   -    (7,899)
                                                        
Issuance of Series B, preferred stock for cash   2,196    2    -    -    -    -    -    25,000    2,195,998    -    2,221,000 
                                                        
Issuance of Series B, conversion of notes payable to preferred stock   23    -    -    -    -    -    -    -    23,000    -    23,000 
                                                        
Stock-based compensation to employees and directors   -    -    8,500    1    -    -    (4,141,777)   -    6,527,999    -    2,386,223 
                                                        
Net loss period ended March 31, 2021   -    -    -    -    -    -    -    -    -    (4,406,059)   (4,406,059)
                                                        
Balance, March 31, 2021   2,453   2    8,500   1    27,732,928   2,774   (4,175,110)   -   25,853,559   (20,860,452)  820,774 
                                                        
Stock-based compensation for services and warrant modification   -    -    -    -    -    -    33,333    -    7,841    -    41,174 
                                                        
Deemed dividend from warrant modification   -    -    -    -    -    -    -    -    155,639    (155,639)   - 
                                                        
Series A, preferred stock contractual dividends   -    -    -    -    -    -    -    -    (7,180)   -    (7,180)
                                                        
Stock-based compensation to employees and directors    -    -    -    -    -    -    2,439,249    -    -    -    2,439,249 
                                                        
Net loss period ended June 30, 2021   -    -    -    -    -    -    -    -    -    (2,904,203)   (2,904,203)
                                                        
Balance, June 30, 2021   2,453   $2    8,500   $1    27,732,928   $2,773   $(1,702,528)  $-   $26,009,859   $(23,920,294)  $389,813 

 

See notes to the condensed consolidated financial statements.

 

6
 

 

QSAM BIOSCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

 

           
   For the six months ended 
   June 30, 
   2021   2020 
         
CASH FLOWS FROM OPERATING ACTIVITIES          
Net Loss  $(7,310,262)  $(1,310,046)
Adjustments to reconcile net loss to net cash used in operating activities:          
Stock-based compensation for services   693,566    45,833 
Stock-based compensation to employees and directors   4,825,472    24,327 
Loss on conversion of bridge notes and accrued interest   744,505    - 
Loss on conversion of debentures and accrued expenses to common stock   390,068    - 
Change in fair value of convertible bridge notes   -    323,185 
Amortization of debt issuance costs   -    1,250 
Paid-in-kind interest - convertible bridge notes   35,983    276,565 
Accrued interest - related party   -    27,470 
Changes in operating assets and liabilities          
Decrease (increase) in prepaid expenses and other current assets   (12,621)   7,665 
(Decrease) increase in accounts payable and accrued expenses   (70,656)   97,005 
Increase accrued payroll and related expenses   -    160,254 
Increase in accrued interest   1,290    - 
Net cash used in operating activities   (702,655)   (346,492)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Proceeds from promissory notes - related parties   -    162,673 
Repayments on promissory notes - related parties   (33,492)   - 
Proceeds from convertible notes payable   -    60,000 
Proceeds from issuance of preferred stock - Series B   2,221,000    - 
Proceeds from Paycheck Protection Program   -    142,942 
Net cash provided by financing activities   2,187,508    365,615 
           
NET INCREASE IN CASH   1,484,853    19,123 
           
CASH - Beginning of period   8,304    478 
           
CASH - End of period  $1,493,157   $19,601 
           
SUPPLEMENTAL CASH FLOW DISCLOSURES:          
           
NON-CASH INVESTING AND FINANCING ACTIVITIES:          
Accrual of contractual and deemed dividends on Series A convertible preferred stock  $557,577   $17,292 
Conversion of convertible bridge notes and accrued interest to 6,627,692 shares of common stock  $3,633,983   $- 
Conversion of debentures and accrued expenses to common stock  $125,000   $- 
Conversion of Series A preferred stock to common stock  $120,000   $- 
Conversion of notes payable with related parties to Series B preferred stock and warrants  $23,000   $- 

 

See notes to the condensed consolidated financial statements.

 

7
 

 

QSAM BIOSCIENCES INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS

 

QSAM Biosciences Inc. (hereinafter the “Company”, “we”, “our”, “us”), incorporated in Delaware on August 26, 2004, is currently engaged in the business of developing a novel radiopharmaceutical drug candidate for the treatment of bone cancer. This business line commenced in earnest in the fourth fiscal quarter of 2020 as a result of the separation and transfer pursuant to an Omnibus Separation Agreement dated November 6, 2020 (the “Separation Agreement”) of the Company’s prior business of managing compost and soil manufacturing facilities (the “Legacy Business”) through an unconsolidated investee entity called Earth Property Holdings LLC, a Delaware limited liability company (“EPH”). Pursuant to the Separation Agreement, the Company transferred to EPH all assets and related liabilities in connection with the Legacy Business in return for a forgiveness of debt. The financial statements presented herein have been adjusted to account for the Legacy Business as discontinued operations (see Note 4 – Separation Agreement and Note 9 – Discontinued Operations). The Company sold its entire equity interest in EPH to a third party in the first quarter of 2021 for $100,000, and currently holds no ownership in EPH.

 

In April 2020, the Company established QSAM Therapeutics Inc. (“QSAM”) as a wholly-owned subsidiary incorporated in the state of Texas, and through QSAM, executed a Patent and Technology License Agreement and Trademark Assignment (the “License Agreement”) with IGL Pharma, Inc. (“IGL”). The License Agreement provides QSAM with exclusive, worldwide and sub-licensable rights to all of IGL’s patents, product data and knowhow with respect to Samaium-153 DOTMP aka CycloSam® (the “Technology”), a clinical stage novel radiopharmaceutical meant to treat different types of bone cancer and related diseases. The establishment of QSAM and execution of the License Agreement and the Separation Agreement are part of the Company’s strategic plan to transition its business into the broader biosciences sector which currently is the Company’s primary focus.

 

In connection with the transition to the biosciences sector, the Company changed its name to QSAM Biosciences Inc. on September 4, 2020, and subsequently changed its stock symbol to QSAM, to better reflect its business moving forward.

 

On September 4, 2020, the Company completed a 25:1 reverse stock split of its common shares. All shares and share prices set forth in this report have been adjusted to account for this reverse stock split as if it had occurred on the date presented.

 

Prior to 2017, the Company owned and licensed technology that converts waste fuels and heat to power, which it sold to a licensee in August of that year. Much of these operations were conducted through a wholly-owned subsidiary of the Company called Q2Power Corp. (“Q2P”), which still exists but has no current operations. Q2P and QSAM are sometimes referred to herein as the “Subsidiaries”. Formerly, the Company’s name was Q2Power Technologies, Inc., and before that, Anpath Group, Inc.

 

The recent outbreak of the novel coronavirus (COVID-19) is impacting worldwide economic activity. COVID-19 poses the risk that we or our employees and other partners may be prevented from conducting business activities for an indefinite period of time, including due to the spread of the disease or shutdowns that may be requested or mandated by governmental authorities. While it is not possible at this time to estimate the full impact that COVID-19 could have on our business, the continued spread of COVID-19 could disrupt our research and development of CycloSam and other related activities, which could have a material adverse effect on our business, financial condition and results of operations. In addition, a severe or prolonged economic downturn could result in a variety of risks to the business. While we have not yet experienced any material disruptions in our business or other negative consequences relating to COVID-19, the extent to which the COVID-19 pandemic impacts our results will depend on future developments that are highly uncertain and cannot be predicted.

 

8
 

 

NOTE 2 – BASIS OF PRESENTATION AND GOING CONCERN

 

The accompanying unaudited condensed financial statements are prepared in accordance with Rule 8-01 of Regulation S-X of the Securities Exchange Commission (“SEC”). Accordingly, certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”) have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures included in these unaudited condensed financial statements are adequate to make the information presented not misleading. The unaudited condensed financial statements included in this document have been prepared on the same basis as the annual financial statements, and in our opinion reflect all adjustments, which include normal recurring adjustments necessary for a fair presentation in accordance with US GAAP and SEC regulations for interim financial statements. The results for the three and six months ended June 30, 2021 are not necessarily indicative of the results that the Company will have for any subsequent period or for the calendar year ended December 31, 2021. These unaudited condensed financial statements should be read in conjunction with the audited financial statements and the notes to those statements for the year ended December 31, 2020 which was filed with the SEC on April 15, 2021.

 

For the six months ended June 30, 2021, the Company used net cash in operating activities for its continuing operations of $702,655 and incurred a loss from its continuing operations of $7,310,262. The accumulated deficit since inception is $23,920,294, which was comprised of operating losses and other expenses for both the continuing and discontinued operations.

 

The Company raised a total of $2,851,908 in convertible bridge notes (the “Bridge Notes”) starting in March 2017 and ending in 2019. In 2020, $2,928,679 of the Bridge Notes inclusive of principal and accrued and capitalized interest were converted by the holders into 13,312,175 shares of common stock. As of March 31, 2021, all remaining Bridge Notes totaling $1,447,315 inclusive of principal and accrued and capitalized interest were converted into 6,578,701 shares of common stock. There are no Bridge Notes currently outstanding.

 

The Company’s convertible debentures totaling $35,000 and $480,000 of redeemable convertible preferred stock were in default as of June 30, 2021. Management is in discussions with the holders of these debt and equity securities to reach an agreement to convert the outstanding balances into common stock or otherwise amend the respective maturity and redemption dates.

 

As of June 30, 2021, the Company had a working capital surplus of $1,068,934.

 

These conditions raise substantial doubt about the Company’s ability to continue as a going concern. There is no guarantee whether the Company will be able to generate revenue and/or raise capital sufficient to support its continuing operations. The ability of the Company to continue as a going concern is dependent on management’s plans which include implementation of its business model to develop and commercialize its drug candidate, seek strategic partnerships to advance clinical trials and other research endeavors which could provide additional capital to the Company, and continue to raise funds for the Company through equity or debt offerings. The unaudited condensed financial statements do not include any adjustments that might result from the outcome of these uncertainties.

 

Our net loss from continuing operations in the periods ended June 30, 2021 and 2020 resulted largely from activities related to the public company and in the 2021 period also from certain license and research expenses in connection with the continuing operations of the Company’s drug development business. All income and losses related to expenses from the Legacy Business are included in discontinued operations (see Note 9 - Discontinued Operations).

 

In January 2021, the Company closed a $2.5 million Series B Preferred Stock private placement to advance its new business model, which is expected to support continuing operations through the end of 2021. In 2020 and the first quarter of 2021, management also was able to reduce debt significantly, in part from the forgiveness of notes payable owed to EPH (see Note 4 – Separation Agreement) and also by converting a significant portion of additional liabilities into common stock (see Note 7 – Debentures, Convertible Bridge Notes and Notes Payable).

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The unaudited condensed financial statements include the accounts of the Company and its Subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation. References herein to the Company include the Company and its Subsidiaries unless the context otherwise requires.

 

9
 

 

Cash

 

The Company considers cash, short-term deposits, and other investments with original maturities of no more than ninety days when acquired to be cash and cash equivalents for the purposes of the statement of cash flows. The Company maintains cash balances at one financial institution and has experienced no losses with respect to amounts on deposit. The Company held no cash equivalents as of June 30, 2021 and 2020.

 

Revenue Recognition

 

The Company recognizes revenue in accordance with ASC Topic 606, “Revenue from Contracts with Customers (“ASC 606”) and all the related amendments.

 

The core principle of ASC 606 requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASC 606 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than previously required under U.S. GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.

 

The Company had no revenue in 2021 and 2020 from continuing operations.

 

Stock Based Compensation

 

The Company applies the fair value method of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 718, “Share Based Payment”, in accounting for its stock-based compensation with employees and non-employees. This standard states that compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. The Company values stock-based compensation at the market price for the Company’s common stock and other pertinent factors at the grant date.

 

The Black-Scholes option pricing valuation method is used to determine fair value of stock options consistent with ASC 718, “Share Based Payment”. Use of this method requires that the Company make assumptions regarding stock volatility, dividend yields, expected term of the awards and risk-free interest rates.

 

Research and Development

 

Research and development costs are expensed as incurred. Research and development costs were $147,453 and $221,407 for the three and six months ended June 30, 2021, respectively, and are a result of the License Agreement for the Company’s drug Technology executed in the second quarter of 2020. Research and development costs were $87,000 and $110,000 for the three and six months ended June 30, 2020, respectively, and are also a result of the License Agreement as well as expenses incurred on the Technology prior to the signing of the License Agreement (see Note 10 – Commitments and Contingencies).

 

Fair Value Measurement

 

The Company measures fair value in accordance with a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The Company’s convertible Bridge Notes are valued by using Monte Carlo Simulation methods and discounted future cash flow models. Where possible, the Company verifies the values produced by its pricing models to market prices. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit spreads, measures of volatility and correlations of such inputs. These convertible Bridge Notes do not trade in liquid markets, and as such, model inputs cannot generally be verified and do involve significant management judgment. Such instruments are typically classified within Level 3 of the fair value hierarchy.

 

10
 

 

Equity Method Investment

 

Investments in partnerships, joint ventures and less-than majority-owned subsidiaries in which we have significant influence are accounted for under the equity method. The Company’s consolidated net income includes the Company’s proportionate share of the net income or loss of our equity method investee. When we record our proportionate share of net income, it increases income (loss) — net in our consolidated statements of operations and our carrying value in that investment. Conversely, when we record our proportionate share of a net loss, it decreases income (loss) — net in our consolidated statements of income and our carrying value in that investment. The Company’s proportionate share of the net income or loss of our equity method investees includes significant operating and nonoperating items recorded by our equity method investee. These items can have a significant impact on the amount of income (loss) — net in our consolidated statements of operations and our carrying value in those investments. The Company divested its investment in its equity method investee in March 2021.

 

Discontinued Operations

 

In accordance with ASC 205-20 Presentation of Financial Statements: Discontinued Operations, a disposal of a component of an entity or a group of components of an entity is required to be reported as discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the components of an entity meets the criteria in paragraph 205-20-45-10. In the period in which the component meets held-for-sale or discontinued operations criteria the major current assets, other assets, current liabilities, and noncurrent liabilities shall be reported as components of total assets and liabilities separate from those balances of the continuing operations. At the same time, the results of all discontinued operations, less applicable income taxes (benefit), shall be reported as components of net income (loss) separate from the net income (loss) of continuing operations.

 

The Company disposed of a component of its business pursuant to a Separation Agreement in November 2020, which met the definition of a discontinued operation. Accordingly, the operating results of the business disposed are reported as income (loss) from discontinued operations in the accompanying unaudited condensed statements of operations for the three month periods ended June 30, 2021 and 2020. For additional information, see Note 4 – Separation Agreement and Note 9 - Discontinued Operations.

 

Income Taxes

 

Income taxes are accounted for under the asset and liability method as stipulated by FASB ASC 740, “Income Taxes” (“ASC 740”). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740, the effect on deferred tax assets and liabilities or a change in tax rate is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced to estimated amounts to be realized by the use of a valuation allowance. A valuation allowance is applied when in management’s view it is more likely than not (50%) that such deferred tax will not be utilized.

 

In the event that an uncertain tax position exists in which the Company could incur income taxes, the Company would evaluate whether there is a probability that the uncertain tax position taken would be sustained upon examination by the taxing authorities. Reserves for uncertain tax positions would be recorded if the Company determined it is probable that a position would not be sustained upon examination or if payment would have to be made to a taxing authority and the amount is reasonably estimated. As of June 30, 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.

 

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.

 

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At June 30, 2021, there were the following potentially dilutive securities that were excluded from diluted net loss per share because their effect would be anti-dilutive (all shares adjusted to reflect a 25:1 reverse stock split effected on September 4, 2020):

 

Shares from the conversion of Series B Preferred Stock   15,625,000 
Shares from the conversion of Series E-1 Preferred Stock (subject to vesting in 2021 through 2023 and potential forfeiture)   8,500,000 
Shares from common stock options   468,619 
Shares from common stock warrants   7,493,575 
Shares from the conversion of debentures   218,750 
Shares from the conversion of redeemable convertible preferred stock (based upon an assumed conversion price at June 30, 2021 of $0.16 per share; not inclusive of cumulative dividends which may be converted to shares of common stock under certain conditions)   3,000,000 

 

At June 30, 2020, there were the following potentially dilutive securities that were excluded from diluted net loss per share because their effect would be anti-dilutive (all shares adjusted to reflect a 25:1 reverse stock split effected on September 4, 2020):

 

Shares from common stock options   468,619 
Shares from common stock warrants   46,154 
Shares from the conversion of debentures   66,000 
Shares that may be converted from Bridge Notes (based upon an assumed conversion price at June 30, 2020 of $1.98 per share);   2,087,234 
Shares from the conversion of redeemable convertible preferred stock (not inclusive of cumulative dividends which may be converted to shares of common stock under certain conditions).   302,768 

 

Significant Estimates

 

U.S. Generally Accepted Accounting Principles (“GAAP”) requires the Company to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, the reported amounts of revenues and expenses, cash flows and the related footnote disclosures during the period. On an on-going basis, the Company reviews and evaluates its estimates and assumptions, including, but not limited to, those that relate to the fair value of stock based compensation fair value of convertible bridge notes, and deferred the valuation allowance on deferred tax assets and contingencies. Actual results could differ from these estimates.

 

Recent Accounting Pronouncements

 

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.

 

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Reclassifications

 

Certain reclassifications of prior year amounts have been made to conform to the 2021 presentation. These reclassifications had no effect on net loss or loss per share as previously reported.

 

Concentration of Risk

 

The Company expects cash to be the asset most likely to subject the Company to concentrations of credit risk. The Company’s bank deposits may at times exceed federally insured limits. The Company’s policy is to maintain its cash with high credit quality financial institutions to limit its risk of loss exposure. The Company’s cash balance as of June 30, 2021, is in excess of FDIC limits in the amount of approximately $1.24 million.

 

The Company had no revenue from its continuing operations in the first or second quarter of 2021 and 2020. Revenue included in discontinued operations was generated from one related customer in 2020.

 

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.
     
  EPH received the right in its sole discretion to use the name “Q2Earth” in all jurisdictions of the United States and worldwide.

 

Pursuant to ASC 205-20 Presentation of Financial Statements: Discontinued Operations and amended by ASU No. 2014-08, management has determined that the Separation Agreement results in the disposal of a component that represents a strategic shift in the Company’s business operations that will have a major effect on the Company’s operations and financial results. Therefore, the net income (loss) generated from this disposed component have been presented as discontinued operations for the period ended June 30, 2020 on the statement of operations.

 

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NOTE 5 – EQUITY METHOD INVESTMENT

 

During November 2018, the Company invested $50,000 for a 19.9% Class B limited liability membership interest in EPH and recorded this transaction as an equity method investment due to the Company’s ability to exercise significant influence over EPH. The carrying value of the investment in EPH was reduced to zero after recording the proportionate share of the investee’s net loss for the 2018 fiscal year. In January 2019, the Company committed an additional $21,588 through a subscription payable to maintain its 19.9% Class B limited liability interests in EPH, after additional Class A units were sold to investors, which was fully paid in April 2020. The carrying value of the investment at December 31, 2020 was zero due to continued losses incurred by EPH. In the first quarter of 2021, the Company sold this equity interest to an unrelated third party for $100,000. There were no distributions received from the equity method investment in 2021 or 2020. See Note 4 for discussion of the Separation Agreement with our equity method investment in November 2020.

 

Our prior Chairman and CEO of the Company, also serves as President of EPH; and Christopher Nelson, General Counsel and Director of the Company, also serves as General Counsel and Secretary of EPH. See Note 6 – Related Party Transactions for transactions with our equity method investment during the periods ended June 30, 2021 and 2020.

 

NOTE 6 – RELATED PARTY TRANSACTIONS

 

The Company currently has a License Agreement with IGL Pharma, Inc., an entity in which the Company’s Executive Chairman serves as President and holds a non-controlling equity interest (see Note 12).

 

The Company currently maintains an executive office in Florida, which is leased by an investment firm in which the Company’s General Counsel serves as an officer but does not hold any equity or voting rights. The Company has no formal agreement for this space and pays no rent.

 

During the quarter ended June 30, 2020, the Company received $175,000 from its equity method investee, EPH, as management fee revenue. The Company did not receive any revenue from EPH in the quarter ended June 30, 2021. Due to the Separation Agreement disclosed in Note 4, management fee revenues received during the period ended June 30, 2020 have been presented on the statement of operations as discontinued operations (see Note 9 – Discontinued Operations). Management fee revenues were the Company’s primary source of revenue during that period.

 

In the period ended June 30, 2021, the Company paid to EPH $34,136 arising from notes payable and accrued interest which was included in notes payable-related parties in prior periods on 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 June 30, 2021, $7,500 of principal remains outstanding on certain of these short-term notes payable. During the six months ended June 30, 2021, $23,000 of these short-term notes payable was converted into 23 shares of the Company’s Series B preferred stock at a conversion ratio of $1,000 per share, and warrants to purchase 65,714 shares of common stock at an exercise price of $0.35 per share, which resulted in no gain or loss on conversion (see Note 9).

 

During the periods ended June 30, 2021 and 2020, the Company incurred approximately $39,006 and $32,676 in legal fees with a law firm in which the Company’s audit committee chair is an employee. As of June 30, 2021, accounts payable and accrued expenses include $1,456 for legal fees due to the law firm for services.

 

NOTE 7 – DEBENTURES, CONVERTIBLE BRIDGE NOTES, AND NOTES PAYABLE

 

Debentures

 

The Company has Original Issue Discount Senior Secured Convertible Debentures (the “Debentures”) in the aggregate amount of $35,000 and $165,000 outstanding as of June 30, 2021 and 2020, respectively. All assets of the Company are secured under the Debentures. The Debentures contain certain anti-dilutive protection provisions in the instance that the Company issues stock at a price below the conversion price of the Debentures, as adjusted from time to time, as well as other standard protections for the holder. There is no interest on these notes. In the first quarter of 2021, the two institutional holders of the debentures converted an aggregate of $102,500 into 517,086 shares of common stock, and the Company recognized a loss on the two debenture conversions of $356,454. As of June 30, 2021, the outstanding amount of $35,000 is in default.

 

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Convertible Bridge Notes

 

In 2017 and 2018, the Company issued a total of $2,771,908 in a convertible promissory note (the “Bridge Notes”) offering, which included three of the Company’s directors converting $156,368 and one shareholder converting $11,784 of prior notes and cash advances, including interest thereon, into the offering. In 2019, an additional $30,000 Bridge Note was issued to one investor. In June 2018, one of the original Bridge Notes for $50,000 plus $7,664 accrued interest was converted by its holder into 24,538 shares of common stock. Maturity for the Bridge Notes was 36 months from issuance (24 months for the Bridge Notes issued in 2018 and 2019) with 15% annual interest which is capitalized each year into the principal of the Bridge Notes and paid in kind.

 

As of March 31, 2021, all Bridge Notes remaining at the end of 2020, inclusive of principal and accrued and capitalized interest, were settled with the holders of these notes converting their debt into a total of 6,627,692 shares of common stock of the Company with a fair value of $4,378,488 based on the stock price of the Company on the date of conversion. The Company recorded a loss on extinguishment of these Bridge Notes of $744,205 in the six months ended June 30, 2021, which is included in loss on conversion of bridge notes and accrued interest on the unaudited condensed statements of operations.

 

Pursuant to ASC 825-10-25-1, Fair Value Option, the Company made an irrevocable election at the time of issuance to report the Bridge Notes at fair value, with changes in fair value recorded through the Company’s condensed consolidated statements of operations as other income (expense) in each reporting period. The estimated fair value of the remaining outstanding Bridge Notes as of June 30, 2021 and 2020 was $0 and $3,038,749 (see Note 8 – Fair Value Measurement), and the principal amount due was $0 and $2,801,908, respectively. During the six month period ended June 30, 2021 and 2020, the change in fair value resulted in a (loss) gain of $0 and ($323,185), respectively, which is presented as change in fair value of convertible bridge notes on the unaudited condensed statements of operations (see Note 8 - Fair Value Measurement).

 

Paycheck Protection Program

 

On April 14, 2020, the Company received $142,942 under the Paycheck Protection Program (PPP) overseen by the U.S. Small Business Administration. The loan has an annual interest rate of 1% with loan payments being deferred six months from the date of the loan with a maturity date of April 2022. The Company used these funds for payroll costs only and will apply for forgiveness of the loan under the program once the U.S. Small Business Administration starts accepting the forgiveness applications. As of June 30, 2021, the amount due on the loan of $142,942 has been presented as current on the accompanying condensed balance sheets.

 

NOTE 8 – FAIR VALUE MEASUREMENT

 

The Company measures fair value in accordance with a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

 

  Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
     
  Level 2 Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
     
  Level 3 Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

 

As disclosed in Note 7, the Bridge Notes are reported at fair value, with changes in fair value recorded through the Company’s condensed consolidated statements of operations as a component of other income (expense) in each reporting period.

 

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The following tables set forth the Company’s consolidated financial assets and liabilities measured at fair value by level within the fair value hierarchy at June 30, 2021 and December 31, 2020. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

    Fair value at                
    June 30, 2021    Level 1    Level 2    Level 3 
Convertible Bridge Notes  $-   $-   $-   $- 
Total  $-   $-   $-   $- 

 

   Fair value at             
   December 31, 2020   Level 1   Level 2   Level 3 
Convertible Bridge Notes  $3,598,000   $       -   $        -   $3,598,000 
Total  $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) and the related realized and unrealized gains (losses) recorded in the consolidated statement of operations during the periods.

 

  

Six Months

Ended
June 30, 2021

 
Fair value, December 31, 2020  $3,598,000 
Accrued interest   35,983 
Conversion to shares of common stock   (3,633,983)
Fair value, June 30, 2021  $- 

 

NOTE 9 – DISCONTINUED OPERATIONS

 

On November 6, 2020, the Company executed a Separation Agreement (see Note 4 – Separation Agreement), whereby the Company transferred its Legacy Business and the related assets and liabilities to EPH, a related party and equity method investee.

 

ASC 205-20 “Discontinued Operations” establishes that the disposal or abandonment of a component of an entity or a group of components of an entity should be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s 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 June 30, 2020. There were no results of operations from the component in the current period. As of June 30, 2021, there were no assets or liabilities held associated with this business. The results of operations of this component, for all periods, are separately reported as “discontinued operations” on the unaudited condensed statements of operations.

 

As disclosed in Note 4 – Separation Agreement, the Company sold its equity interest in EPH as of March 31, 2021. There have been no transactions between the Company and EPH since the Separation Agreement.

 

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A reconciliation of the major classes of line items constituting the income (loss) from discontinued operations, net of income taxes as is presented in the consolidated statements of operations for the three and six month periods ended June 30, 2021 and 2020, are summarized below:

 

Reconciliation of revenue and expense items in discontinued operations on the unaudited condensed statement of operations:

 

   2021  2020  2021  2020
   For the three months ended  For the six months ended
   June 30,  June 30,
   2021  2020  2021  2020
             
REVENUES  $-   $175,000   $-   $350,000 
                     
OPERATING EXPENSES                    
Payroll and related expenses   -    99,761    -    214,153 
General and administrative   -    12,769    -    37,815 
Total Operating Expenses   -    112,530    -    251,968 
Financing costs including interest   -    14,043    -    27,124 
INCOME FROM DISCONTINUED OPERATIONS  $-   $48,427   $-   $70,908 

 

Reconciliation of cash flows from operating activities and financing activities on the unaudited condensed statement of cash flows:

 

   2021  2020
   For the six months ended
   June 30,
   2021  2020
CASH FLOWS FROM OPERATING ACTIVITIES          
Net Income from Discontinued Operations  $-   $70,908 
Adjustments to reconcile net loss to net cash provided by discontinued operations:        
Changes in operating assets and liabilities        
Increase in accounts payable and accrued expenses   -    15,000 
Increase in accrued interest - related party   -    27,124 
Net cash used in operating activities  $-   $113,032 
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Proceeds from promissory notes - related parties        147,673 
Net cash provided by financing activities   -    147,673 
           
Net cash provided by discontinued operations  $-   $260,705 

 

NOTE 10 – COMMON STOCK, PREFERRED STOCK AND WARRANTS

 

Common Stock

 

In the three month period ended June 30, 2021, the Company did not issue any shares of common stock.

 

As of March 31, 2021, $125,007 of debentures and accrued expenses plus bridge notes with a face value of principal and accrued interest of $1,447,315 for an aggregate of $1,572,315 of obligations were converted into shares of common stock in the quarter ended March 31, 2021 at a price of $0.22 per share. Further, $120,000 of Series A preferred stock was converted into 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 six months ended June 30, 2021: $744,505 from the conversion of Bridge Notes including accrued interest, and $390,068 from the conversion of a debenture and accrued expenses. A deemed dividend was recognized in the amount of $542,500 for the difference between the value of the common stock shares using market price on the date of conversion and the $120,000 stated value of the Series A preferred stock upon conversion into common stock which has been presented as an increase to the net loss available to common stockholders on the condensed consolidated statement of operations.

 

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In 2020, the Company also effected a 25:1 reverse stock split and all share numbers herein have been adjusted for that change.

 

The Company issued 200,000 shares of common stock valued at $50,000 in the quarter ended March 31, 2020 as compensation for a services contract.

 

For the three month periods ended June 30, 2021 and 2020, the Company recognized $41,174 and $25,000 of stock-based compensation expense for shares of common stock and warrants issued as consideration for several service agreements. For the six month periods ended June 30, 2021 and 2020, the Company recognized $288,674 and $45,833 of stock-based compensation expense for shares of common stock and warrants issued as consideration for several service agreements.

 

Series A Redeemable Convertible Preferred Stock

 

The Company has 480 shares of Preferred Stock issued and outstanding as of June 30, 2021, which currently are convertible at $0.16 per share of the Company’s common stock (the “Conversion Price”), which was adjusted to match the conversion price of the Company’s Series B Preferred Stock. The Preferred Stock bears a 6% dividend per annum, calculable and payable per quarter in cash or additional shares of common stock as determined in the Certificate of Designation. The Preferred Stock has no voting rights until converted to common stock and has a liquidation preference equal to the aggregate purchase price of $480,000 plus accrued dividends. The Preferred Stock is currently in default, and the Company is negotiating a modification with the holders, including the conversion of these shares into common stock. Each share of Preferred Stock received warrants, all of which had expired as of the first quester of 2021.

 

The Preferred Stock has price protection provisions in the case that the Company issues any shares of stock not pursuant to an “Exempt Issuance” at a price below the Conversion Price. Exempt Issuances include: (i) shares of Common Stock or common stock equivalents issued pursuant to the original merger of the company or any funding contemplated by that transaction; (ii) any common stock or convertible securities outstanding as of the date of closing; (iii) common stock or common stock equivalents issued in connection with strategic acquisitions; (iv) shares of common stock or equivalents issued to employees, directors or consultants pursuant to a plan, subject to limitations in amount and price; and (v) other similar transactions. The Certificate of Designation contains restrictive covenants not to incur certain debt, repurchase shares of common stock, pay dividends or enter into certain transactions with affiliates without consent of holders of 67% of the Preferred Stock.

 

Management has determined that the Preferred Stock is more akin to a debt security than equity primarily because it contains a mandatory 2-year redemption at the option of the holder, which only occurs if the Preferred Stock is not converted to common stock. Therefore, management has presented the Preferred Stock outside of permanent equity as mezzanine equity, which does not factor into the totals of either liabilities or equity.

 

The Preferred Stock carries a 6% per annum dividend calculated on the stated value of the stock and is cumulative and payable quarterly beginning July 1, 2016. These dividends are accrued at each reporting period. They add to the redemption value of the stock; however, as the Company shows an accumulated deficit, the charge has been recognized in additional paid-in capital.

 

Series B Preferred Stock

 

In December 2020, the Company filed an amendment to its Articles of Incorporation to authorize the issuance of up to 2,500 shares of Series B Convertible Preferred Stock (the “Series B Stock”), par value $0.001 per share, pursuant to a Certificate of Designation. The Series B Preferred Shares provide the holders a 10% annual paid-in-kind dividend, a liquidation preference equal to the purchase price of the shares ($1,000 per share) followed by the right to participate with the common stockholders in the instance of a liquidation or other exit event, and provide the holders the right to vote along with the common holders based on the common conversion amount of their holdings. The Series B Preferred Shares are convertible into common stock at a price of $0.16 per share, subject to anti-dilution protections in the case of certain issuances of securities below that conversion price. The Series B Preferred Shares are not redeemable.

 

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In January 2021, the Company closed a private offering of its Series B Stock for $1,000 per share, raising a total of $2,500,000, inclusive of $156,000 in prior debt conversion and $23,000 of notes payable with directors converted to shares of Series B Stock and warrants. As of June 30, 2021, 2,500 shares of Series B Stock were issued and outstanding.

 

Series E-1 Preferred Stock

 

On December 3, 2020, the Company filed an amendment to its Articles of Incorporation to authorize the issuance of up to 8,500 shares of Series E-1 Preferred Stock (the “Series E-1 Stock”) pursuant to a Certificate of Designation. The shares of Series E-1 Stock are incentive-based, vesting and forfeitable securities that provide the holders the right in the aggregate to receive an “earnout” equal to 20% of the total consideration received by the Company in the instance of a sale or sub-license of its core licensed radiopharmaceutical Technology, or sale or merger of the Company, which is paid on a priority, senior basis. In addition, the holders of the Series E-1 Stock can convert their vested preferred stock at anytime or after an event resulting in an earnout payment, such as an acquisition of the Company, into an aggregate of 8.5 million common shares. The holders of the Series E-1 Stock have the right to vote along with the common stockholders based on the common conversion amount of their holdings, and have the right to nominate two members of the Board of Directors.

 

On December 30, 2020, 7,650 shares of Series E-1 Stock had been issued to five individuals, including the Company’s Executive Chairman, CEO and General Counsel which vest starting in July 2021 through January 2023 and are forfeitable by the holders prior to vesting. In February 2021, the remaining 850 shares of Series E-1 Stock were issued to one newly-appointed director, vesting half in February 2022 and the balance in February 2023. Upon these shares of Series E-1 preferred stock becoming fully vested, they are convertible in the aggregate into 8,500,000 shares of common stock. During the three and six months ended June 30, 2021, employee and director stock option expense for vested Series E-1 amounted to $2,349,249 and $4,825,472, respectively. As of June 30, 2021, $1,702,528 of unrecognized compensation remains which will be recognized over a weighted average period of 1.36 years.

 

The Company computed the total grant date fair value of the Series E-1 Stock to be approximately $6,528,000 million using an option pricing model and the following assumptions: (1) with respect to the shares granted in 2020: expected term of four years, dividend yield of -0-%, volatility of 96.12%, and a risk-free rate of .27%; and (2) with respect to the shares granted in 2021: expected term of four years, dividend yield of -0-%, volatility of 96.12%, and a risk-free rate of .27%. The value of these shares will be recognized as stock-based compensation expense over the vesting period through February 2023.

 

Warrants

 

During the six months ended June 30, 2021, the Company issued 6,743,575 warrants in connection with its Series B offering, and 750,000 warrants to a service provider. On June 17, 2021, by resolution of the Company’s board of directors, the expirations of 6,268,575 of the warrants issued in connection with the Series B offering, including those issued to directors, and the 750,000 warrants issued to the service provider were extended to September 30, 2021 which were set to expire in July 2021.

 

The following is a summary of all outstanding common stock warrants as of June 30, 2021:

 

   Number of
Warrants
   Exercise price
per share
   Average
remaining
term in years
 
Warrants issued in connection with issuance of Series B Preferred Stock   6,202,861   $0.35    0.25 
Warrants issued in connection with issuance of Series B Preferred Stock to lead investor