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 (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 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 divestiture of the Legacy Business, 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
March 4, 2022, the Company completed a 40:1 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.
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, 2022, the Company used net cash in operating activities for its operations of $2,712,090
and incurred a loss from its operations of $.
As of December 31, 2022, the Company’s accumulated deficit is $35,177,625.
As of December 31, 2022, the Company has negative working capital of $1,215,409
and cash of $225,276. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
The
Company’s $480,000 of Series A redeemable convertible preferred stock was in default as of December 31, 2022, but the holders
of the Series A stock have agreed to stay any action pursuant to a conditional conversion agreement until the end of March 2023, and
management is in discussions with these holders to extend those agreements.
The
Company has supported operations through the issuance of common stock, preferred stock and debt over the last 12 months. This includes
the current $3.5 million common stock and warrant offering, of which $1,405,500 has been raised as of December 31, 2022; the $2.5 million
Series B preferred stock offering in the first quarter of 2021; the exercise in late 2021 of approximately $470,000 in warrants issued
in connection with the Series B offering; and 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. See Note 6 for further discussion.
Management
expects expenses to increase in 2023 as our drug technology continues 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 2023. 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 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. Any loss incurred or a lack of access to
such funds above the FDIC limit could have a significant adverse impact on the Company’s financial condition, results of
operations and cash flows. The Company held no
cash equivalents as of December 31, 2022 and 2021.
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 2022 and 2021 from 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 $1,022,412 for the year ended December 31, 2022,
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 $647,302 for the year ended December
31, 2021, 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 has determined the fair value of certain assets and liabilities in accordance with generally accepted accounting principles,
which provides a framework for measuring fair value. Fair value is defined as the exchange price that would be received for an asset
or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. Valuation techniques should maximize the use of observable inputs and
minimize the use of unobservable inputs.
A
fair value hierarchy has been established, which prioritizes the valuation inputs into three broad levels. Level 1 inputs consist of
quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement
date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the related asset or liability.
Level 3 inputs are unobservable inputs related to the asset or liability.
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.
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, 2022, the Company does
not believe it has any uncertain tax positions that would result in the Company having a liability to the taxing authorities.
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, 2022, 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 inclusive of accrued dividends ($6.19 conversion price) | |
| 292,990 | |
Shares from common stock options | |
| 177,815 | |
Shares from common stock warrants | |
| 323,543 | |
Shares from conversion of convertible notes inclusive of accrued interest ($8.00 conversion price) | |
| 64,126 | |
Shares from the conversion of Series A Preferred stock (calculated from liquidation value and assumed conversion price at December 31, 2022 of $3.33 per share) | |
| 216,577 | |
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:
Shares from the conversion of Series B Preferred Stock not inclusive of accrued dividends | |
| 235,774 | |
Shares from common stock options | |
| 27,815 | |
Shares from common stock warrants | |
| 37,083 | |
Shares from conversion of convertible notes not inclusive of accrued interest | |
| 75,625 | |
Shares from the conversion of debentures | |
| 5,469 | |
Shares from the conversion of Series A Preferred Stock (calculated from liquidation value and an assumed conversion price at December 31, 2021 of $6.40 per share) | |
| 108,231 | |
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.
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, 2022 does not exceed the FDIC limits.
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 operations for the year periods ended December 31, 2022 and 2021.
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.
Reclassifications
Certain reclassifications of prior
year amounts have been made which consisted of the reclassification of the convertible notes payable outstanding as of December 31, 2021
with a maturity date of December 2023 as long-term which were incorrectly presented as current in the prior year. These reclassifications
had no effect on net loss or loss per share as previously reported.
NOTE
4 – 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 2022
or 2021.
Christopher
Nelson, General Counsel of the Company, also serves as General Counsel and Secretary of EPH. See Note 5 – Related Party Transactions
for transactions with our equity method investment during the years ended December 31, 2022 and 2021.
NOTE
5 – 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 12,500
shares of the Company to IGL Pharma, Inc (see Note 7). The associated expense of $140,000
was recorded in Professional Fees. Under the License Agreement, the Company incurred research and development related expenses of $105,382 during the
year ended December 31 2022 which have been included in research and development expenses on the consolidated financial statements and
reimbursed IGL for direct expenses totaling $39,499. As of December 31, 2022, amounts outstanding due IGL Pharma, Inc, for their services
amounted to $13,900.
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.
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, 2022 and 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 $14.00 per share, which resulted in no gain or loss on conversion (see Note 7).
During
the years ended December 31, 2022 and 2021, the Company incurred $238,401 and $77,064, respectively, in legal fees with a law firm in
which the Company’s former Director and audit committee chair (resigned from the Board in February 2021) is a partner. As of December
31, 2022 and 2021, accounts payable and accrued expenses include $219,459 and $195,000 for legal fees due to the law firm for services,
respectively.
NOTE
6 – 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 $0
and $35,000 outstanding as of December 31, 2022 and 2021, respectively. In the first quarter of 2021, the two institutional holders of
the debentures converted an aggregate of $102,500 into 12,927 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 5,469 shares of common stock at $6.40 per share, and the balance as of December 31, 2022 on
the convertible debenture is currently $0.
Convertible
Bridge Notes
In
prior years, 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 332,804 shares of common stock at $8.80 per share. 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
165,692 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.
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,
any time prior to maturity at a conversion price of $8.00. 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. In the fourth quarter of 2022, two note holders converted $132,932 of principal and interest on their notes
into 22,155 shares of common stock, at a reduced conversion price approved by the Board of $6.00. In addition to the notes payable, each
holder received a warrant for the purchase of shares of common stock with a purchase price of $24.00, which expired in 2022. In accordance
with accounting standards, the warrants were 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. During the years ended December 31, 2022 and 2021, the Company recorded
interest expense related to the amortization of the discount of $36,300 and $0, respectively. As of December 31, 2022 and 2021, unamortized
debt discount was $72,600 and $36,300, respectively, and the convertible liability balance, net of a discount was $443,700 and $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) on the consolidated statements of operations.
NOTE
7 – TEMPORARY EQUITY, PREFERRED STOCK, COMMON STOCK, AND
WARRANTS
Series
A Redeemable Convertible Preferred Stock (“Series A Stock”)
As
of both December 31, 2022 and 2021, the Company has 480
shares of Series A Stock issued and outstanding. The outstanding shares of Series A Stock are currently convertible at $3.33
per share of the Company’s common stock (the “Conversion Price”), which was reduced in 2022 pursuant to a price
protection provision included in the Series A Certificate of Designation (“Series A Designation” as the Company began
selling common stock and a warrant in an offering at $4.50
(see below). The Series A Designation requires an adjustment to the conversion price if a subsequent equity sale occurs at a price
below the conversion rate. The Company recorded a deemed dividend within stockholders’ equity associated with the reduction in
conversion price from $6.40
to $3.33
of $342,497
based on the incremental value to the Series A holders due to the conversion price reduction. This incremental value has also been
presented on the consolidated statement of operations as an addition to the net loss available to common stockholders. The
incremental value was determined by computing the additional shares the Series A holders would receive based on the conversion price
reduction multiplied by the estimated fair value of common stock of $3.33,
based on the sale of common stock in a recent offering.
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 as of December 31, 2022, but the holders of the Series A stock have agreed
to stay any action pursuant to a conditional conversion agreement until the end of March 2023, and management is in discussions with
these holders to extend those agreements. 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. This price protection provision was triggered on September 30, 2022 when the
Company sold common stock and a warrant for $4.50. 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 resides between liabilities and 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 $241,200
and $213,580
as of December 31, 2022 and 2021, respectively.
As of December 31, 2022 and 2021, the stated value of the Series A and the accrued dividends was $721,200 and $693,580 which has
been presented as mezzanine equity on the consolidated balance sheets, which resides between liabilities and stockholders’ equity.
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.
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 163,134
shares of common stock, which included $53,061
of accrued dividends. As of December 31, 2022 and 2021, 1,509
shares of Series B Stock were issued and outstanding. The accrued dividends are $304,653
and $153,343
as of December 31, 2022 and 2021, respectively, which are presented on the consolidated balance sheets.
The
Series B Stock was originally convertible into common stock at a ratio of $6.40 per
share, subject to anti-dilution protections in the case of certain issuances of securities below that conversion price, and as a
result of this price protection, the ratio was reduced to reduced to $6.19
per share based on the Series B Certificate of Designation (“Series B Designation”) which define the adjustment to the
conversion ratio and incremental shares when the Company issues common stock at a price below the conversion ratio. Based on the
Series B Designation, the conversion ratio was reduced to $6.19.
The Company recorded a deemed dividend within stockholders’ equity associated with the reduction in conversion price from
$6.40
to $6.19
of $30,938
based on the incremental value to the Series B holders due to the conversion price reduction. This incremental value has also been
presented on the consolidated statement of operations as an addition to the net loss available to common stockholders. The
incremental value was determined by computing the additional shares the Series B holders would receive based on the conversion price
reduction multiplied by the estimated fair value of common stock of $3.33,
based on the sale of common stock in a recent offering.
With respect to the Series B Preferred Stock, the Company recognized the incremental value associated with the downround of the conversion
price due to the issuance of common stock at a lower price than Series B conversion price and associated adjustment of convertible shares
as a deemed dividend charge of $30,938 within stockholders’ equity and as a reduction of net loss available to common stockholders
on the consolidated statement of operations in 2022. The incremental value associated with the Series B Preferred stock was determined
using an adjusted conversion price of $6.19 and an adjusted common stock conversion of 290,965 shares.
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 720,986 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 $12.00 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, 2022, approximately 717,924 common shares are fully vested and
approximately 3,062 common shares are unvested, but have fully vested as of February 2023.
During
the years ended December 31, 2022 and 2021, the Company recognized stock-based compensation to employees and directors totaling $864,002,
and $7,751,087, respectively 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, 2022, approximately $37,000 of unrecognized compensation remains which will be recognized
by February 1, 2023.
Common
Stock
In
2022, the Company effected a 40:1 reverse stock split and all share numbers herein have been adjusted for that change.
In
2022 and 2021, the Company issued 626,917 and 1,167,423 shares of common stock, respectively, as follows:
SCHEDULE OF
ISSUED SHARES OF COMMON STOCK
| |
2022 | | |
2021 | |
| |
For the Years Ended December 31, | |
| |
2022 | | |
2021 | |
Adjustment for 40:1 Reverse Stock Split | |
| 266 | | |
| - | |
Conversion of bridge notes and accrued interest to common stock | |
| - | | |
| 165,692 | |
Conversion of debentures | |
| 5,469 | | |
| 15,825 | |
Conversion of accrued salary to management | |
| 168,611 | | |
| - | |
Conversion of Series A Stock to common stock | |
| - | | |
| 18,750 | |
Conversion of Series B Stock to common stock | |
| - | | |
| 163,134 | |
Exercise of Series B Warrants to common stock | |
| - | | |
| 46,786 | |
Exchange of Series E-1 Stock to common stock | |
| - | | |
| 720,986 | |
Conversion of convertible debt to common stock | |
| 22,155 | | |
| - | |
Issuance of common stock for cash | |
| 311,666 | | |
| - | |
Stock based compensation for services | |
| 118,750 | | |
| 36,250 | |
Total Common Shares issued | |
| 626,917 | | |
| 1,167,423 | |
During
the year ended December 31, 2022, the Company issued 5,469 shares of common stock in connection with $35,000 of debentures that were
converted at a price of $6.40 per share.
During
the year ended December 31, 2022, the Company issued 168,611 shares
of common stock in connection with conversion of management salaries that were deferred totaling $606,998.
The salary was converted at a price of $3.55 per
share based on a weighted average of the market price of common stock and the offering price of common stock of $3.33 sold
during 2022 (see below). The fair value of the shares issued upon settlement was equal to the amount owed for the management
salaries; thefore, no gain or loss was recorded on the settlement and the accrued salaries were reclassed to stockholders’
equity. The shares of common stock issued in the settlement are restricted and shall be subject to forfeiture as follows:
until such time that the Company successfully closes $5 million in a single fundraising (the “Trigger Event”), which may
be completed in one or more closings over a period of 90 days, the shares of common stock may not be sold, transferred or otherwise
disposed of by the holder. Upon the occurrence of the Trigger Event, the shares shall be fully vested. If the Trigger Event does not
occur within 36 months of November 14, 2022, the shares of common stock shall be forfeited and returned to the Company. The shares
issued with the settlement agreements have been presented as issued and outstanding on the statement of stockholders’ equity
as of December 31, 2022.
During
the year ended December 31, 2022, the Company issued 22,155
shares of common stock in connection with conversion
of convertible notes in the amount of $132,932
that were converted at a $6.00
price per share. The Company recorded a gain
on the conversion of the debt to equity of $54,281
which was recorded in other income and expense.
The gain was calculated by the difference between the total of the principal and accrued interest outstanding the estimated fair value
of the shares issued upon conversion of $3.55 based on a weighted average of the market price of common stock and the offering price
of common stock of $3.33 sold during 2022 (see below).
During
the year ended December 31, 2022, the Company issued 311,666
shares of common stock in connection with its common stock private placement which included a unit which consisted of one share of
common stock and one common stock warrant at a price per unit of $4.50.
During the year ended December 31, 2022, the Company received cash proceeds of $1,402,500
from the sale of units. The common stock sold in the unit was determined to have an estimated fair value of $3.33 based on the fair value of one warrant of $1.17
which was determing using a Black-scholes pricing model and the following assumptions: exercise price $6.00, expected term of 2 years,
volatility of 91.2%, dividend rate of 0%, and discount rate of 4.22%. The implied stock price of $3.33 was then determined based on the
$4.50 offering price for one unit.
During
the year ended December 31, 2022, the Company issued 118,750
shares of common stock for services with an estimated fair value of $632,750
based on the market price of stock or estimated value of a common stock shares sold in the private placement offering (see above) on
the date of issuance. The shares are recognized as expense over the related service period. During the year ended December 31, 2022,
the Company recognized $482,161
of stock-based compensation of which $411,161
has been reflected in professional fees and $71,000
reflected in compensation and related expenses for shares issued to a former director and audit committee chair of the Company for
such services. As of December 31, 2022, unearned deferred compensation related to these shares issued for services to be provided
through May 2023 was $150,589.
During
the year ended December 31, 2021, the Company issued 163,134 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 $6.40. The
Company also issued 36,250 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 a total of 181,517 shares of common stock at a price of $6.40 per share.
Further, $120,000 of Series A Stock was converted into 18,750 shares of common stock at a price of $6.40 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 720,986 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, 46,786 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.
Warrants
In
2022, the Company effected a 40:1 reverse stock split and all warrant numbers herein have been adjusted for that change.
During
the year ended December 31, 2022, the Company issued 311,666 warrants in connection with its private placement offering (the “Common
Stock Warrants”).
During
the year ended December 31, 2021, the Company issued 168,589 warrants in connection with its Series B Stock offering (the “Series
B Warrants”), 18,750 warrants to a service provider (the “Service Warrants”), and 25,208 warrants in connection with
its convertible note offering (the “Note Warrants”).
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 $14.00 per share to $10.00 per share.
As of October 15, 2021, 46,786 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 with the exception of 11,875 for one warrant holder that expired in January 2023.
A
summary of warrant activity and related information during the years ended December 31, 2022 and 2021 is as follows:
SCHEDULE
OF WARRANT ACTIVITY
| |
Warrants | | |
Weighted Average Exercise Price | | |
Aggregate Intrinsic Value | |
Outstanding as of December 31, 2020 | |
| 1,154 | | |
$ | 8.80 | | |
$ | - | |
Issued | |
| 212,548 | | |
| 11.55 | | |
| - | |
Exercised | |
| 46,786 | | |
| 10.00 | | |
| - | |
Expired | |
| 129,832 | | |
| 9.82 | | |
| - | |
Outstanding as of December 31, 2021 | |
| 37,083 | | |
$ | 19.52 | | |
$ | - | |
Issued | |
| 311,668 | | |
| 6.00 | | |
| - | |
Expired | |
| 25,208 | | |
| 24.00 | | |
| - | |
Outstanding as of December 31, 2022 | |
| 323,543 | | |
$ | 6.15 | | |
$ | - | |
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, 2022 and 2021.
The
following is a summary of the outstanding common stock warrants as of December 31, 2022:
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 | |
| 11,875 | | |
$ | 10.00 | | |
January 15, 2023 |
Warrants issued in connection with common stock | |
| 311,668 | | |
$ | 6.00 | | |
Sept. 30 – Dec. 31, 2024 |
Total Outstanding as of December 31, 2022 | |
| 323,543 | | |
| | | |
|
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 an increase of net loss
available to common stockholders on the consolidated statement of operations in 2021. 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 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 $41,225 within stockholders’ equity and as a reduction of net loss
available to common stockholders on the consolidated statement of operations in 2022. 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 .50 years, dividend yield of 0%, volatility of 224.2%%, and a risk-free rate of 0.51%.
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 that 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%. As of December 31, 2022 and 2021, there were
no service warrants outstanding as they were fully expired as of December 31, 2021.
With
respect to the Note Warrants, the Company computed the total grant dates fair value of the warrants to be $72,600 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.
With
respect to the Common Stock Warrants, the Company computed the total grant date fair value of the warrants to be $364,651 using a Black-Scholes
option pricing model and the following assumptions: expected term of 2 years, dividend yield of 0%, volatility of 91.2% and a risk-free
rate of 4.22% The value of these warrants was recorded using the relative fair value method and included in additional paid- in capital.
NOTE
8 – STOCK OPTIONS AND RESTRICTED STOCK UNITS
In
2016 to compensate officers, directors and other key service providers with equity grants, the Board approved the 2016 Omnibus Equity
Incentive Plan (“2016 Plan”), which initially allowed for 4,000 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 multiple
times by Board resolution, most recently to 200,000 shares on January 13, 2022. As of December 31, 2022, there are 25,000 shares available
under the 2016 Plan for future issuance; however, the Board may increase the authorized shares under the 2016 Plan each year to an amount
equal to 5% of the total issued and outstanding common shares of the Company or such other amount in its reasonable discretion. The Board
has indicated that they intend to increase the authorized shares under the 2016 Plan in 2023.
The
Company issued 150,000 stock options to purchase common stock to officers and directors of the Company during 2022. These options have
a 10 year term. The options have the following vesting schedules:
SCHEDULE OF VESTED DESCRIPTION
Vesting Description | |
Number of
Options | |
| |
| |
| |
| 87,500 | |
50% 12 months after issuance and the balance 24 months after issuance | |
| 87,500 | |
100% 10 months after issuance | |
| 25,000 | |
34% 12 months after issuance, 33% 24 months after issuance, and the remaining 36 months after issuance | |
| 25,000 | |
Performance conditions set by Board of Directors | |
| 12,500 | |
A
summary of stock option activity and related information during the years ended December 31, 2022 and 2021 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, 2020 | |
| 11,715 | | |
$ | 70.00 | | |
| 5.6 | | |
$ | - | |
Granted | |
| 16,100 | | |
$ | 14.40 | | |
| - | | |
$ | - | |
Outstanding as of December 31, 2021 | |
| 27,815 | | |
$ | 30.40 | | |
| 7.9 | | |
$ | - | |
Granted | |
| 150,000 | | |
$ | 9.25 | | |
| - | | |
$ | - | |
Outstanding as of December 31, 2022 | |
| 177,815 | | |
$ | 12.57 | | |
| 8.8 | | |
$ | - | |
Exercisable as of December 31, 2022 | |
| 56,565 | | |
$ | 30.46 | | |
| 8.0 | | |
$ | - | |
The
Company recorded $670,962 and $75,692 of stock-based compensation expense which is included in compensation and related expenses for
the years ended December 31, 2022 and 2021, 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, 2022.
As
of December 31, 2022, there was unrecognized stock-based compensation of $638,237 which is expected to be expensed through March 2024
based on the option vesting requirements. The weighted average fair value of options granted was $7.82 per share for the year ended December
31, 2022.
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, 2022 and 2021 were as follows:
SCHEDULE OF FAIR VALUE OF STOCK OPTIONS GRANTED USING THE ASSUMPTIONS
| |
For the years ended | |
| |
2022 | | |
2021 | |
Expected term (years) | |
| 5.50 | | |
| 5.38 | |
Expected volatility | |
| 130.6% - 166.7 | % | |
| 153.9 | % |
Risk-free interest rate | |
| 1.65% - 1.86 | % | |
| 0.94 | % |
Expected dividend yield | |
| 0.0 | % | |
| 0.0 | % |
NOTE
9 – 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, 2022 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
| |
2022 | | |
2021 | |
Tax benefit at U.S. statutory rate | |
$ | (1,151,071 | ) | |
$ | (2,515,184 | ) |
State taxes, net of federal benefit | |
| - | | |
| (89,264 | ) |
Stock based compensation | |
| 423,597 | | |
| 1,875,514 | |
PPP loan forgiveness | |
| - | | |
| (30,018 | ) |
Gain on extinguishment of liabilities | |
| (11,399 | ) | |
| 238,260 | |
Other permanent differences | |
| 592,659 | | |
| - | |
Change in valuation allowance | |
| 146,214 | | |
| 520,692 | |
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, 2022 and 2021 consisted of the following:
SCHEDULE
OF DEFERRED TAX ASSETS AND LIABILITIES
| |
2022 | | |
2021 | |
Net operating loss carry-forward | |
$ | 3,204,894 | | |
$ | 3,073,065 | |
Accrued expenses | |
| - | | |
| 166,783 | |
Stock based compensation | |
| 58,106 | | |
| 70,128 | |
Section 174 R&D expenses | |
| 193,236 | | |
| - | |
Charitable contribution | |
| 221 | | |
| 267 | |
Net deferred tax assets | |
| 3,456,457 | | |
| 3,310,243 | |
Valuation allowance | |
| (3,456,457 | ) | |
| (3,310,243 | ) |
Total net deferred tax asset | |
$ | — | | |
$ | — | |
At
December 31, 2022 and 2021, the Company had net deferred tax assets of $3,456,457 and $3,310,243
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, 2022 and 2021. At December 31, 2022, the
Company has net operating loss carry forwards totaling approximately $15,261,399.
The potential tax benefit arising from NOLs generated of approximately $6,822,000
prior to 2018 effective date will begin to expire in 2034. The potential tax benefit arising from the net operating loss carryforwards
of approximately $8,439,531
generated after 2018 can be carried forward indefinitely within the annual usage limitations. The Company is in compliance with
filling its federal tax returns through December 31, 2021.
The
Company’s U.S. federal and state income tax returns are generally subject to tax examinations for the tax years ended December 31,
2019 through December 31, 2021. There are currently no pending income tax examinations. To the extent the Company has tax attribute carryforwards,
the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service and state tax
authorities to the extent utilized in a future period. The Company’s policy is to record interest and penalties related to income
taxes as part of its income tax provision.
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, 2022 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
10 – 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.
Pursuant
to amendments dated November 14, 2022 to the three employment agreements of the Company’s Executive Chairman, CEO and General Counsel,
as well as an amendment to the employment agreement for the Company’s VP Operations, each of these four employees have agreed to
accept reduced salaries until the Company is successful in raising additional funds. Specifically, when the Company raises at least $7.5
million in a single offering, each employee’s salary will be increased to the full contracted rate; and prior to that time, the
reduced salaries will be gradually increased as the Company raises $2 million and then $5 million. During this time, the difference between
the reduced salaries and the full contracted salaries will not accrue as liabilities for the Company. As of December 31, 2022 and 2021,
the accrued salary for the management team was $79,166 and $83,731.
During
the year ended December 31, 2022, the Company entered into settlement agreements with four employees of the Company who had accrued salaries
at time of settlement of $758,748.
Pursuant to the settlement agreements, the accrued salaries were settled with shares of common stock with an estimated fair value of
$606,998 and cash payments of $151,750,
of which $79,166
remains unpaid and has been accrued as of December
31, 2022. The Company issued 168,611
shares of common stock in connection with conversion
of management salaries. The salary was converted at a price of $3.55
per share.
The
shares of common stock issued in the settlement are restricted and shall be subject to forfeiture as follows: until such time that the
Company successfully closes $5 million in a single fundraising (the “Trigger Event”), which may be completed in one or more
closings over a period of 90 days, the shares of common stock may not be sold, transferred or otherwise disposed of by the holder. Upon
the occurrence of the Trigger Event, the shares shall be fully vested. If the Trigger Event does not occur within 36 months of November
14, 2022, the shares of common stock shall be forfeited and returned to the Company. The shares issued with the settlement agreements
have been presented as issued and outstanding on the statement of stockholders’ equity as of December 31, 2022.
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 and for its VP Operations each
contain a similar transaction bonus equal to 0.5% of consideration received by the Company.
Board
of Director Agreements
In
January 2022, Adriann Sax was appointed as a Director to the Board of Director and awarded an annual retainer of $30,000 per year with
an additional $7,500 for serving as an Audit Committee member and an additional $10,000 for serving as the Nominating & Governance
Committee Chair. Ms. Sax has agreed to defer compensation for serving as a Director until the completion of the next fundraising round.
As such, the Company has accrued the director compensation for Ms. Sax monthly with a total accrued balance of $43,542 as of December
31, 2022.
In
February 2022, Charles J. Link, Jr. was appointed as a Director to the Board of Director and awarded an annual retainer of $30,000 per
year with an additional $7,500 for serving as an Audit Committee member and an additional $15,000 for serving as the Compensation Committee
Chair, and $3,500 for serving as a member of the Nominating Committee. Dr. Link has agreed to defer compensation for serving as a Director
until the completion of the next fundraising round. As such, the Company has accrued the director compensation for Dr. Link monthly with
a total accrued balance of $51,333 as of December 31, 2022.
License
Agreement
The
License Agreement for the Technology, as amended, between the Company’s wholly-owned subsidiary QSAM and 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 12,500 shares of the Company’s common stock 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 the QSAM subsidiary. The Company 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, 2022, the Company has paid $39,499
in expense reimbursements required under the
agreement. The drug development costs to IGL including the fixed $8,500
monthly consulting fee, which has been reflected
as research and development expense on the consolidated statements of operations was $105,382
and $136,232
for the years ended December 31, 2022 and 2021,
respectively. As of December 31, 2022, $13,900 of these costs remained outstanding and included in accounts payable and accrued
expenses on the consolidated balance sheets.
On July 1, 2022, QSAM signed a
new work order under the Master Services Agreement dated August 31, 2020 with IsoTherapeutics Group, Inc.(“ISO”), a company
that has common ownership control with IGL. The new work order with ISO is a $8,500 per month consulting contract to utilize the knowledge
and expertise of Drs. Keith Frank and Jim Simon, primary scientists and owners in ISO and IGL, and to provide scientific and manufacturing
consulting support with the clinical trials as they progress through each phase. The work order is a 2 year term with a 15 day cancellation
notice and the Company is only obligated for fees incurred for services performed to date under the work order.
NOTE
11 – SUBSEQUENT EVENTS
On
January 15, 2023, the Company entered into a consulting agreement with Checkmate Capital Group LLC for advisory services related to foreign
strategic partners, and under the agreement issued 50,000 common stock warrants that may be exercised at $6.00 per share at any time
prior to January 15, 2025.
In
the first quarter of 2023, the Company completed an additional $254,251
in investments under its common stock and warrant
private placement, with an additional 56,500
shares of common stock and 56,500
common stock warrants issued to these accredited
investors. The shares of common stock and common stock warrant were offered at $4.50.
The warrants are exercisable for a period of two-years
at a $6.00
exercise price.