NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description
of Business
Oncotelic
Therapeutics, Inc. (“Oncotelic”), was formed in the State of New York in 1988 as OXiGENE, Inc., was reincorporated
in the State of Delaware in 1992, and changed its name to Mateon Therapeutics, Inc. in 2016, and Oncotelic Therapeutics, Inc. in November
2020. Oncotelic conducts business activities through Oncotelic and its wholly owned subsidiaries, Oncotelic, Inc., a Delaware corporation,
PointR Data, Inc. (“PointR”), a Delaware corporation: and EdgePoint AI, Inc. (“Edgepoint”), a Delaware
Corporation for which there are non-controlling interests, (Oncotelic, Oncotelic Inc., PointR and Edgepoint are collectively called the
“Company” or “We”). The Company completed a reverse merger with Oncotelic Inc in April 2019, a
merger with PointR in November 2019 and formed a subsidiary Edgepoint in February 2020. For more information on these mergers, refer
to our 2020 Annual Report on Form 10-K filed with the SEC on April 15, 2021.
The
Company is currently developing OT-101, through its joint venture (“JV”) with Dragon Overseas Capital Limited (“Dragon”)
and GMP Biotechnology Limited (“GMP Bio”), both affiliates of Golden Mountain Partners (“GMP”),
for various cancers and COVID-19, Artemisinin for COVID-19 and AI technologies for clinical development and manufacturing. The Company
is also independently planning to develop OT-101 for certain animal health indications and contemplating using crypto currencies for
that platform. The Company has acquired apomorphine for Parkinson’s Disease, erectile dysfunction and female sexual dysfunction.
In addition, the Company is evaluating the further development of its product candidates OXi4503 as a treatment for acute myeloid leukemia
and myelodysplastic syndromes and CA4P in combination with a checkpoint inhibitor for the treatment of advanced metastatic melanoma.
The
Company is primarily a cancer immunotherapy company dedicated to the development of first in class self-immunization protocol (“SIP™”)
candidates for difficult to treat cancers. The Company’s proprietary SIP™ candidates are expected to offer advantages over
other immunotherapies because they do not require extraction of the tumor or isolation of the antigens, and they have the potential for
broad-spectrum applicability for multiple cancer types. The Company’s proprietary product candidates have shown promising clinical
activity in phase 2 trials for the treatment of gliomas and pancreatic cancers. The Company aims to translate its unique insights, which
span more than three decades of original work using RNA therapeutics, into the deployment of antisense as a RNA therapeutic for diseases
which are caused by TGF-β overexpression, starting with cancer and expanding to Duchenne Muscular Dystrophy (“DMD”)
and others. OT-101, is being developed as a broad-spectrum anti-cancer drug that can also be used in combination with other standard
cancer therapies to establish an effective multi-modality treatment strategy for difficult-to-treat cancers. The JV plans to initiate
phase 3 clinical trials for OT-101 in both high-grade glioma and pancreatic cancer, and any other indications that may evolve, for human
pharmaceutical needs. The Company is evaluating the further development of its product candidates OXi4503 as a treatment for acute myeloid
leukemia and myelodysplastic syndromes and CA4P in combination with a checkpoint inhibitor for the treatment of advanced metastatic melanoma.
The JV is also developing OT-101 for the various epidemics and pandemics, similar to the current corona virus (“COVID-19”)
pandemic. In this connection, the Company entered into an agreement and supplemental agreement with GMP for a total of $1.2 million to
render services and was paid for the development of OT-101. In 2020 and 2021, the Company was developing Artemisinin as a potential therapy
for COVID-19. Artemisinin, purified from a plant Artemisia annua. For more information on GMP and Artemisinin, refer to our 2021
Annual report on Form 10-K filed with the SEC on April 15, 2022.
Fundraising
J.H.
Darbie Financing Notes & Issuance of Oncotelic Warrants
Between
July 2020 and March 2021, the Company issued and sold a total of 100 units (“Units”). For more information on the
JH Darbie Financing, refer to our Annual Report on Form 10-K filed with the SEC on April 15, 2022 and Note 7 to these Financial Statements.
In
February 2022, the Company and 99 out of 100 of the Investors agreed to extend the maturity date of the notes connected to the Units
from March 31, 2022, to March 31, 2023. In addition, the Company issued approximately 33 million warrants to purchase $50,000 of shares
of common stock of the Company in connection with agreeing to extend the maturity date by one year. The issuance of the additional warrants
resulted in the Company recording an expense of approximately $2.9 million in the Company’s statement of operations during the
nine months ended September 30, 2022.
Equity
Purchase Agreement
In
May 2021, the Company entered into an Equity Purchase Agreement (the “EPL”) and Registration Rights Agreement (the
“Registration Rights Agreement”) with Peak One Opportunity Fund, L.P. (“Peak One”), pursuant to
which the Company shall have the right, but not the obligation, to direct Peak One to purchase up to $10.0 million (the “Maximum
Commitment Amount”) in shares of the common stock, par value $0.01 per share (“Common Stock”) in multiple
tranches. The Company filed a post-effective amendment to reregister the EPL on April 26, 2022 and the post-effective amendment was found
effective by the SEC on May 6, 2022. Since the EPL was made effective in June 2021 till September 30, 2022,
the Company has directed Peak One, on multiple occasions, for an aggregate of 4.7 million shares
of Common Stock for aggregate net cash proceeds of approximately $0.6 million. For more information on the EPL, refer to our Annual Report
on Form 10-K filed with the SEC on April 15, 2022.
August
2021 Notes
In
August 2021, the Company issued Note Purchase Agreements with Autotelic Inc., a related party, the Company’s Chief Financial Officer
(“CFO”), and certain other accredited investors. Under the terms of the Note Purchase Agreements, the Company issued
an aggregate of $698,500 (the “Principal Amount”) in debt in the form of unsecured convertible promissory notes (collectively,
the “August 2021 Notes”). For further information on the Agreement, refer to our 2021 Annual report on Form 10-K filed
with the SEC on April 15, 2022 and Note 5 to these Notes to the Consolidated Financial Statements.
November/December
2021 and March 2022 Notes
In
November and December 2021, the Company entered into various securities purchase agreements with Talos Victory Fund, LLC (the (“Talos”),
Mast Hill Fund, LP (“Mast”), FirstFire Global Opportunities Fund, LLC (“FirstFire”), Blue Lake
Partners, LLC (“Blue Lake”) and Fourth Man, LLC (“Fourth Man”), (collectively called the “Purchase
Agreements”), pursuant to which the Company issued convertible promissory notes in the aggregate principal amount of $0.25
million each, aggregating gross $1.25 million (the “November/December Notes”), which November/December Notes are convertible
into shares of the Company’s Common Stock.
The
Purchase Agreements were entered into as part of a convertible note financing round with aggregate gross proceeds to the Company of up
to $1.25 million (the “Financing”), undertaken by the Company pursuant to that certain Finder’s Fee Agreement between
the Company and JH Darbie & Co., Inc. (“JH Darbie”), dated October 26, 2021 (the “Darbie Agreement”).
All of the Purchase Agreements and the Note contain identical terms except with reference to the name of the holders, the use of proceeds,
which include repayment of certain debt, general corporate expenses and payroll, as applicable and the jurisdictions.
In
January 2022, three of the five note holders under the November and December 2021 Notes exercised their warrants to purchase shares of
Common Stock of the Company on a cashless basis. As such, the Company issued the note holders 3,041,958 shares of Common Stock.
In
March 2022, the Company entered into a Securities Purchase Agreement with Fourth Man, pursuant to which the pursuant to which the Company
issued convertible promissory note in the aggregate principal amount of $0.25 million, which Note is convertible into shares of the Company’s
Common Stock. This Note was undertaken by the Company pursuant to the Darbie Agreement.
In
August 2022, the Company converted $140,000 of Fourth
Man Note into 2,025,000 shares of common stock. Further in September 2022, the Company converted $68,250 of Blue Lake note into 1,428,571
shares of common stock.
For
more information on the notes, refer to Note 6: November – December 2021 Financing of these Notes to the Unaudited Consolidated
Financial Statements.
May
2022 Note
In
May 2022, the Company entered into a Securities Purchase Agreement with Mast, pursuant to which the Company issued convertible
promissory notes in the aggregate principal amount of $0.6 million,
which note is convertible into shares of the Company’s Common Stock. This note was used to fully repay November 2021 Talos
note and the December 2021 First Fire note. $35,000 of
the First Fire Note was converted into 500,000 shares
of Common Stock and the balance was repaid in cash
In
June 2022, Mast fully converted their November 2021 Note, for which the company issued 4,025,000 shares of Common Stock.
June
2022 Note
In
June 2022, the Company entered into a Securities Purchase Agreement with Blue Lake, pursuant to which the Company issued convertible
promissory notes in the aggregate principal amount of $0.34 million, which note is convertible into shares of the Company’s Common
Stock. This note was utilized for corporate expenses.
Joint
Venture with GMP Bio
In
March 2022, the Company formalized a joint venture (“JV”) with Dragon Overseas Capital Limited (“Dragon”)
and GMP Biotechnology Limited (“GMP Bio”), both affiliates of GMP. Although no assurances can be given, the Company
and GMP currently intend to conduct an initial public offering of the JV, at a future date, on either the Hong Kong Exchange or other
stock exchange. For more information on the JV, refer to Note 6 of the Notes to these Financial Statements and our Current Report on
Form 8-K filed with the SEC on April 6, 2022.
The
Company also entered into certain note purchase agreements and notes with GMP in September 2021, October 2021 and January 2022. For information
on the GMP notes, refer to our 2021 Annual Report on Form 10K filed with the SEC on April 15, 2022 and Note 6 to the Notes to these Financial
Statements.
Principles
of Consolidation
The
consolidated financial statements include the accounts of Oncotelic, its wholly owned subsidiaries, Oncotelic Inc. and PointR, and Edgepoint
our non-controlled interest entity. Intercompany accounts and transactions have been eliminated in consolidation.
Basis
of Presentation
The
accompanying consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission including Form 10-Q and Regulation S-X. The information furnished herein reflects all adjustments (consisting
of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly state the operating results
for the respective periods. Certain information and footnote disclosures normally present in annual financial statements prepared in
accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been omitted
pursuant to such rules and regulations.
Liquidity
and Going Concern
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company
has incurred net accumulated losses of approximately $20.6 million, negative working capital of over $15.9 million and negative cash
flow from operations of approximately $1.4 million at September 30, 2022. These conditions raise substantial doubt about the Company’s
ability to continue as a going concern for a period of one year from the date of this filing. Management expects to incur significantly
lower costs and losses in the foreseeable future, as a majority of the costs related with the development of OT-101 will be incurred by the JV, but the Company also recognizes the need to raise capital to remain viable. The accompanying consolidated financial statements
do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. For more information
on Liquidity and Going Concern, refer to our 2021 Annual Report on Form 10-K filed with the SEC on April 15, 2022.
The
Company’s long-term plans include continued development of its current pipeline of products, in addition to continue the development
of OT-101 which is exclusively out-licensed to the JV and the JV will be responsible for the funding required to support the development
in entirety, to generate sufficient revenues, through either technology transfer or product sales, or raise additional financing to cover
its anticipated expenses. Until the Company is able to generate sufficient revenues from its current pipeline, the Company plans on funding
its operations through the sale of equity and/or the issuance of debt, combined with or without warrants or other equity instruments.
Although
no assurances can be given as to the Company’s ability to deliver on its revenue plans, or that unforeseen expenses may arise,
management believes that the potential equity and/or debt financing or other potential financing will provide the necessary funding for
the Company to continue as a going concern. Also, management cannot guarantee any potential debt or equity financing will be available
on favourable terms or at all. As such, management does not believe the Company has sufficient cash for 12 months from the date of this
report. If adequate funds are not available on acceptable terms, or at all, the Company will need to curtail operations, or cease operations
completely.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use
of Estimates
The
preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, equity-based transactions and disclosure of contingent liabilities at the date of the financial
statements and revenues and expense during the reporting period. Actual results could materially differ from those estimates.
The
Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation
of the financial statements. Significant estimates include the valuation of goodwill and intangible assets for impairment, deferred tax
asset and valuation allowance, and fair value of financial instruments.
Cash
As
of September 30, 2022, and December 31, 2021 the Company held all its cash in banks. The Company considers investments in highly liquid
instruments with a maturity of three months or less to be cash equivalents. The Company did not have any cash equivalents as of September
30, 2022 and December 31, 2021, respectively. Restricted cash consists of certificates of deposits held at banks as collateral for various
purposes.
Debt
issuance Costs and Debt discount
Issuance
costs are specific incremental costs that are (1) paid to third parties and (2) directly attributable to the issuance of a debt or equity
instrument. The issuance costs attributable to the initial sale of the instrument are offset against the associated proceeds in the determination
of the instrument’s initial net carrying amount.
Debt
issuance costs and debt discounts are being amortized over the lives of the related financings on a basis that approximates the effective
interest method. Costs and discounts are presented as a reduction of the related debt in the accompanying balance sheets if related to
the issuance of debt or presented as a reduction of additional paid in capital if related to the issuance of an equity instrument. The
Company applies the relative fair value to allocate the issuance costs among freestanding instruments that form part of the same transaction.
If
the Company amends the terms of its convertible notes, the Company reviews and applies the guidance per ASC 470-60 Troubled debt restructurings
and ASC 470-50 Debt-Modifications and Extinguishments, evaluates and concludes whether the terms of the agreements were or
were not substantially different as of a particular reporting date and accounts the transaction as a debt modification or a troubled
debt restructuring.
Fair
Value of Financial Instruments
The
carrying value of cash, accounts payable and accrued expense approximate their fair values based on the short-term maturity of these
instruments. As defined in ASC 820, “Fair Value Measurements and Disclosures,” fair value is the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit
price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including
assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market
corroborated, or generally unobservable. ASC 820 establishes a fair value hierarchy that prioritizes the inputs 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 measurement) and the lowest priority to unobservable inputs (level 3 measurement). This fair value measurement framework applies at
both initial and subsequent measurement.
The
three levels of the fair value hierarchy defined by ASC 820 are as follows:
| ● |
Level
1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets
are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information
on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities
and listed equities. |
| |
|
| ● |
Level
2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly
observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation
methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices
for commodities, time value, volatility factors and current market and contractual prices for the underlying instruments, as well
as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full
term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed
in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest
rate swaps, options and collars. |
| |
|
| ● |
Level
3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be
used with internally developed methodologies that result in management’s best estimate of fair value. |
Investment
in equity securities
The
following table summarizes the cumulative gross unrealized gains and losses and fair values for long-term investments accounted for at
fair value under the fair value option, with the unrealized gains and losses reported within earnings on the Condensed Consolidated Statements
of Operation as of September 30, 2022. No similar investments were held by the Company at December 31, 2021:
SCHEDULE
OF UNREALIZED GAINS AND LOSSES
| | |
Initial Book Value | | |
Cumulative
Gross
Unrealized
Gains | | |
Cumulative
Gross
Unrealized
Losses | | |
Fair
Value | |
| September 30, 2022 | |
| | | |
| | | |
| | | |
| | |
| Investment in GMP Bio (equity securities) | |
$ | 22,640,521 | | |
$ | - | | |
$ | - | | |
$ | 22,640,521 | |
| Total | |
$ | 22,640,521 | | |
$ | - | | |
$ | - | | |
$ | 22,640,521 | |
The
table below sets forth a summary of the recording of the initial value of the long-term value of investment in equity securities of GMP
Bio, based on a third-party valuation report, and changes in the fair value of such equity securities, if such change occurs, as a Level
3 fair value as of September 30, 2022. The Company did not own similar long-term investments as of September 30, 2021:
SUMMARY
OF CHANGES IN FAIR VALUE OF LONG-TERM INVESTMENT IN EQUITY SECURITIES
| | |
September 30, 2022
Fair Value | |
| Balance at January 1, 2022 | |
$ | - | |
| Contribution at cost basis | |
| 5,689,044 | |
| Gain on derecognition of non-financial asset | |
| 16,951,477 | |
| Change in fair value | |
| - | |
| | |
| | |
| Balance at September, 2022 | |
$ | 22,640,521 | |
Derivative
Liability
The
Company has certain derivative liabilities associated with its 2019 bridge financing Convertible Notes (see Note 5), consisted of conversion
feature derivatives at September 30, 2022 and 2021, are Level 3 fair value measurements.
The
table below sets forth a summary of the changes in the fair value of the Company’s derivative liabilities classified as Level 3
as of September 30, 2022 and 2021:
SUMMARY
OF CHANGES IN FAIR VALUE OF DERIVATIVE LIABILITIES
| | |
September 30, 2022
Conversion Feature | | |
September 30, 2021
Conversion Feature | |
| Balance at January 1, 2022 and 2021 | |
$ | 340,290 | | |
$ | 777,024 | |
| New derivative liability | |
| - | | |
| - | |
| Reclassification to additional paid in capital from conversion of debt to common stock | |
| - | | |
| (144,585 | ) |
| Change in fair value | |
| (37,740 | ) | |
| (239,278 | ) |
| | |
| | | |
| | |
| Balance at September, 2022 and 2021 | |
$ | 302,550 | | |
$ | 393,161 | |
As
of September 30, 2022, and December 31, 2021, the Company estimated the fair value of the conversion feature derivatives embedded in
the convertible debentures based on assumptions used in the Black-Scholes valuation model. The key valuation assumptions used consists,
in part, of the price of the Company’s Common Stock, a risk-free interest rate based on the yield of a Treasury note and expected
volatility of the Company’s Common Stock all as of the measurement dates. The Company used the following assumptions to estimate
fair value of the derivatives as of September 30, 2022:
SUMMARY
OF ESTIMATE FAIR VALUE OF DERIVATIVE LIABILITIES
| | |
September 30, 2022
Key Assumptions for fair value of conversions | |
| Risk free interest | |
| 0.17% -2.69% | |
| Market price of share | |
$ | 0.07- 0.23 | |
| Life of instrument in years | |
| 0.01-0.33 | |
| Volatility | |
| 99.80%-109.40% | |
| Dividend yield | |
| 0 | % |
When
the Company changes its valuation inputs for measuring financial liabilities at fair value, either due to changes in current market conditions
or other factors, it may need to transfer those liabilities to another level in the hierarchy based on the new inputs used. The Company
recognizes these transfers at the end of the reporting period that the transfers occur. For the periods ended September 30, 2022 and
2021, respectively, there were no transfers of financial assets or financial liabilities between the hierarchy levels.
The
$2,625,000 of contingent consideration, of shares issuable to PointR shareholders which was recorded and associated with the PointR Merger,
is also classified as Level 3 fair value measurements. For more information on the contingent consideration, refer to our 2021 Annual
Report on Form 10-K filed with the SEC on April 15, 2022 and our Quarterly Report on Form 10-Q filed with the SEC on August 21, 2022.
Net
Income (Loss) Per Share
Basic
net income (loss) per common share is computed by dividing the net income (loss) by the weighted-average number of common shares outstanding
during the period. Diluted net income (loss) per share includes the effect of Common Stock equivalents (notes convertible into Common
Stock, stock options and warrants) when, under either the treasury or if-converted method, such inclusion in the computation would be
dilutive. The Company has excluded from diluted loss per share the dilutive shares, since such inclusion would be anti-dilutive.
Stock-Based
Compensation
The
Company applies the provisions of ASC 718, Compensation—Stock Compensation (“ASC 718”), which requires the measurement
and recognition of compensation expense for all stock-based awards made to employees, including employee stock options, in the statements
of operations.
For
stock options issued to employees, members of the Board of Directors (the “Board”) and consultants for their services,
the Company estimates the grant date fair value of each option using the Black-Scholes option pricing model. The use of the Black-Scholes
option pricing model requires management to make assumptions with respect to the expected term of the option, the expected volatility
of the Common Stock consistent with the expected life of the option, risk-free interest rates and expected dividend yields of the Common
Stock. For awards subject to service-based vesting conditions, including those with a graded vesting schedule, the Company recognizes
stock-based compensation expense equal to the grant date fair value of stock options on a straight-line basis over the requisite service
period, which is generally the vesting term. Forfeitures are recorded as they are incurred as opposed to being estimated at the time
of grant and revised.
For
warrants issued in connection with fund raising activities, the Company estimates the grant date fair value of each warrant using the
Black-Scholes pricing model. The use of the Black-Scholes option pricing model requires management to make assumptions with respect to
the expected term of the warrant, the expected volatility of the Common Stock consistent with the expected life of the warrant, risk-free
interest rates and expected dividend yields of the Common Stock. If the warrants are issued upon termination or cancellation of prior
issued warrants, then the Company estimates the grant date fair value of the new warrants using the Black-Scholes pricing model and evaluates
whether the new warrants are deemed as equity instruments or liability instruments. If the warrants are deemed to be equity instruments,
the Company records stock compensation expense and an addition to additional paid in capital. If, however, the warrants are deemed to
be liability instruments, then the fair value is treated as a deemed dividend and credited to additional paid in capital.
Impairment
of Long-Lived Assets
The
Company reviews long-lived assets, including definite-lived intangible assets, for impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable. Recoverability of these assets is determined by comparing the
forecasted undiscounted net cash flows of the operation to which the assets relate to the carrying amount. If the operation is determined
to be unable to recover the carrying amount of its assets, then these assets are written down first, followed by other long-lived assets
of the operation to fair value. Fair value is determined based on discounted cash flows or appraised values, depending on the nature
of the assets. For the three and nine months ended September 30, 2022 and the year ended December 31, 2021, there were no impairment
losses recognized for long-lived assets.
Intangible
Assets
The
Company records its intangible assets at cost in accordance with ASC 350, Intangibles – Goodwill and Other. The Company reviews
the intangible assets for impairment on an annual basis or if events or changes in circumstances indicate it is more likely than not
that they are impaired. These events could include a significant change in the business climate, legal factors, a decline in operating
performance, competition, sale or disposition of a significant portion of the business, or other factors. If the review indicates the
impairment, an impairment loss would be recorded for the difference of the value recorded and the new value. For the three and nine months
ended September 30, 2022 and the year ended December 31, 2021, there were no impairment losses recognized for intangible assets. When
we sell or contribute properties to unconsolidated arrangements and retain a non-controlling ownership interest in such assets, we recognize
the difference between the consideration received and the carrying amount of the asset sold or contributed. For the three and nine months
ended September 30, 2022, we derecognized the intangibles of $0.8 million associated with OT-101 upon the transfer of our non-financial
asset as a capital contribution for our 45% ownership in the JV.
Goodwill
Goodwill
represents the excess of the purchase price of acquired business over the estimated fair value of the identifiable net assets acquired.
Goodwill is not amortized but is tested for impairment at least once annually, at the reporting unit level or more frequently if events
or changes in circumstances indicate that the asset might be impaired. The goodwill impairment test is applied by performing a qualitative
assessment before calculating the fair value of the reporting unit. If, on the basis of qualitative factors, it is considered not more
likely than not that the fair value of the reporting unit is less than the carrying amount, further testing of goodwill for impairment
would not be required. Otherwise, goodwill impairment is tested using a two-step approach.
The
first step involves comparing the fair value of the reporting unit to its carrying amount. If the fair value of the reporting unit is
determined to be greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount is determined
to be greater than the fair value, the second step must be completed to measure the amount of impairment, if any. The second step involves
calculating the implied fair value of goodwill by deducting the fair value of all tangible and intangible assets, excluding goodwill,
of the reporting unit from the fair value of the reporting unit as determined in step one. The implied fair value of the goodwill in
this step is compared to the carrying value of goodwill. If the implied fair value of the goodwill is less than the carrying value of
the goodwill, an impairment loss equivalent to the difference is recorded. For the three and nine months ended September 30, 2022 and
the year ended December 31, 2021 there were no impairment losses recognized for Goodwill. When we sell or contribute properties to unconsolidated
arrangements and retain a non-controlling ownership interest in such assets, we recognize the difference between the consideration received
and the carrying amount of the asset sold or contributed. For the three and nine months ended September 30, 2022, we derecognized the
goodwill of $4.8 million associated with OT-101upon the transfer of our non-financial asset as a capital contribution for our 45% ownership
in the JV.
Derivative
Financial Instruments Indexed to the Company’s Common Stock
We
have generally issued derivative financial instruments, such as warrants, in connection with our equity offerings. We evaluate the terms
of these derivative financial instruments in order to determine their accounting treatment in our financial statements. Key considerations
include whether the financial instruments are freestanding and whether they contain conditional obligations. If the warrants are freestanding,
do not contain conditional obligations and meet other classification criteria, we account for the warrants as an equity instrument. However,
if the warrants contain conditional obligations, then we account for the warrants as a liability until the conditional obligations are
met or are no longer relevant. Because no established market prices exist for the warrants that we issue in connection with our equity
offerings, we must estimate the fair value of the warrants, which is as inherently subjective as it is for stock options, and for similar
reasons as noted in the stock-based compensation section above. For financial instruments which are accounted for as a liability, we
report any changes in their estimated fair values as gains or losses in our Consolidated Statement of Income.
Convertible
Instruments
The
Company evaluates and accounts for conversion options embedded in its convertible instruments in accordance with ASC 815 “Derivatives
and Hedging”.
ASC
815 generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and
account for them as free-standing derivative financial instruments. These three criteria include circumstances in which (a) the economic
characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and
risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is
not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported
in earnings as they occur, and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered
a derivative instrument. Professional standards also provide an exception to this rule when the host instrument is deemed to be conventional
as defined under professional standards as “The Meaning of Conventional Convertible Debt Instrument.”
The
Company accounts for convertible instruments (when it has determined that the embedded conversion options should not be bifurcated from
their host instruments) in accordance with ASC 470-20 “Debt – Debt with Conversion and Other Options.” Accordingly,
the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments
based upon the differences between the fair value of the underlying Common Stock at the commitment date of the note transaction and the
effective conversion price embedded in the note. Original issue discounts under these arrangements are amortized over the term of the
related debt to their earliest date of redemption. The Company also records when necessary deemed dividends for the intrinsic value of
conversion options embedded in preferred shares based upon the differences between the fair value of the underlying Common Stock at the
commitment date of the note transaction and the effective conversion price embedded in the note.
ASC
815-40 “Derivatives and Hedging – Contracts in Entity’s Own Equity” provides that, among other things, generally,
if an event is not within the entity’s control could or require net cash settlement, then the contract shall be classified as an
asset or a liability.
Variable
Interest Entity (VIE) Accounting
The
Company evaluates its ownership, contractual relationships and other interests in entities to determine the nature and extent of the
interests, whether such interests are variable interests and whether the entities are VIEs in accordance with ASC 810, Consolidations.
These evaluations can be complex and involve Management judgment as well as the use of estimates and assumptions based on available historical
information, among other factors. Based on these evaluations, if the Company determines that it is the primary beneficiary of a VIE,
the entity is consolidated into the financial statements. At September 30, 2022 and December 31, 2021, the Company identified EdgePoint
to be the Company’s sole VIE. At September 30, 2022 and December 31, 2021, the Company’s ownership percentage of EdgePoint
was 29% and 29%, respectively. The VIE’s net assets were $14 thousand and $0.1 million at September 30, 2022 and December 31, 2021,
respectively.
Investments
- Equity Method
The
Company accounts for equity method investments at cost, adjusted for the Company’s share of the investee’s earnings or losses,
which are reflected in the consolidated statements of operations. The Company periodically reviews the investments for other than temporary
declines in fair value below cost and more frequently when events or changes in circumstances indicate that the carrying value of an
asset may not be recoverable. The Investment in GMP Bio represents the investment into equity securities for which the Company elected
the fair value option pursuant to ASC 825-10-15 and subsequent fair value changes in the GMP Bio shares shall be included in the result
from other income. Refer to Note 6 to these Notes to the Consolidated Financial Statements.
Joint
Venture agreement
We
have equity interest in unconsolidated arrangement that is primarily engaged in the business of drug discovery, development, and commercialization,
including but not limited to development and commercialization of TGF-beta therapeutics as well as establishing and operating contract
development and manufacturing organization (“CDMO”) facilities and capabilities. The Company first reviews the arrangement
to determine if it meets the definition of an accounting joint venture pursuant to ASC 323-10-20. In order to meet the definition of
a joint venture, the arrangement must have all of the following characteristics, (i) the arrangement is organized within a separate legal
entity, (ii) the entity is under the joint control of the venturers, (iii) the venturers must be able to exercise joint control through
their equity investments, (iv) the qualitative characteristics of the entity, including its purpose and design must be consistent with
the definition of a joint venture.
We
consolidate arrangements that are considered to be VIEs where we are the primary beneficiary. We analyze our investments in joint ventures
to determine if the joint venture is considered a VIE and would require consolidation. We (i) evaluate the sufficiency of the total equity
investment at risk, (ii) review the voting rights and decision-making authority of the equity investment holders as a group and whether
there are limited partners (or similar owning entities) that lack substantive participating or kick out rights, guaranteed returns, protection
against losses, or capping of residual returns within the group and (iii) establish whether activities within the venture are on behalf
of an investor with disproportionately few voting rights in making this VIE determination.
To
the extent that we own interests in a VIE and we (i) have the power to direct the activities that most significantly impact the economic
performance of the VIE and (ii) have the obligation or rights to absorb losses or receive benefits that could potentially be significant
to the VIE, then we would be determined to be the primary beneficiary and would consolidate the VIE. To the extent that we own interests
in a VIE, then at each reporting period, we re-assess our conclusions as to which, if any, party within the VIE is considered the primary
beneficiary.
To
the extent that our arrangements do not qualify as VIEs, they are consolidated if we control them through majority ownership interests
or if we are the managing entity (general partner or managing member) and our partner does not have substantive participating rights.
Control is further demonstrated by our ability to unilaterally make significant operating decisions, refinance debt, and sell the assets
of the joint venture without the consent of the non-managing entity and the inability of the non-managing entity to remove us from our
role as the managing entity.
We
use the equity method of accounting for those arrangements where we exercise significant influence but do not have control. Under the
equity method of accounting, our investment in each arrangement is included on our consolidated balance sheet; however, the assets and
liabilities of the joint ventures for which we use the equity method are not included on our consolidated balance sheet.
When
we sell or contribute properties to unconsolidated arrangements and retain a non-controlling ownership interest in such assets, we recognize
the difference between the consideration received and the carrying amount of the asset sold or contributed when its derecognition criteria
are met. The equity method investment we retain in such partial sale transactions is noncash consideration and is measured at fair value.
As a result, the accounting for a partial sale will result in the recognition of a full gain or loss.
When
circumstances indicate there may have been a reduction in the value of an equity investment, we evaluate whether the loss in value is
other than temporary. If we conclude it is other than temporary, we recognize an impairment charge to reflect the equity investment at
fair value.
The
Company elected the fair value option under the fair value option Subsection of Section 825-10-15 to account for its equity-method investment
as the Company believes that the fair value option is most appropriate for a company in the biotechnology industry, The fair value option
is more appropriate for companies that are involved in extensive and usually very expensive research and development efforts, which are
not appropriately reflected in the market value or reflective of the true value of the development activities of the company
Revenue
Recognition
The
Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers (Topic 606).
Under
Topic 606, the Company recognizes revenue when its customers obtain control of the promised good or services, in an amount that reflects
the consideration which the Company expects to receive in exchange for those goods or services. The Company applies the following five-step:
(i) identify the contract(s) with a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction
price; (iv) allocate the transaction price to the performance obligation(s) in the contract; and (v) recognize revenue when (or as) the
Company satisfies a performance obligation.
At
contract inception, once the contract is determined to be within the scope of Topic 606, the Company identifies the performance obligation(s)
in the contract by assessing whether the goods or services promised within each contract are distinct. The Company then recognizes revenue
for the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation
is satisfied.
The
Company anticipates generating revenues from rendering services to other third-party customers for the development of certain drug products
and/or in connection with certain out-licensing agreements. In the case of services rendered for development of the drugs, revenue is
recognized upon the achievement of the performance obligations or over time on a straight-line basis over the extended service period.
In the case of out-licensing contracts, the Company records revenues either upon achievement of certain pre-defined milestones, when
there is no obligation of the Company achieve any performance obligations in connection with the said pre-defined milestones, or upon
achievement of the performance obligations if the milestones require the Company to provide the performance obligations.
The
Company occasionally collects advance payments from customers toward commitments to provide services or performance obligations, in which
case the advance payment is recorded as a liability until the obligations are fulfilled and revenue is recognized.
Research
& Development Costs
In
accordance with ASC 730-10-25 “Research and Development”, research and development costs are charged to expense as and when
incurred.
Recent
Accounting Pronouncements
In
August 2020, the FASB issued “ASU 2020-06, 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”) which simplifies the accounting for convertible
instruments. The guidance removes certain accounting models which separate the embedded conversion features from the host contract for
convertible instruments. Either a modified retrospective method of transition or a fully retrospective method of transition was permissible
for the adoption of this standard. Update No. 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim
periods within those fiscal years. Early adoption was permitted no earlier than the fiscal year beginning after December 15, 2020. The
Company is evaluating the impact of implementation on its financial statements, if any.
All
other newly issued but not yet effective accounting pronouncements have been deemed to be not applicable or immaterial to the Company.
Prior
Period Reclassifications
Certain
amounts in prior periods may have been reclassified to conform with current period presentation, if any.
NOTE
3 - INTANGIBLE ASSETS AND GOODWILL
Goodwill
from 2019 Reverse Merger with Oncotelic and PointR
The
Company completed the merger with Oncotelic Inc. (“Merger”) in April 2019. The Company completed the merger with PointR Data
Inc (“PointR Merger”) in November 2019. For more details on the two mergers, refer to our 2020 Annual Report on Form 10-K
for the year ended December 31, 2020 filed by the Company on April 15, 2021.
The
Oncotelic merger gave rise to Goodwill of $4,879,999. Further, we added goodwill of $16,182,456 upon the completion of the Merger with
PointR. In general, the goodwill is tested on an annual impairment date of December 31. As of September 30, 2022, the goodwill from the
Oncotelic merger of $4.9 million was contributed towards the JV as Oncotelic’s investment in equity in GMP Bio. Since the PointR
assets are currently being developed for therapies and manufacturing AI platforms, the Company does not believe the there are any factors
or indications that the goodwill is impaired.
Upon
the non-financial sale of our asset as contribution to our equity method investment we derecognized the balance of the carrying value
of our goodwill of approximately $4.9 million from the Oncotelic Merger in accordance with our policy and authoritative accounting guidance.
Assignment
and Assumption Agreement with Autotelic, Inc.
In
April 2018, Oncotelic Inc. entered into an Assignment and Assumption Agreement (the “Assignment Agreement”) with Autotelic
Inc., an affiliate company, and Autotelic LLC, an affiliate company, pursuant to which Oncotelic acquired the rights to all intellectual
property (“IP”) related to a patented product. As consideration for the Assignment Agreement, Oncotelic Inc. issued
204,798 shares of its Common Stock for a value of $819,191. The Assignment Agreement also provides that Oncotelic Inc. shall be responsible
for all costs related to the IP, including development and maintenance, going forward.
Intangible
Asset Summary
The
following table summarizes the balances as of September 30, 2022 and December 31, 2021, of the intangible assets acquired, their useful
life, and annual amortization:
SCHEDULE
OF INTANGIBLE ASSETS
| | |
September 30, 2022 | | |
Remaining Estimated
Useful Life
(Years) | |
| Intangible asset – Intellectual property | |
$ | 819,191 | | |
| 16.25 | |
| Intangible asset – Capitalization of license cost | |
| 190,989 | | |
| 16.25 | |
| | |
| 1,010,180 | | |
| | |
| Less Accumulated Amortization | |
| (201,180 | ) | |
| | |
| Less: Derecognition of carrying value upon transfer of non-financial asset | |
| (809,000 | ) | |
| | |
| Total | |
$ | - | | |
| | |
| | |
December 31, 2021 | | |
Remaining Estimated
Useful Life
(Years) | |
| Intangible asset – Intellectual property | |
$ | 819,191 | | |
| 17.00 | |
| Intangible asset – Capitalization of license cost | |
| 190,989 | | |
| 17.00 | |
| | |
| 1,010,180 | | |
| | |
| Less Accumulated Amortization | |
| (188,339 | ) | |
| | |
| Total | |
$ | 821,841 | | |
| | |
Amortization
of identifiable intangible assets for the three months ended September 30, 2022 and 2021 was $0 and $12,841, respectively. Amortization
of identifiable intangible assets for the nine months ended September 30, 2022 and 2021 was $12,841 and $38,524, respectively. Upon the
non-financial sale of our asset as contribution to our equity method investment of approximately $0.8 million, we derecognized the balance
of the carrying value of our intangibles in accordance with our policy and authoritative accounting guidance.
There
will be no future yearly amortization expense related to our intangibles.
In-Process
Research & Development (“IPR&D”) Summary
The
IPR&D assets were acquired in the PointR Merger during the year ended December 31, 2019. Since January 2021, the Company has determined
that the IPR&D should be reported as an indefinitely lived asset and therefore will evaluate, on an annual basis, for any impairment
on the IPR&D and will record an impairment if identified. The balance of IPR&D as of September 30, 2022 and December 31, 2021
was $1,101,760. The following table summarizes the balances as of September 30, 2022 and December 31, 2021 of the IPR&D assets. The
Company evaluates, on an annual basis, for any impairment and records an impairment if identified. The Company identified no impairment
to IPR&D assets during its evaluation.
NOTE
4 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts
payable and accrued expense consists of the following amounts:
SCHEDULE
OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES
| | |
September 30, 2022 | | |
December 31, 2021 | |
| | |
| | |
| |
| Accounts payable | |
$ | 1,783,561 | | |
$ | 1,927,749 | |
| Accrued expense | |
| 1,068,598 | | |
| 1,164,974 | |
| Accounts payable and accrued liabilities, current | |
$ | 2,852,159 | | |
$ | 3,092,723 | |
| | |
September 30, 2022 | | |
|
December 31, 2021 |
|
| | |
| | | |
|
|
|
| Accounts payable – related party | |
$ | 349,462 | | |
$ |
403,423 |
|
NOTE
5 – CONVERTIBLE DEBENTURES, NOTES AND OTHER DEBT
As
of September 30, 2022 special purchase agreements (SPAs) with convertible debentures and notes, net of debt discount and including accrued
interest, if any, consist of the following amounts:
SCHEDULE
OF CONVERTIBLE DEBENTURES AND NOTES, NET OF DISCOUNT
| | |
September 30,
2022 | |
| Convertible debentures | |
| | |
| 10% Convertible note payable, due April 23, 2022 – Bridge Investor | |
$ | 35,556 | |
| 10% Convertible note payable, due April 23, 2022 – Related Party | |
| 164,444 | |
| 10% Convertible note payable, due August 6, 2022 – Bridge Investor | |
| 200,000 | |
| | |
| 400,000 | |
| Fall 2019 Notes | |
| | |
| 5% Convertible note payable – Stephen Boesch | |
| 122,708 | |
| 5% Convertible note payable – Related Party | |
| 285,608 | |
| 5% Convertible note payable – Dr. Sanjay Jha (Through his family trust) | |
| 285,128 | |
| 5% Convertible note payable – CEO, CTO* & CFO – Related Parties | |
| 93,432 | |
| 5% Convertible note payable – Bridge Investors | |
| 191,422 | |
| | |
| 978,298 | |
| | |
| | |
| August 2021 Convertible Notes | |
| | |
| 5% Convertible note – Autotelic Inc– Related Party | |
| 264,426 | |
| 5% Convertible note – Bridge investors | |
| 395,053 | |
| 5% Convertible note – CFO – Related Party | |
| 79,328 | |
| | |
| 738,807 | |
| | |
| | |
| JH Darbie PPM Debt | |
| | |
| 16% Convertible Notes - Non-related parties | |
| 2,305,370 | |
| 16% Convertible Notes – CEO – Related Party | |
| 141,928 | |
| | |
| 2,447,298 | |
| | |
| | |
| November/December 2021 & March 2022 Notes | |
| | |
| 12% Convertible Notes – Accredited Investors | |
| 304,683 | |
| | |
| | |
| Debt for Clinical Trials – GMP | |
| | |
| 2% Convertible Notes – GMP | |
| 4,637,096 | |
| | |
| | |
| May and June 2022 Note | |
| | |
| 12% Convertible Notes – Accredited Investors | |
| 288,540 | |
| | |
| | |
| Other Debt | |
| | |
| Short term debt – Bridge investors | |
| 243,916 | |
| Short term debt from CFO – Related Party | |
| 25,050 | |
| Short term debt – Autotelic Inc– Related Party | |
| 20,000 | |
| | |
| 288,966 | |
| Accrued interest | |
| -2,401 | |
| Total of convertible debentures & notes and other debt | |
$ | 10,081,287 | |
For
information on the special purchase agreements (SPAs) with convertible debentures and notes, net of debt discount and including accrued
interest, if any, as of December 31, 2022, refer to our Annual Report on Form 10-K for the year ended December 31, 2021.
Convertible
Debentures
As
of September 30, 2022, the Company had a derivative liability of approximately $300,000 and a change in fair value of approximately $38,000
on the Convertible Debentures issued in 2019 to our CEO and a bridge investor.
Bridge
Financing
Notes
with Officer and Bridge Investor
In
April 2019, the Company entered into a Securities Purchase Agreement (the “Bridge SPA”) with our CEO and the Bridge
Investor with a commitment to purchase convertible notes in the aggregate of $400,000. For more information on the Bridge SPA, refer
to our Annual Report on Form 10-K filed with the SEC on April 15, 2022.
The
issuance of the Trieu Note resulted in a discount from the beneficial conversion feature totaling $131,555 related to the conversion
feature. Total amortization of the OID and the discount totaled $19,500 and $2,743 for the nine months ended September 30, 2022, and
2021. Total unamortized discount on this note was approximately $0 and $19,000 as of September 30, 2022, and December 31, 2021, respectively.
In
April 2019, pursuant to the Bridge SPA the Company entered into Convertible Note Tranche #1 (“Tranche #1”) with the
Bridge Investor. For more information on Tranche #1, refer to our Annual Report on Form 10-K filed with the SEC on April 15, 2022.
The
issuance of the note resulted in a discount from the beneficial conversion feature totaling $28,445. Total amortization of the OID and
discount totaled approximately $4,400 and $1,400 for the nine months ended September 30, 2022, and 2021, respectively. Total unamortized
discount on this note was approximately $0 and $4,400 as of September 30, 2022, and December 31, 2021.
On
August 6, 2019, pursuant to the Bridge SPA the Company entered into Convertible Note Tranche #2 (“Tranche #2”) with
the Bridge Investor. For more information on Tranche #2, refer to our Annual Report on Form 10-K filed with the SEC on April 15, 2022.
The
issuance of the note resulted in a discount from the beneficial conversion feature totaling $175,000.
Total amortization of the OID and discount totaled approximately $11,700
and approximately $6,300
for the nine months ended September 30, 2022, and 2021, respectively. Total unamortized discount on this note was $0
and $12,000
as of September 30, 2022, and December 31, 2021.
Fall
2019 Debt Financing
In
December 2019, the Company closed its Fall 2019 Debt Financing, raising an additional $500,000 bringing the gross proceeds of all debt
financings under the Fall 2019 Debt Financing to $1,000,000. . The Majority Holders have waived
the default in the maturity of the Fall 2019 Notes and as such there is no event of default. The Majority Holders have also extended
the terms of the notes till June 30, 2023. For more information on the Fall 2019 Debt Financing, refer to our Annual
Report on Form 10-K filed with the SEC on April 15, 2022.
The
Company recorded interest expense of $10,625 and $31,875 for the three and nine months ended September 30, 2022. The Company recorded
interest expense of $10,625 and $32,787 for the three and nine months ended September 30, 2021. The total amount outstanding under the
Fall 2019 note, including accrued interest was $978,299 and $946,424 as of September 30, 2022 and December 31, 2021, respectively. The
Company repaid $0 of principal during the three and nine months ended September 30, 2022. The total gross principal amount was
$850,000 as of September 30, 2022, and December 31, 2021.
GMP
Notes
In
June 2020, the Company secured $2 million in debt financing, evidenced by a one-year convertible note (the “GMP Note”)
from GMP, to conduct a clinical trial evaluating OT-101 against COVID-19 bearing 2% annual interest, and is personally guaranteed by
Dr. Vuong Trieu, the Chief Executive Officer of the Company. The GMP Note is convertible into the Company’s Common Stock upon the
GMP Note’s maturity of the GMP Note, at the Company’s Common Stock price on the date of conversion with no discount. GMP
has waived the default in the maturity of the GMP Note and as such there is no event of default and also agreed to extend the date of
maturity of the GMP Note to December 31, 2022. GMP does not have the option to convert prior to the GMP Note’s maturity. Such financing
will be utilized solely to fund the clinical trial. The Company’s liability under GMP Note commenced to accrue when GMP first began
to pay for services related to the clinical trial to our third-party clinical research organization, up to a maximum of $2 million. GMP
has been invoiced by the clinical research organization for the full $2 million as of March 31, 2022, and as such the Company has recognized
the liability as a convertible debt.
In
September 2021, the Company secured a further $1.5
million in debt financing, evidenced by a one-year convertible note (the “GMP Note 2”) from GMP, to fund the same
clinical trial evaluating OT-101 against COVID-19 bearing 2%
annual interest. The GMP Note is convertible into the Company’s Common Stock upon the GMP Note 2’s maturity one year
from the date of the GMP Note 2, at the Company’s Common Stock price on the date of conversion with no discount. GMP has
waived the default in the maturity of the GMP Note and as such there is no event of default and also agreed to extend the date of
maturity of the GMP Note to December 31, 2022. GMP does not have the option to convert prior to the GMP Note 2’s maturity at
the end of one year. Such financing was to be utilized solely to fund the clinical trial. GMP was invoiced by the clinical research
organization for $0.5
million and. GMP paid the clinical trial organization the first tranche of $0.5
million in October 2021.
In
October 2021, the Company entered into an Unsecured Convertible Note Purchase Agreement (the “October Purchase Agreement”)
with GMP, pursuant to which the Company issued a convertible promissory note in the aggregate principal amount of $0.5 million (the “October
2021 Note”), which October 2021 Note is convertible into shares of the Company’s Common Stock.
In
January 2022, the Company entered into an Unsecured Convertible Note Purchase Agreement (the “January Purchase Agreement”)
with GMP, pursuant to which the Company issued a convertible promissory note in the aggregate principal amount of $0.5 million (the “January
2022 Note”), which January 2022 Note is convertible into shares of the Company’s Common Stock.
The
GMP Note 2, the October 2021 Note and the January 2022 Note carries an interest rate of 2% per annum and matures on the earlier of (a)
the one-year anniversary of the date of the Purchase Agreement, or (b) the acceleration of the maturity by GMP upon occurrence of an
Event of Default (as defined below). The GMP Note 2, the October 2021 Note and the January 2022 Note contains a voluntary conversion
mechanism whereby GMP may convert the outstanding principal and accrued interest under the terms of the GMP Note 2, the October 2021
Note and the January 2022 Note into shares of Common Stock (the “Conversion Shares”), at the consolidated closing
bid price of the Company’s Common Stock on the applicable OTC Market as of the date the Company receives a Notice of Conversion
from GMP. Prepayment of the GMP Note 2, the October 2021 Note and the January 2022 Note may be made at any time by payment of the outstanding
principal amount plus accrued and unpaid interest. The October Note contains customary events of default (each an “Event of
Default”). If an Event of Default occurs, at GMP’s election, the outstanding principal amount of the GMP Note 2, the
October 2021 Note and the January 2022 Note, plus accrued but unpaid interest, will become immediately due and payable in cash. The October
Purchase Agreement and the January Purchase Agreement requires the Company to use of the proceeds received under the October 2021 Note
and January 2022 Note to support the clinical development of OT-101, including payroll and has been made in continuation of the relationship
between the Company and GMP.
The
total principal outstanding on all the GMP notes, inclusive of accrued interest, was $4,637,096 and $4,069,781 as of September 30, 2022,
and December 31, 2021, respectively.
During
the nine months ended September 31, 2022, and 2021, the Company incurred approximately $66,500
and approximately $10,600,
of interest expense respectively.
August
2021 Notes
In
August 2021, the Company entered into Note Purchase Agreements with Autotelic - a related party, our CFO - a related party, and
certain accredited investors (the “August 2021 investors”), whereby the Company issued four convertible notes in the
aggregate principal amount of $698,500
convertible into shares of common stock of the Company for net proceeds of $690,825. The
convertible notes carry a five (5%) percent coupon and mature one year from issuance. The majority of the August 2021 investors have
the right, but not the obligation, not more than five days following the maturity date, to convert all, but not less than all, the
outstanding and unpaid principal plus accrued interest into the Company’s common stock, at a conversion price of $0.18.
The August 2021 Note Holders has waived the default in the maturity of the August 2021 Notes and as such there is no event of
default and also agreed to extend the date of maturity of the August 2021 Notes to June 30, 2023. The Company determined that the
economic characteristics and risks of the embedded conversion option are not clearly and closely related to the economic
characteristics and risks of the debt host instrument. Further, the Company determined that the embedded conversion feature meets
the definition of a derivative but met the scope exception to the derivative accounting required under ASC 815 for certain contracts
involving a reporting entity’s own equity.
During
the three and nine months ended September 30, 2022, the Company recognized approximately $8,700 and $26,050 of interest, respectively.
During
the three and nine months ended September 30, 2021, the Company recognized approximately $5,400 of interest.
At
September 30, 2022, and December 31, 2021, accrued interests on these convertible notes totaled approximately $40,300 and $14,260, respectively.
November
– December 2021 and March 2022 Financing
In
November and December 2021, the Company entered into securities purchase agreement with five institutional investors, whereby the Company
issued five convertible notes in the aggregate principal amount of $1,250,000 convertible into shares of common stock of the Company.
The convertible notes carry a twelve (12%) percent coupon and a default coupon of 16% and mature at the earliest of one year from issuance
or upon event of default. Investors has the right at any time following issuance date to convert all or any part of the outstanding and
unpaid amount of the note into the Company’s common stock at a conversion price established at a fixed rate of $0.07. The Company
granted a total number of 9,615,385 warrants convertible into an equivalent number of the Company common shares at a strike price of
$0.13 up to five years after issuance. The Placement agent was also granted a total amount of 961,540 as part of a finder’s fee
agreement.
In
March 2022, the Company entered into a Securities Purchase Agreement with Fourth Man, pursuant to which the Company issued convertible
promissory note in the aggregate principal amount of $0.25 million, convertible into shares of common stock of the Company. The convertible
notes carry a twelve (12%) percent coupon and a default coupon of 16% and mature at the earliest of one year from issuance or upon event
of default. Investors has the right at any time following issuance date to convert all or any part of the outstanding and unpaid amount
of the note into the Company’s common stock at a conversion price established at a fixed rate of $0.10. The Company granted a total
number of 1,250,000 warrants convertible into an equivalent number of the Company common shares at a strike price of $0.20 up to five
years after issuance. The Placement agent was also granted a total amount of 125,000 as part of a finder’s fee agreement.
During
the nine months ended September 30, 2022, the Company converted the Mast Hill convertible note into 4,025,000 shares of the Company’s
common stock, which fully retired the convertible note as of June 30, 2022. Such conversion resulted in a loss from debt conversion of
approximately $0.1 million, which was recorded in other expense in the Company’s consolidated statements of operations.
During
the nine months ended September 30, 2022, the Company repaid the Talos Victory and First Fire convertible notes with the proceeds from
the May 2022 Mast Hill convertible note. Such repayment resulted in a loss from debt extinguishment of approximately $258,100, which
was recorded in other expense in the Company’s consolidated statements of operations.
During
the nine months ended September 30, 2022, the Company converted $68,250 of Blue Lake note into 1,428,571 shares of common stock.
During
the nine months ended September 30, 2022, the Company converted $140,000 of Fourth Man note into 2,025,000 shares of common stock.
As
of September 30, 2022, and December 31, 2021, convertible notes under the November-December 2021 Financing, net of debt discount, consist
of the following amounts:
SCHEDULE
OF CONVERTIBLE NOTES, NET OF DISCOUNT
| | |
September
30, 2022 | | |
December
31, 2021 | |
| | |
| | |
| |
| Mast
Hill Convertible note, 12% coupon November 21 | |
$ | - | | |
$ | 250,000 | |
| Talos
Victory Convertible note, 12% coupon November 2021 | |
| - | | |
| 250,000 | |
| First
Fire Convertible note, 12% coupon, December 2021 | |
| - | | |
| 250,000 | |
| Blue
Lake Convertible note, 12% coupon, December 2021 | |
| 181,750 | | |
| 250,000 | |
| Fourth
Man Convertible note, 12% coupon December 2021 | |
| 110,000 | | |
| 250,000 | |
| Convertible
notes, gross | |
$ | 291,750 | | |
$ | 1,250,000 | |
| Less
Debt discount recorded | |
| (500,000 | ) | |
| (1,250,000 | ) |
| Amortization
debt discount | |
| 386,734 | | |
| 76,994 | |
| Convertible
notes, net | |
$ | 178,484 | | |
$ | 76,994 | |
The
Company recognized approximately $150,000 and $0 of interest during the nine months ended September 30, 2022, and 2021, respectively.
The balance of Accrued interest was approximately $30,000 and $10,300 as of September 30, 2022, and December 31, 2021, respectively.
The
Company recognized approximately $774,600 and $0 of interest expense attributable to the amortization of the debt discount from the original
debt discount, deferred financing costs, fair value allocated to the warrants and the beneficial conversion feature as of September 30,
2022, and 2021, respectively.
The
Company recorded an initial debt discount of approximately $0.4 million representing the intrinsic value of the conversion option embedded
in the convertible debt instrument based upon the difference between the fair value of the underlying common stock at the commitment
date of the note transaction and the effective conversion price embedded in the note. The Company recognized amortization expense related
to the debt discount and debt issuance costs of approximately $0.8 million for the nine months ended September 30, 2022, which is included
in interest expense in the consolidated statements of operations.
March
2022 Financing
In
March 2022, the Company entered into a securities purchase agreement with an accredited investor, whereby the Company issued a promissory
note in the aggregate principal amount of $250,000 convertible into shares of common stock of the Company. The convertible note carries
a twelve (12%) percent coupon and a default coupon of 16% and mature one year from issuance. The investor has the right at any time following
issuance date to convert all or any part of the outstanding and unpaid amount of the note into the Company’s common stock at a
conversion price established at a fixed rate of $0.10. The Company also granted a total number of 1,250,000 warrants convertible into
an equivalent number of the Company common shares at a strike price of $0.20 up to five years after issuance.
As
of September 30, 2022, the March 2022 convertible note, net of debt discount, consisted of the following amount. There were no similar
amounts due on the March 2022 Notes as of December 31, 2021:
The
Company recognized approximately $7,500 and $15,100 of accrued interest during the three and nine months ended September 30, 2022, respectively.
The Company recognized approximately $63,000 and $126,000 of interest expense attributable to the amortization of the debt discount from
the original deferred financing costs, fair value allocated to the warrants and the beneficial conversion feature during the three and
nine months ended September 30, 2022, respectively.
May
2022 Mast Financing
In
May 2022, the Company entered into a securities purchase agreement with one institutional investor, whereby the Company issued one convertible
note in the aggregate principal amount of $605,000 convertible into shares of common stock of the Company (“May 2022 Mast Note”).
The convertible notes carry a twelve (12%) percent coupon and a default coupon of 16% and mature at the earliest of one year from issuance
or upon event of default. Investor has the right at any time following issuance date to convert all or any part of the outstanding and
unpaid amount of the note into the Company’s common stock at a conversion price established at a fixed rate of $0.10. The Company
granted a total number of 3,025,000 warrants convertible into an equivalent number of the Company common shares at a strike price of
$0.20 up to five years after issuance. The Placement agent was also granted a total amount of 302,500 as part of a finder’s fee
agreement. Portion of the proceeds will be used to retire some of the November/December 2021 notes. The extinguishment of existing notes
resulted in the recognition of approximately $258,100 in loss on extinguishment of debt in the consolidated statement of operations in
nine months ended September 30, 2022.
As
of September 30, 2022 the May 2022 Mast Note, net of debt discount, consisted of the following amount. No similar amount was outstanding
as at December 31, 2021:
The
Company recognized approximately $72,600 and $0 of accrued interest during the nine months ended September 30, 2022, and 2021, respectively,
which is the guaranteed twelve-month coupon and earned in full at issuance date. The Company recognized approximately $196,200 and $0
of interest expense attributable to the amortization of the debt discount from the original debt discount, deferred financing costs,
fair value allocated to the warrants and the beneficial conversion feature during the nine months ended September 30, 2022, and 2021,
respectively.
June
2022 Financing
In
June 2022, the Company entered into a securities purchase agreement with one institutional investor, whereby the Company issued one convertible
note in the aggregate principal amount of $335,000 convertible into shares of common stock of the Company (“June 2022 Blue Lake
Note”). The convertible notes carry a twelve (12%) percent coupon and a default coupon of 16% and mature at the earliest of one
year from issuance or upon event of default. Investor has the right at any time following issuance date to convert all or any part of
the outstanding and unpaid amount of the note into the Company’s common stock at a conversion price established at a fixed rate
of $0.10. The Company granted a total number of 837,500 warrants convertible into an equivalent number of the Company common shares at
a strike price of $0.20 up to five years after issuance. The Placement agent was also granted a total amount of 83,750 warrants as part
of a finder’s fee agreement. Portion of the proceeds will be used to retire some of the November/December 2021 notes.
As
of September 30, 2022 the June 2022 Blue Lake Note, net of debt discount, consisted of the following amount. No similar amount was outstanding
as at December 31, 2021:
The
Company recognized approximately $40,200 and $0 of accrued interest during the nine months ended September 30, 2022, and 2021, respectively,
which is the guaranteed twelve-month coupon and earned in full at issuance date. The Company recognized approximately $90,620 and $0
of interest expense attributable to the amortization of the debt discount from the original debt discount, deferred financing costs,
fair value allocated to the warrants and the beneficial conversion feature during the nine months ended September 30, 2022, and 2021,
respectively.
Other
short-term advances
During
the year ended December 31, 2020, the Company’s CEO provided additional funding of $70,000 to the Company, of which $50,000 was
repaid before December 31, 2020. Further, during the nine months ended September 30, 2022, $20,000 was repaid to the Company’s
CEO. As such, $0 and $20,000 was outstanding at September 30, 2022 and December 31, 2021, respectively.
During
the year ended December 31, 2021, Autotelic Inc. provided a short-term funding of $120,000 to the Company, which was repaid in 2021.
In May 2021, Autotelic provided an additional short-term funding of $250,000 to the Company, which was converted into the August 2021
Notes. Autotelic provided an additional $20,000 short-term loan to the Company, and as such, $20,000 was outstanding and payable to Autotelic
at September 30, 2022 and December 31, 2021, respectively.
During
the year ended December 31, 2021, the Company’s CFO, a related Party, provided short term advances of approximately $45,000. During
the year ended December 31, 2020, the Company’s CFO had provided a short-term advance of $25,000, which was repaid during the year
ended December 31, 2021. $20,000 was repaid to the CFO in January 2022. As such approximately $25,000 and $45,000 was outstanding at
September 30, 2022 and December 31, 2021, respectively.
NOTE
6 - JOINT VENTURE WITH GMP BIO AND AFFILIATES, EQUITY METHOD INVESTMENT
On
March 31, 2022, the Company entered into (i) a joint venture (the “JV”) agreement with Dragon and GMP Bio, both affiliates
of GMP, (and the Company, Dragon and GMP Bio are collectively called the “Parties”) (the “JVA”),
(ii) a license agreement for rights to OT-101 (the “US License Agreement”) for the territory within the United States
of America (the “US”) with Sapu Holdings, LLC, a subsidiary of GMP Bio and (iii) a license agreement for rights to
OT-101 for the rest of the world with GMP Bio (the “Ex-US Rights Agreement”, and the US License Agreement and the
Ex-US License Agreement are collectively called the “Agreements”).
Dragon
and the Company entered into the JVA to regulate their relationship and the operation and management of the JV. The JVA contains provisions
for the licensed products and licensed technologies related to OT-101 (the “Licensed products and technologies”).
Pursuant to the JVA the Company is required to transfer to GMP Bio all of the Company’s rights and obligations under the research
and development agreement dated 3 February 2020 between the Company and Golden Mountain Partners, LLC (“GMP”), an
affiliate of Dragon, as amended, varied and/or supplemented by a supplement to research and Services Agreement dated 23 March 2020 between
the Company, Mateon Therapeutics, Inc. (subsequently renamed the Company) and GMP (the “R&D Agreement”). The JVA
permits GMP to seek conversion of certain convertible promissory notes entered into between the Company and GMP (see reference to Purchase
Agreements and Notes below) into shares of the Common Stock of the Company within 15 business days of the execution of the JVA at a price
of $0.2242 per Common Share, the closing price of the Common Share as traded on the OTCQB the day prior to the execution of the JVA,
or the closing price of the Common Stock prior to the date of conversion if not within 15 business days of the JVA. Upon the execution
of the JVA, Dragon will pay for and hold 55 shares of GMP Bio and the Company will pay for and hold 45 shares of GMP Bio, both to be
acquired at $1.00 per share of GMP Bio. Such shares of GMP Bio were issued shortly after the date of the JVA. The JVA required the entering
into of the Agreements on or before the execution of the JVA. The JVA defines the valuation of the Agreements (taking into account the
transfer of the Company’s rights and obligations under the R&D Agreement) each at approximately $11.3 million, for an aggregate
of approximately $22.7 million. The Parties also agreed that if a Rare Pediatric Disease (“RPD”) Priority Review Voucher,
upon clinical approval of OT-101 Technologies for treatment of diffuse intrinsic pontine glioma (the “DIPG Voucher”),
is issued to GMP Bio and GMP Bio, or a subsidiary thereof, sells the DIPG Voucher to a non-GMP subsidiary, then the Company shall be
eligible to receive up to 50% of the net sales proceeds or $50 million, whichever is less. Dragon shall fund the JVA, for a total of
approximately $27.7 million, based on the conditions contained in the JVA, and the Company will input the licenses under the Agreements
into the JV. The Company is obligated to (i) (A) rectify the chain of legal title such that the Company is the sole legal owner of such
rights, (B) complete registration as the sole owner of all the Company’s Patent Rights and (C) provide evidence of such registration
that is satisfactory to Dragon; (ii) provide Dragon with copies of official documents issued by the relevant patent offices in the relevant
countries evidencing the Company’s legal ownership of all the Company’s Patents Rights; and (iii) reflect the Company’s
legal ownership of all the Company’s Patent Rights in the relevant online registers of the relevant patent offices in the relevant
countries. The JVA intends to raise funding for the JVA through a Series A round of financing of not less than $20 million. Dragon can
suspend funding the JVA if the Series A round of financing is not successfully completed by August 31, 2022, in which case Dragon’s
funding obligation would be restricted to $250,000 per month to GMP Bio. If Dragon decides to terminate the JVA, the licenses granted
under the Agreements shall be terminated and the OT-101 assets licensed by the Company will revert back to the Company. The rest of the
JVA deals with the conduct of the JV, the board of directors of GMP Bio and other administrative matters. Dragon shall nominate up to
three directors of their choosing to the board of directors of GMP Bio, two of whom are already nominated as “A” Directors
and the Company shall nominate up to two directors of their choosing to the board of directors of GMP Bio, one of whom is already nominated
as a “B” Director. The JVA defines how the board of directors will operate as well as the general management and operations
of the JV. Other standard terms on shareholder rights, indemnification etc. are also defined in the JVA. Also included are the other
terms with relation to insurance, indemnification, jurisdiction and other customary terms and conditions.
The
Agreements include terms of an exclusive, irrevocable, perpetual, royalty-free, sublicensable license under the Licensed Technology to
manufacture, have manufactured, use, import, sell, offer for sale or otherwise exploit the Licensed Products, which is OT-101, in the
Field, which is all therapeutic uses in humans, and in the Territories, which is the US and the rest of the world. In addition, the Company
grants a non-exclusive, irrevocable, perpetual, royalty-free, non-sublicensable license for its sole use of the Company’s Vision
Grid system for monitoring process, man flow, equipment flow, and material flow in contract development and manufacturing organization
operations. These have been granted to GMP Bio and Sapu Holdings, LLC as the capital contribution by the Company to GMP Bio. The Agreements
include the contributions by the key employees, as defined and included in the Agreements, standard representations and warranties, intellectual
property protection, insurance, indemnification, jurisdiction and other customary terms and conditions.
The
Company determined that the arrangement does not meet the accounting definition of a joint venture. Subsequently, we analyzed our investment
and determined that such investment was not considered a VIE, which would require consolidation because the Company does not have the
power to direct the activities that most significantly impact the economic performance of the JV. The Company does not control the JV
through majority ownership interest or Board participation. As such, the Company followed the guidance in ASC 610-20 regarding the sale
of nonfinancial assets to noncustomers when retaining a non-controlling ownership interest in such assets. The Company is deemed to have
substantially transferred the actual intellectual property related to OT-101 as the investee can benefit from the risk and rewards of
ownership of such intellectual property. This resulted in the derecognition of the carrying amount of our intangible assets for approximately
$0.8
million and goodwill for $4.9
million for an aggregate amount of approximately $5.7
million, recorded its initial investment at its fair value for approximately $22.6
million and which resulted in a non-cash gain on non-financial asset disposal of approximately $17
million, which was reported in other income in the condensed consolidated statements of operations in the three and nine months
ended September 30, 2022.
As of the effective date of the
formation of the JV, the combined enterprise value of GMP Bio was approximately $50.4 million, comprising of the fair value of the Company’s
investment in GMP Bio of approximately $22.7 million and the total original capital contributions by Dragon Overseas of approximately
$27.7 million. As of September 30, 2022, the JV had approximately $22.8 million in assets, not including GMP Bio’s capital subscriptions
of approximately $24 million; recorded approximately $0.5 million in liabilities and incurred approximately $4.1 million in operational
expenses. The Company elected the fair value option under subsection of Section 825-10-15 to account for its equity-method investment
as the Company believes that it the most appropriate method to properly value the Company and record a change in value when and upon conducting
a fair value assessment. As of September 30, 2022, the Company does not believe the fair value of the JV has changed and hence has not
recorded a change in value.
For
information on the various notes from GMP, refer to Note 5 – GMP Notes of the Notes to the Consolidated Financial Statements
above.
NOTE
7 - PRIVATE PLACEMENT AND JH DARBIE FINANCING
During
the period from July 2020 to March 31, 2021, the Company entered into various subscription agreements with certain accredited investors,
including the CEO, pursuant to the JH Darbie Financing, whereby the Company issued and sold a total of 100 Units, for total gross proceeds
of approximately $5 million, pursuant to the JH Darbie Placement Agreement, with each Unit consisting of:
| |
■ |
25,000
shares of Edge Point Common stock for a price of $1.00 per share of Edge Point Common stock. |
| |
■ |
One
convertible promissory note, convertible up to 25,000 shares of Edge Point Common stock, at a conversion price of $1.00 per share
or up to 138,889 shares of the Company’s common stock, at a conversion price of $0.18 per share. |
| |
■ |
50,000
warrants to purchase an equivalent number of shares of Edge Point Common stock at $1.00 per share and an equivalent number of shares
of the Company’s common stock at $0.20 per share with a three-year expiration date. Either the Edgepoint or the Company’s
warrants would be exercised. |
The
Company incurred approximately $0.64 million of issuance costs, including legal costs of approximately $39,000, that are incremental
costs directly related to the issuance of the various instruments bundled in the offering.
Concurrently
with the sale of the Units, JH Darbie was granted a warrant, exercisable over a five-year period, to purchase 10% of the number of Units
sold in the JH Darbie Financing. As such, the Company granted 10 Units to JH Darbie pursuant to the JH Darbie Placement Agreement.
The
terms of convertible notes are summarized as follows:
| |
■ |
Term:
Through March 31, 2022, extended further to March 31, 2023 |
| |
■ |
Coupon:
16%. |
| |
■ |
Convertible
at the option of the holder at any time in the Company’s Common Stock or Edgepoint Common Stock. |
| |
■ |
The
conversion price is initially set at $0.18 per share for the Company’s Common Stock or $1.00 for Edgepoint Common Stock, subject
to adjustment. |
The
Company allocated the proceeds among the freestanding financial instruments that were issued in the single transaction using the relative
fair value method, which affects the determination of each financial instrument initial carrying amount. The Company utilized the relative
fair value method as none of the freestanding financial instruments issued as part of the single transaction are measured at fair value.
Under the relative fair value method, the Company made separate estimates of the fair value of each freestanding financial instrument
and then allocated the proceeds in proportion to those fair value amounts. The Company recorded non-controlling interests of approximately
$1 million in Edgepoint. Non-controlling interests represent the portion of net assets in consolidated entities that are not owned by
the Company and are reported as a component of equity in the consolidated balance sheets.
As
of the multiple closings of the Company during the six months ended June 30, 2021, under the private placement memorandum with JH Darbie,
the estimated volume weighted grant date fair value of approximately $0.21 per share associated with the warrants to purchase up to 2,035,000
shares of common stock issued in this offering, or a total of approximately $ 0.7 million, was recorded to additional paid-in capital
on a relative fair value basis. All warrants sold in this offering had an exercise price of $0.20 per share of the Company stock or $1.00
per share of Edge Point, subject to adjustment, are exercisable immediately and expire three years from the date of issuance. The fair
value of the warrants was estimated using a Black Scholes valuation models using the following input values:
SCHEDULE
OF FAIR VALUE WARRANTS ESTIMATED USING BLACK SCHOLES VALUATION MODEL
| Expected Term | |
| 1.5 years |
|
| Expected volatility | |
| 152.3%-164.8 |
% |
| Risk-free interest rates | |
| 0.09%-0.11 |
% |
| Dividend yields | |
| 0.00 |
% |
In
February 2022, the Company and all except one of the Investors agreed to extend the maturity date of the Notes from March 31, 2022, to
March 31, 2023. In consideration for the extension of the Notes, the Company issued to the Investors an aggregate of 33,000,066 Oncotelic
Warrants at a price of $0.15 per share of Company’s Common Stock and are immediately exercisable and expire two years from the
date of issuance or February 9, 2024. Each Investor will be entitled to receive 333,334 Oncotelic Warrants for each Unit purchased. Upon
the amendment of the terms of the convertible notes under the private placement memorandum. As incentive to extend the maturity date,
approximately 33 million warrants were issued to the Unit Holders who participated in the amendment, The Company repaid the 1-unit holder
who did not participate in the amendment shortly after March 31, 2022.
The
Company reviewed the guidance per ASC 470-60 Troubled debt restructurings and ASC 470-50 Debt-Modifications and Extinguishments and concluded
that the terms of the agreements were substantially different as of June 30, 2022, and, accounted for the transaction as a debt extinguishment.
The loss is recognized equal to the difference between the net carrying amount of the original debt and the fair value of the modified
debt instrument.
At
March 31, 2022, the Company estimated the fair value of the warrants issued in conjunction with the amendment of the private placement
under the JH Darbie financing based on assumptions used in the Black-Scholes valuation model. The warrants resulted in an aggregate fair
value of approximately $2.9 million. The key valuation assumptions used consists, in part, of the price of the Company’s Common
Stock, a risk-free interest rate based on the yield of a Treasury note and expected volatility of the Company’s Common Stock all
as of the measurement date. The Company used the following assumptions to estimate fair value of the warrants:
The
Company recognized amortization expense related to the debt discount and debt issuance costs of approximately $71
thousand and approximately $0.9 million
for the nine months ended September 30, 2022 and 2021 respectively, which is included in interest expense in the statements of
operations.
NOTE
8 - RELATED PARTY TRANSACTIONS
Master
Service Agreement with Autotelic Inc.
In
October 2015, Oncotelic entered into a Master Service Agreement (the “MSA”) with Autotelic Inc., a related party that
is partly-owned by the Company’s CEO Vuong Trieu, Ph.D. Dr. Trieu, a related party, is a control person in Autotelic Inc. Autotelic
Inc. currently owns less than 10% of the Company. The MSA stated that Autotelic Inc. will provide business functions and services to
the Company and allowed Autotelic Inc. to charge the Company for these expenses paid on its behalf. The MSA includes personnel costs
allocated based on amount of time incurred and other services such as consultant fees, clinical studies, conferences and other operating
expenses incurred on behalf of the Company. The MSA requires a 90-day written termination notice in the event either party requires to
terminate such services.
Expenses
related to the MSA were approximately $10,000 for the three months ended September 30, 2022 as compared to approximately $61,000 for
the same period of 2021. Expenses related to the MSA were approximately $77,000 for the nine months ended September 30, 2022 as compared
to approximately $220,000 for the same period of 2021. During the nine months ended September 30, 2022, Autotelic, Inc. paid expenses
and accrued liabilities in the aggregate amount of approximately $0.5 million on behalf of the Company. This payment, on the Company’s
behalf, was recognized as a capital contribution from Autotelic, Inc.
In
September 2021, the Company entered into an exclusive License Agreement (the “Agreement”) with Autotelic. For more information
on this Agreement, refer to our 2021 Annual Report on Form 10-K filed with the SEC on April 15, 2022.
Note
Payable and Short-Term Loan – Related Parties
In
April 2019, the Company issued a convertible note to Dr. Trieu totaling $164,444, including OID of $16,444, receiving net proceeds of
$148,000, which was used by the Company for working capital and general corporate purposes. The Company issued a Fall 2019 Note to Dr.
Trieu in the principal amount of $250,000. Dr. Trieu also offset certain amounts due to him in the amount of $35,000 and was converted
into the Fall 2019 debt. During the year ended December 31, 2020, Dr. Trieu provided additional short-term funding of $70,000 to the
Company, of which the Company repaid $50,000 prior to December 31, 2020. During the year ended December 31, 2020, Dr. Trieu purchased
a total of 5 Units under the private placement for a gross total of $250,000.
During
the year ended December 2021, Autotelic Inc provided a short-term loan of $270,000, of which $250,000 was converted into the August 2021
loan and the balance of $20,000 continues to be a short-term loan. During the six months ended June 30, 2021, Autotelic Inc, provided
a short-term loan of $120,000 to the Company. Such loan was repaid in April 2021. No loans or repayments were made to Autotelic Inc.
during the same period in 2022.
Artius
Consulting Agreement
On
March 9, 2020, the Company and Artius Bioconsulting, LLC (“Artius”), for which Mr. King is the Managing Member, entered
into an amendment to the Consulting Agreement dated December 1, 2018, under which Artius agreed to serve as a consultant to the Company
for services related to the Company’s business from time to time, effective December 1, 2019 (the “Effective Date”)
(the “Artius Agreement”). For more information on this Agreement, refer to our 2021 Annual Report on Form 10-K filed
with the SEC on April 15, 2022.
No
expense was recorded during the three and nine months ended September 30, 2022 or 2021, respectively, related to this Agreement.
Maida
Consulting Agreement
Effective
May 5, 2020, the Company and Dr. Maida entered into an independent consulting agreement, commencing April 1, 2020 (the “Maida Agreement”),
under which Dr. Maida will assist the Company in providing medical expertise and advice from time to time in the design, conduct and
oversight of the Company’s existing and future clinical trials. For more information on this Agreement, refer to our 2021 Annual
Report on Form 10-K filed with the SEC on April 15, 2022.
The
Company recorded an expense of $0 during the three months ended September 30, 2022 related to this Agreement as compared to $45,000 during
the same period in 2021. The Company recorded an expense of $75,000 during the nine months ended September 30, 2022 related to this Agreement
as compared to $135,000 during the same period in 2021. Effective April 1, 2022, Dr Maida’s compensation shall be borne by the JVA
with GMP Bio.
NOTE
9 - EQUITY PURCHASE AGREEMENT AND REGISTRATION RIGHTS AGREEMENT
On
May 3, 2021, the Company entered into an Equity Purchase Agreement (“EPL”) and Registration Rights Agreement with
Peak One Opportunity Fund LP (“Peak One” or the “Investor”). For further information on EPL, refer
to our 2021 Annual Report on Form 10-K filed with the SEC on April 15, 2022.
The
Company filed a post-effective amendment Registration Statement on Form S-1 with the Commission on April 26, 2022, and the Form S-1 was
declared effective on May 6, 2022. The Company filed the prospectus in this connection on May 11, 2022.
During
the nine months ended September 30, 2022, the Company sold a total of 1.3 million shares of Common Stock to Peak One, at prices ranging
from $0.09 and $0.25, for total gross proceeds of approximately $0.2 million, net of issuance costs.
Similarly,
during the nine months ended September 30, 2021, the Company sold a total of 1.3 million shares of Common Stock at prices ranging from
$0.11 and $0.23 for total gross proceeds of approximately $0.2 million, net of issuance costs.
NOTE
10 - STOCKHOLDERS’ EQUITY
The
following transactions affected the Company’s Stockholders’ Equity:
Issuance
of Common Stock during the nine months ended September 30, 2022
In
January 2022, three of the five investors from the November/December 2021 financing made a cashless exercise for their warrants. In connection
with this exercise, the Company issued 3,041,958 shares of Common Stock in exchange of approximately 5,769,231 million warrants.
In
March 2022, the Company sold 300,000 shares of its Common Stock to Peak One under the EPL for net proceeds of approximately $52 thousand.
In
May 2022, Blue Lake made a cashless exercise for their warrants. In connection with this exercise, the Company issued 1,403,326 shares
of Common Stock in exchange of 1,923,077 warrants.
In
June 2022, the Company sold 300,000 shares of its Common Stock to Peak One under the EPL for net proceeds of approximately $47 thousand.
In
June 2022, Mast Hill converted their debt of approximately $0.28 million. In connection with the Note conversion, the Company
issued 4,025,000 shares of Common Stock to Mast Hill.
In
June 2022, Company issued 500,000 shares of Common Stock to First Fire under partial repayment of convertible debt of $35,000.
In
June 2022, First Fire made a cashless exercise for their warrants. In connection with this exercise, the Company issued 1,183,400 shares
of Common Stock in exchange for 1,923,077 warrants.
In
July 2022, the Company sold 400,000 shares of its Common Stock to Peak One under the EPL for net proceeds of approximately $38 thousand.
In
August 2022, the Company sold 300,000 shares of its Common Stock to Peak One under the EPL for net proceeds of approximately $23 thousand.
In
August 2022, Fourth Man converted $0.14 million of their debt of approximately $0.28 million. In connection with the Note conversion,
the Company issued 2,025,000 shares of Common Stock
to Fourth Man.
In
September 2022, Blue Lake converted $0.1 million of their debt of approximately $0.1 million. In connection with the Note conversion,
the Company issued 1,428,571 shares of Common Stock
to Blue Lake.
For
further information on Common Stock issuance, refer to our 2021 Annual Report on Form 10-K filed with the SEC on April 15, 2022.
NOTE
11 – STOCK-BASED COMPENSATION
Options
Pursuant
to the Merger, the Company’s Common Stock and corresponding outstanding options survived. The below information details the Company’s
associated option activity.
As
of June 30, 2022, options to purchase Common Stock were outstanding under three stock option plans – the 2017 Equity Incentive
Plan (the “2017 Plan”), the 2015 Equity Incentive Plan (the “2015 Plan”) and the 2005 Stock Plan
(the “2005 Plan”). Under the 2017 Plan, up to 2,000,000 shares of the Company’s Common Stock may be issued pursuant
to awards granted in the form of nonqualified stock options, restricted and unrestricted stock awards, and other stock-based awards.
Under the 2015 and 2005 Plans, taken together, up to 7,250,000 shares of the Company’s Common Stock may be issued pursuant to awards
granted in the form of incentive stock options, nonqualified stock options, restricted and unrestricted stock awards, and other stock-based
awards.
Employees,
consultants, and directors are eligible for awards granted under the 2017 and 2015 Plans. The Company registered an additional total
of 20,000,000 shares of its Common Stock, which may be issued pursuant to the Registrant’s Amended and Restated 2015 Equity Incentive
Plan (the “Plan”). Such additional shares were approved by the shareholders of the Company on August 10, 2020 and
as reported to the Securities and Exchange Commission (the “SEC”) vide a Current Report on Form 8-K on August 14,
2020. As such, the total number of shares of the Company’s Common Stock available for issuance under the 2015 plan is 27,250,000.
Since the adoption of the 2015 Plan, no further awards may be granted under the 2005 Plan, although options previously granted remain
outstanding in accordance with their terms.
Compensation
based stock option activity for qualified and unqualified stock options are summarized as follows:
SCHEDULE
OF COMPENSATION BASED STOCK OPTION ACTIVITY
| | |
| | |
Weighted | |
| For the nine months ended September 30, 2022 | |
| | |
Average | |
| | |
Shares | | |
Exercise Price | |
| Outstanding at January 1, 2022 | |
| 16,592,620 | | |
$ | 0.30 | |
| Expired or cancelled | |
| (2,359 | ) | |
| 11.88 | |
| Issued | |
| 9,100,000 | | |
| 0.10 | |
| Outstanding at September 30, 2022 | |
| 25,690,261 | | |
$ | 0.23 | |
Information
on compensation-based stock option activity for qualified and unqualified stock options for the year ended December 31, 2021 can be found
in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on April 15, 2022.
The
following table summarizes information about options to purchase shares of the Company’s Common Stock outstanding and exercisable
at September 30, 2022:
SCHEDULE
OF OPTIONS TO PURCHASE SHARES OF COMMON STOCK OUTSTANDING AND EXERCISABLE
| |
|
|
|
|
|
Weighted- |
|
|
Weighted- |
|
|
|
|
| |
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
| |
|
|
Outstanding |
|
|
Remaining
Life |
|
|
Exercise |
|
|
Number |
|
| Exercise
prices |
|
|
Options |
|
|
In
Years |
|
|
Price |
|
|
Exercisable |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ |
0.01 to 0.15 |
|
|
|
16,250,000 |
|
|
|
9.4 |
|
|
$ |
0.12 |
|
|
|
6,057,500 |
|
| |
0.16 |
|
|
|
5,502,761 |
|
|
|
8.8 |
|
|
|
0.16 |
|
|
|
5,502,761 |
|
| |
0.22 |
|
|
|
1,750,000 |
|
|
|
3.6 |
|
|
|
0.22 |
|
|
|
1,750,000 |
|
| |
0.38 |
|
|
|
900,000 |
|
|
|
2.9 |
|
|
|
0.38 |
|
|
|
900,000 |
|
| |
0.73 |
|
|
|
762,500 |
|
|
|
2.5 |
|
|
|
0.73 |
|
|
|
762,500 |
|
| |
1.37 |
|
|
|
150,000 |
|
|
|
0.7 |
|
|
|
1.37 |
|
|
|
150,000 |
|
| |
1.43 |
|
|
|
300,000 |
|
|
|
2.7 |
|
|
|
1.43 |
|
|
|
300,000 |
|
| |
15.00 |
|
|
|
75,000 |
|
|
|
2.7 |
|
|
|
15.00 |
|
|
|
75,000 |
|
| |
|
|
|
|
25,690,261 |
|
|
|
8.3 |
|
|
$ |
0.30 |
|
|
|
15,497,761 |
|
The
compensation expense attributed to the issuance of the options is recognized as they are vested.
The
employee stock option plan stock options are generally exercisable for ten years from the grant date and vest over various terms from
the grant date to three years.
The
aggregate intrinsic value totaled approximately $0 and was based on the Company’s closing stock price of $0.07 as of September
30, 2022, which would have been received by the option holders had all option holders exercised their options as of that date. Information
on the aggregate intrinsic value for the year ended December 31, 2021 can be found in our Annual Report on Form 10-K for the year ended
December 31, 2021 filed with the SEC on April 15, 2022.
The
Company granted 9.1 million stock options to its employees during the three months ended September 30, 2022. 20% of the options vested
immediately and the balance will vest at December 31, 2022, based on achievement of certain corporate and individual milestones. At September
30, 2022, the Company estimated the fair value of the options issued based on assumptions used in the Black-Scholes valuation model.
The options resulted in an aggregate fair value of approximately $0.5 million. The key valuation assumptions used of the price of the
Company’s Common Stock, a risk-free interest rate based on the yield of a Treasury note and expected volatility of the Company’s
Common Stock all as of the measurement date. The Company used the following assumptions to estimate fair value of the warrants:
SCHEDULE OF ASSUMPTIONS TO
ESTIMATE FAIR VALUE OF THE WARRANTS
| Strike price | |
$ | 0.10 | |
| Expected Term | |
| 1 year | |
| Expected volatility | |
| 95.5 | % |
| Risk-free interest rates | |
| 3.12 | % |
| Dividend yields | |
| 0.00 | % |
The
Company amortized approximately $0.3 million and $0.6 million of stock compensation expense during the three and the nine months ended
September 30, 2022 on the 2021 and 2022 grants. The Company recorded $0.3 million of similar expense during the same periods of 2021
respectively.
Warrants
Pursuant
to the Merger, the Company’s Common Stock and corresponding outstanding warrants survived. The below information represents the
Company’s associated warrant activity.
In
February 2022, the Company and all except one of the Investors agreed to extend the maturity date of the Notes from March 31, 2022, to
March 31, 2023. In consideration for the extension of the Notes, the Company issued to the Investors an aggregate of approximately 33
million Oncotelic Warrants at a price of $0.15 per share of Company’s Common Stock. At March 31, 2022, the Company estimated the
fair value of the warrants issued in conjunction with the amendment of the private placement under the JH Darbie financing based on assumptions
used in the Black-Scholes valuation model. The warrants resulted in an aggregate fair value of approximately $2.9 million. The key valuation
assumptions used consists, in part, of the price of the Company’s Common Stock, a risk-free interest rate based on the yield of
a Treasury note and expected volatility of the Company’s Common Stock all as of the measurement date. The Company used the following
assumptions to estimate fair value of the warrants:
SCHEDULE
OF BLACK SCHOLES VALUATION ALLOWANCE MODEL
| Strike price | |
$ | 0.15 | |
| Expected
Term | |
| 1
year | |
| Expected
volatility | |
| 115.1 | % |
| Risk-free
interest rates | |
| 1.36 | % |
| Dividend
yields | |
| 0.00 | % |
The
issuance of warrants to purchase shares of the Company’s Common Stock, including those attributed to debt issuances, as of September
30, 2022 are summarized as follows:
SCHEDULE
OF WARRANTS ACTIVITY
| | |
Shares | | |
Average Exercise Price | |
| Outstanding at January 1, 2022 | |
| 53,314,424 | | |
$ | 0.20 | |
| Issued during the nine months ended September 30, 2022 | |
| 38,623,816 | | |
| 0.15-0.20 | |
| Exercised / cancelled during the nine months ended September 30, 2022 | |
| (9,615,385 | ) | |
| 0.13 | |
| Outstanding at September 30, 2022 | |
| 82,322,855 | | |
$ | 0.18 | |
The
following table summarizes information about warrants outstanding and exercisable at September 30, 2022:
SCHEDULE
OF WARRANTS OUTSTANDING AND EXERCISABLE
| | | |
Outstanding and exercisable | |
| | | |
| | |
Weighted- | | |
Weighted- | | |
| |
| | | |
| | |
Average | | |
Average | | |
| |
| | | |
Number | | |
Remaining Life | | |
Exercise | | |
Number | |
| Exercise Price | | |
Outstanding | | |
in Years | | |
Price | | |
Exercisable | |
| $ | 0.20 | | |
| 42,737,500 | | |
| 0.50 | | |
$ | 0.20 | | |
| 42,737,500 | |
| | 0.13 | | |
| 961,539 | | |
| 4.21 | | |
| 0.13 | | |
| 961,539 | |
| | 0.15 | | |
| 33,000,066 | | |
| 1.50 | | |
| 0.15 | | |
| 33,000,066 | |
| | 0.20 | | |
| 5,623,750 | | |
| 4.50-4.73 | | |
| 0.20 | | |
| 5,623,750 | |
| | | | |
| 82,322,855 | | |
| 1.0 | | |
$ | 0.18 | | |
| 82,322,855 | |
NOTE
12 – INCOME TAXES
The
Company had gross deferred tax assets, which primarily relate to net operating loss carry forwards. As of December 31, 2021, the Company
had gross federal and state net operating loss carry forwards of approximately $236.1 million and $76.3 million, respectively, which
are available to offset future taxable income, if any. A portion of the gain on the sale of the non-financial asset may give rise to
some taxable income, but such income is likely to be offset against the available net operating losses. The Company recorded a valuation
allowance in the full amount of its net deferred tax assets since realization of such tax benefits has been determined by our management
to be less likely than not. Information on our deferred tax assets and liabilities can be found in our Annual Report on Form 10-K for
the year ended December 31, 2021 filed with the SEC on April 15, 2022.
Portions
of these carry forwards will expire through 2038, if not otherwise utilized. The Company’s utilization of net operating loss carry
forwards could be subject to an annual limitation. as a result of certain past or future events, such as stock sales or other equity
events constituting a “change in ownership” under the provisions of Sections 382 and 383 of the Internal Revenue Code of
1986, as amended, and similar state provisions. The annual limitations could result in the expiration of net operating loss carry forwards
and tax credits before they can be utilized. We have not performed a formal analysis, but we believe our ability to use such net operating
losses and tax credit carry forwards will be subject to annual limitations, due to change of ownership control provisions under Section
382 and 383 of the Internal Revenue Code, which would significantly impact our ability to realize these deferred tax assets.
NOTE
13 – COMMITMENTS AND CONTINGENCIES
Leases
Currently,
the Company is leasing the office located at 29397 Agoura Road, Suite 107, Agoura Hills, CA 91301 on a month-to-month basis until such
time a new office is identified. The Company believes the office is sufficient for its current operations.
Legal
Claims
From
time to time, the Company may become involved in legal proceedings arising in the ordinary course of business. The Company is not presently
a party to any legal proceedings that it currently believes, if determined adversely to the Company, would individually or taken together
have a material adverse effect on the Company’s business, operating results, financial condition or cash flows.
PointR
Merger Contingent Consideration
The
total purchase price in the PointR Merger of $17,831,427 represented the consideration transferred from the Company and was calculated
based on the number of shares of Common Stock plus the preferred shares outstanding but convertible into Common Stock outstanding at
the date of the PointR Merger and included $2,625,000 of contingent consideration of shares issuable to PointR shareholders, which could
increase to $15 million of contingent consideration, upon achievement of certain milestones. For more information on the PointR Merger
Contingent Consideration, refer to our 2021 Annual Report on Form 10-K filed with the SEC on April 15, 2022.
Other
claims
From
time to time, the Company may become involved in certain claims arising in the ordinary course of business. One of the Company’s
ex-employees has made a claim against the Company. The Company is evaluating the validity of the claim, as the Company believes that
such claim has limited merits and is hopeful to attain a positive outcome for such claim. Since the Company is still evaluating the claim,
we are unable to quantify the amount such claim would be settled at, if at all settled.
NOTE
14 – SUBSEQUENT EVENTS
In
October 2022, the Company was awarded a contract with Biomedical Advanced Research and Development Authority (BARDA) for the development
of OT-101 therapeutic against long term effects of respiratory distress post COVID-19.