NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
QSAM
Biosciences Inc. (hereinafter the “Company”, “we”, “our”, “us”), incorporated in Delaware
on August 26, 2004, is currently engaged in the business of developing a novel radiopharmaceutical drug candidate for the treatment of
bone cancer. This business line commenced in earnest in the fourth fiscal quarter of 2020 as a result of the separation and transfer
pursuant to an Omnibus Separation Agreement dated November 6, 2020 (the “Separation Agreement”) of the Company’s prior
business of managing compost and soil manufacturing facilities (the “Legacy Business”) through an unconsolidated investee
entity called Earth Property Holdings LLC, a Delaware limited liability company (“EPH”). Pursuant to the Separation Agreement,
the Company transferred to EPH all assets and related liabilities in connection with the Legacy Business in return for a forgiveness
of debt. The Company sold its entire equity interest in EPH to a third party in the first quarter of 2021 for $100,000, and currently
holds no ownership in EPH.
In
April 2020, the Company established QSAM Therapeutics Inc. (“QSAM”) as a wholly-owned subsidiary incorporated in the state
of Texas, and through QSAM, executed a Patent and Technology License Agreement and Trademark Assignment (the “License Agreement”)
with IGL Pharma, Inc. (“IGL”). The License Agreement provides QSAM with exclusive, worldwide and sub-licensable rights to
all of IGL’s patents, product data and knowhow with respect to Samaium-153 DOTMP aka CycloSam® (the “Technology”),
a clinical stage novel radiopharmaceutical meant to treat different types of bone cancer and related diseases.
In
connection with the transition to the biosciences sector, the Company changed its name to QSAM Biosciences Inc. on September 4, 2020,
and subsequently changed its stock symbol to QSAM, to better reflect its business moving forward.
On March 9, 2022, the Company
completed a 40:1 reverse stock split of its common shares. All shares and share prices set forth in this report have been adjusted retroactively
to present this reverse stock split as if it had occurred at the beginning of the period presented in these condensed consolidated financial
statements.
Prior
to 2017, the Company owned and licensed technology that converts waste fuels and heat to power, which it sold to a licensee in
August of that year. Much of these operations were conducted through a wholly-owned subsidiary of the Company called Q2Power Corp.
(“Q2P”), which still exists but has no current operations. Q2P and QSAM are sometimes referred to herein as the
“Subsidiaries” collectively, or with respect to just QSAM, the “Subsidiary”. Formerly, the Company’s
name was Q2Power Technologies, Inc., and before that, Anpath Group, Inc.
The
recent outbreak of the novel coronavirus (COVID-19) is impacting worldwide economic activity. COVID-19 poses the risk that we or our
employees and our other partners may be prevented from conducting business activities for an indefinite period of time, including due
to the spread of the disease or shutdowns that may be requested or mandated by governmental authorities. While it is not possible at
this time to estimate the full impact that COVID-19 could have on our business, the continued spread of COVID-19 could disrupt our research
and development of the Technology and other related activities, which could have a material adverse effect on our business, financial condition
and results of operations. In addition, a severe or prolonged economic downturn could result in a variety of risks to the business. While
we have not yet experienced any material disruptions in our business or other negative consequences relating to COVID-19, the extent
to which the COVID-19 pandemic impacts our results will depend on future developments that are highly uncertain and cannot be predicted.
NOTE
2 – BASIS OF PRESENTATION AND GOING CONCERN
The
accompanying unaudited condensed financial statements are prepared in accordance with Rule 8-01 of Regulation S-X of the Securities
Exchange Commission (“SEC”). Accordingly, certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles in the United States of America (“US
GAAP”) have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the
disclosures included in these unaudited condensed financial statements are adequate to make the information presented not
misleading. The unaudited condensed financial statements included in this document have been prepared on the same basis as the
annual financial statements, and in our opinion reflect all adjustments, which include normal recurring adjustments necessary for a
fair presentation in accordance with US GAAP and SEC regulations for interim financial statements. The results for the three and six
months ended June 30, 2022 are not necessarily indicative of the results that the Company will have for any subsequent period or for
the calendar year ended December 31, 2022. These unaudited condensed financial statements should be read in conjunction with the
audited financial statements and the notes to those statements for the year ended December 31, 2021 which was filed with the SEC on
February 24, 2022.
The
Company’s convertible debentures of $35,000 and $480,000 of Series A 6% convertible preferred stock (the “Series A Stock”)
was in default as of December 31, 2021. On February 22, 2022, the holder of the debenture converted the full balance of $35,000 into
5,469 shares of common stock at $6.40 per share, and the balance on the convertible debenture is currently $0. On March 9, 2022, the
Company entered into a conversion notice and reservation of rights agreement with the two Series A Stockholders whereby such holders
waived all default interest, penalties and fees from the Company’s failure to redeem the Series A Stock, and agreed to convert
such preferred shares into common stock contingent upon the completion of the Company’s underwritten equity offering and uplisting
to Nasdaq; provided however, if such offering is completed at a lower price than $6.40 per share, the conversion price for the Series
A Stock would be reduced to that lower price, and further provided, if warrants are issued in the offering, the Series A Stockholders
would receive warrants on similar terms. In the second quarter of 2022, the Company terminated its planned offering and uplisting to
Nasdaq due to general market conditions, and therefore, the Series A Stock is still technically in default.
For
the six months ended June 30, 2022, the Company used net cash in its operating activities of $1,105,513
and incurred a loss from its operations of $.
As of June 30, 2022, the Company’s accumulated deficit is $32,394,591,
working capital deficit is $1,832,329,
and cash on hand is $429,353.
The
Company has supported operations through the issuance of common stock, preferred stock and debt over the last 12 months. This
includes the $2.5
million Series B preferred stock offering in the first quarter of 2021, the exercise of approximately $470,000
in warrants issued in connection with the Series B offering, and also a convertible debt offering in the amount of $605,000
conducted in the fourth quarter of 2021. Management expects expenses to increase in 2022 as our drug technology is currently in
clinical trials, and forecasts that current cash resources will only last into the third quarter of 2022. As a result, we will need
to raise additional capital to support these operations. Management believes that it can do so through debt or equity raises in
2022; however, there is no guarantee that such plan will be successful. If we are not successful in raising additional capital, we
may need to delay clinical trials, reduce overhead, or in the most extreme scenario, shut down operations.
These
conditions raise substantial doubt about the Company’s ability to continue as a going concern. There is no guarantee whether the
Company will be able to generate revenue and/or raise capital sufficient to support its operations. The ability of the Company
to continue as a going concern is dependent on management’s plans which include implementation of its business model to develop
and commercialize its drug candidate, seek strategic partnerships to advance clinical trials and other research endeavors which could
provide additional capital to the Company, and continue to raise funds for the Company through equity or debt offerings. There is no
assurance, however, that the Company will be successful in raising the needed capital and, if funding is available, that it will be available
on terms acceptable to the Company. The unaudited condensed financial statements do not include any adjustments that might result from
the outcome of these uncertainties.
NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The
unaudited condensed financial statements include the accounts of the Company and its Subsidiaries. All significant inter-company transactions
and balances have been eliminated in consolidation. References herein to the Company include the Company and its Subsidiaries unless the
context otherwise requires.
Cash
and Cash Equivalents
The
Company considers cash, short-term deposits, and other investments with original maturities of no more than ninety days when acquired
to be cash and cash equivalents for the purposes of the statement of cash flows. The Company maintains cash balances at one financial
institution and has experienced no losses with respect to amounts on deposit. The Company held no cash equivalents as of June 30, 2022
and December 31, 2021.
Revenue
Recognition
The
Company recognizes revenue in accordance with ASC Topic 606, “Revenue from Contracts with Customers (“ASC 606”) and
all the related amendments.
The
core principle of ASC 606 requires that an entity recognize revenue to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASC
606 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required
within the revenue recognition process than previously required under U.S. GAAP, including identifying performance obligations in the
contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to
each separate performance obligation.
The
Company had no revenue in 2022 and 2021.
Stock
Based Compensation
The
Company applies the fair value method of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) 718, “Share Based Payment”, in accounting for its stock-based compensation with employees and
non-employees. This standard states that compensation cost is measured at the grant date based on the fair value of the award and is
recognized over the service period, which is usually the vesting period. The Company values stock-based compensation at the market price
for the Company’s common stock and other pertinent factors at the grant date.
The
Black-Scholes option pricing valuation method is used to determine fair value of stock options consistent with ASC 718, “Share
Based Payment”. Use of this method requires that the Company make assumptions regarding stock volatility, dividend yields,
expected term of the awards and risk-free interest rates.
Research
and Development
Research
and development costs are expensed as incurred. Research and development costs were $459,053 for the six months ended June 30, 2022,
and are a result of the Company’s activities to commence clinical trials of its drug Technology, as secured by the Company under
a License Agreement executed in the second quarter of 2020. Research and development costs were $221,407 for the six months ended June
30, 2021, and are also a result of the License Agreement as well as expenses incurred on the Technology prior to the signing of the License
Agreement (see Note 9 – Commitments and Contingencies).
Equity
Method Investment
Investments
in partnerships, joint ventures and less-than majority-owned subsidiaries in which we have significant influence are accounted for under
the equity method. The Company’s consolidated net income includes the Company’s proportionate share of the net income or
loss of our equity method investee. When we record our proportionate share of net income, it increases income (loss) — net in our
consolidated statements of operations and our carrying value in that investment. Conversely, when we record our proportionate share of
a net loss, it decreases income (loss) — net in our consolidated statements of income and our carrying value in that investment.
The Company’s proportionate share of the net income or loss of our equity method investees includes significant operating and nonoperating
items recorded by our equity method investee. These items can have a significant impact on the amount of income (loss) — net in
our consolidated statements of operations and our carrying value in those investments. The Company divested its investment in its equity
method investee in March 2021.
Income
Taxes
Income
taxes are accounted for under the asset and liability method as stipulated by FASB ASC 740, “Income Taxes” (“ASC
740”). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit
carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled. Under ASC 740, the effect on deferred tax assets and liabilities
or a change in tax rate is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced to estimated
amounts to be realized by the use of a valuation allowance. A valuation allowance is applied when in management’s view it is more
likely than not (50%) that such deferred tax will not be utilized.
In
the event that an uncertain tax position exists in which the Company could incur income taxes, the Company would evaluate whether there
is a probability that the uncertain tax position taken would be sustained upon examination by the taxing authorities. Reserves for uncertain
tax positions would be recorded if the Company determined it is probable that a position would not be sustained upon examination or if
payment would have to be made to a taxing authority and the amount is reasonably estimated. As of June 30, 2022 and December 31, 2021,
the Company does not believe it has any uncertain tax positions that would result in the Company having a liability to the taxing authorities.
Interest and penalties related to any unrecognized tax benefits is recognized in the unaudited condensed consolidated financial statements
as a component of income taxes.
Basic
and Diluted Loss Per Share
Net
loss per share is computed by dividing the net loss attributable to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted net loss per share is calculated by dividing the net loss attributable to common stockholders
by the weighted average number of common shares outstanding during the period plus any potentially dilutive shares related to the issuance
of stock options, shares from the issuance of stock warrants, shares issued from the conversion of convertible preferred stock
and shares issued for the conversion of convertible debt.
As
of June 30, 2022, there were the following potentially dilutive securities that were excluded from diluted net loss per share because
their effect would be anti-dilutive (all shares adjusted to reflect a 40:1 reverse stock split effected on March 9, 2022):
SCHEDULE OF ANTIDILUTIVE SECURITIES EXCLUDED FROM COMPUTATION OF EARNINGS PER SHARE
Shares from common stock options | |
| 177,815 | |
Shares from common stock warrants | |
| 37,083 | |
Shares from the conversion of convertible notes and accrued interest | |
| 78,584 | |
Shares from the conversion of Series A Stock inclusive of cumulative dividends | |
| 110,437 | |
Shares from the conversion of Series B Preferred Stock inclusive of dividends | |
| 271,490 | |
As
of June 30, 2021, there were the following potentially dilutive securities that were excluded from diluted net loss per share because
their effect would be anti-dilutive (all shares adjusted to reflect a 40:1 reverse stock split effected on March 9, 2022):
Shares from common stock options | |
| 11,715 | |
Shares from common stock warrants | |
| 187,339 | |
Shares from the conversion of debentures | |
| 5,469 | |
Shares from the conversion of Series A Stock | |
| 75,000 | |
Shares from the conversion of Series B Preferred Stock | |
| 390,625 | |
Shares from the conversion of Series E-1 Preferred Stock | |
| 212,500 | |
Significant
Estimates
U.S.
Generally Accepted Accounting Principles (“GAAP”) requires the Company to make judgments, estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited
financial statements, the reported amounts of revenues and expenses, cash flows and the related footnote disclosures during the period.
On an on-going basis, the Company reviews and evaluates its estimates and assumptions, including, but not limited to, those that relate
to the fair value of stock-based compensation fair value of convertible bridge notes, and a valuation allowance on deferred tax assets
and contingencies. Actual results could differ from these estimates.
Recent
Accounting Pronouncements
In
August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in
Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”) to simplify accounting for certain financial instruments.
ASU 2020-06 eliminates the current models that require separation of beneficial conversion and cash conversion features from
convertible instruments and simplifies the derivative scope exception guidance pertaining to equity classification of contracts in
an entity’s own equity. The new standard also introduces additional disclosures for convertible debt and freestanding
instruments that are indexed to and settled in an entity’s own equity. ASU 2020-06 amends the diluted earnings per share
guidance, including the requirement to use the if-converted method for all convertible instruments. ASU 2020-06 is effective January
1, 2022 for public business entities that are not smaller reporting companies and for all other entities, fiscal years beginning
after December 15, 2023, and interim periods within those fiscal years. The standard should be applied on a full or modified
retrospective basis, with early adoption permitted beginning on January 1, 2021. Effective January 1, 2021, the Company adopted ASU
2020-06 and noted no material impact to the consolidated financial statements.
Management
does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect
on its unaudited financial statements.
Reclassifications
Certain
reclassifications of prior year amounts have been made to conform to the 2022 presentation. These reclassifications had no effect on
net loss or loss per share as previously reported and primarily related to the reclassification of stock based compensation from general and administrative expenses
to payroll and related expenses.
Concentration
of Risk
The
Company expects cash to be the asset most likely to subject the Company to concentrations of credit risk. The Company’s bank deposits
may at times exceed federally insured limits. The Company’s policy is to maintain its cash with high credit quality financial institutions
to limit its risk of loss exposure. The Company’s cash balance as of June 30, 2022, is in excess of FDIC limits in the amount of
approximately $179,353.
The
Company is subject to a number of risks similar to those of other companies at a clinical-stage for radiopharmaceutical drug candidates,
including dependence on key individuals; the need to develop commercially viable therapeutics; competition from other companies, many
of which are larger and better capitalized; and the need to obtain adequate additional financing to fund the development of its products.
The Company currently depends on third-party, suppliers for key materials and services used in its research and development manufacturing
process, and is subject to certain risks related to the loss of these third-party suppliers or their inability to supply the Company
with adequate materials and services.
Fair
Value of Financial Instruments
In
accordance with Accounting Standards Codification (“ASC”) 825, Financial Instruments, disclosures of fair value information
about financial instruments are required, whether or not recognized in the balance sheet, for which it is practicable to estimate that
value. Cash is carried fair value.
Other
financial instruments, including accounts payable, accrued liabilities and short-term debt, are carried at cost, which approximates fair
value given their short-term nature.
Deferred
Offering Cost
Costs
incurred prior to an equity offering are capitalized until the offering occurs. Upon the equity offering, all accumulated costs are charged
against proceeds. If the Company determines that the equity offering will not occur, the accumulated costs are charged to operations.
Segment
Reporting
Operating
segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation
by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. To date, the Company
views its operations and manages its business as one segment.
NOTE
4 – EQUITY METHOD INVESTMENT
During
November 2018, the Company invested $50,000 for a 19.9% Class B limited liability membership interest in EPH and recorded this transaction
as an equity method investment due to the Company’s ability to exercise significant influence over EPH. The carrying value of the
investment in EPH was reduced to zero after recording the proportionate share of the investee’s net loss for the 2018 fiscal year.
In January 2019, the Company committed an additional $21,588 through a subscription payable to maintain its 19.9% Class B limited liability
interests in EPH, after additional Class A units were sold to investors, which was fully paid in April 2020. The carrying value of the
investment at December 31, 2020 was zero due to continued losses incurred by EPH. In the first quarter of 2021, the Company sold this
equity interest to an unrelated third party for $100,000. There were no distributions received from the equity method investment in the
relevant periods of 2022 or 2021.
NOTE
5 – RELATED PARTY TRANSACTIONS
The
Company currently has a License Agreement with IGL Pharma, Inc., an entity in which the Company’s Executive Chairman serves as
President, holds options to purchase less than a 1%
non-controlling equity interest and receives a $500
per month fee. See Note 9 for further disclosures of expenses incurred in connection with this License Agreement during the six
months ended June 30, 2022 and 2021.
During
the year ended December 31, 2020, the Company received $45,500 of proceeds from short-term notes payable with officers and directors
of the Company bearing interest at 10%. As of June 30, 2022, $7,500 of principal remains outstanding on certain of these short-term notes
payable. During the six months ended June 30, 2021, $23,000 of these short-term notes payable was converted into 23 shares of the Company’s
Series B Preferred Stock at a conversion ratio of $1,000 per share and warrants to purchase 1,643 shares of common stock at an exercise
price of $14.00 per share, which resulted in no gain or loss on conversion. These warrants expired in October 2021.
NOTE
6 – DEBENTURES, CONVERTIBLE BRIDGE NOTES, AND CONVERTIBLE PROMISSORY NOTES
Debentures
The
Company has Original Issue Discount Senior Secured Convertible Debentures (the “Debentures”) in the aggregate amount of
$0
and $35,000
outstanding as of June 30, 2022 and December 31, 2021, respectively. All assets of the Company were previously secured under the
Debentures. There is no interest on these notes. In the first quarter of 2021, the two institutional holders of the debentures
converted an aggregate of $102,500
into 12,927
shares of common stock, and the Company recognized a loss on the two debenture conversions of $356,454.
In the first quarter of 2022, the remaining institutional holder converted an aggregate of $35,000
into 5,469
shares of common stock, and the Debentures were retired in full. The fair value of the shares issued upon conversion was estimated
to be approximately $35,000
based on the market price on the date of conversion. Therefore, no gain or loss was recorded on conversion.
Convertible
Bridge Notes
In
2017, 2018 and 2019, the Company issued a total of $2,801,908
in a convertible promissory note (the “Bridge Notes”) offering, which included three of the Company’s directors
converting $156,368
and one shareholder converting $11,784
of prior notes and cash advances, including interest thereon, into the offering. In 2020, $2.9
million of the Bridge Notes, inclusive of principal and accrued and capitalized interest, was converted into 332,804
shares of common stock at $8.80
per share. The Company recorded a loss on extinguishment of these Bridge Notes of $495,320,
which is included in the loss on conversion of bridge notes and accrued interest. As of March 31, 2021, all remaining Bridge Notes
inclusive of principal and accrued and capitalized interest, were settled with the holders of these notes converting their debt into
a total of 165,692
shares of common stock of the Company with a fair value of $4,378,488
based on the stock price of the Company on the date of conversion. The Company recorded a loss on extinguishment of these Bridge
Notes of $744,205
for the three and six months ended June 30, 2021, which is included in loss on conversion of bridge notes and accrued interest, as
other income expenses in the statements of operations.
Convertible Notes Payable
In
the fourth quarter of 2021, the Company issued a total of $605,000 in
convertible notes payable. The convertible notes mature on December
31, 2023, and include a 6%
simple interest rate per annum payable upon maturity. The notes are convertible into common stock, at the option of the holder, any
time prior to maturity at a conversion price of $8.00 per share. Each of the convertible notes have an automatic conversion feature
in the event that the Company completes an equity offering resulting in gross proceeds to the Company of at least $5,000,000 or
lists its equity securities on NASDAQ or NYSE. The conversion of notes will be at $8.00 per
share and adjusted for stock splits, stock dividends or other recapitalizations. In addition, holders of the convertible notes were
issued a total of 25,208
warrants to purchase common stock at a price of $24 per share. The exercise period for the warrant holder expires on October
31, 2022 (see Note 7). In accordance with
accounting standards, the warrants were valued using a Black Scholes Model and the relative fair value of the warrants was applied
against the convertible notes for a debt discount of $72,600 resulting
in a net convertible note payable of $532,400 at
December 31, 2021. The amortization expense of the debt discount for the six months ended June 30, 2022 is $18,150.
As of June 30, 2022, the outstanding principal on the convertible notes payable is $605,000
and the remaining unamortized discount is $54,450
resulting in a net convertible note payable of $550,550.
As of June 30, 2022, the Company has recorded $23,669
of accrued interest related to the convertible promissory notes which is recorded in accounts payable and accrued expenses on the
condensed consolidated balance sheets.
NOTE
7 – COMMON STOCK, PREFERRED STOCK AND WARRANTS
Common
Stock
In
the three month period ended June 30 2022 and June 30, 2021, the Company did not issue any shares of common stock.
During
the six months ended June 30, 2022, the Company issued the following shares of common stock:
SCHEDULE OF ISSUED SHARES OF COMMON STOCK
| |
| | |
Stock based compensation for services | |
| 18,750 | |
Stock based compensation for services performed by one prior Director | |
| 10,000 | |
Conversions of debentures | |
| 5,469 | |
Conversion
of Bridge Notes | |
| | |
Conversion
of Series A Preferred Stock | |
| | |
Total common stock issued during the six months ended June 30, 2022 | |
| 34,219 | |
During
the six months ended June 30, 2021, the Company issued the following shares of common stock:
|
|
|
|
|
Stock
based compensation for services |
|
|
6,250 |
|
Conversions
of debentures and accrued expenses |
|
|
15,825 |
|
Conversion
of Bridge Notes |
|
|
165,692 |
|
Conversion
of Series A Stock |
|
|
18,750 |
|
Total
common stock issued during the six months ended June 30, 2021 |
|
|
206,517 |
|
Total
common stock issued |
|
|
206,517 |
|
During
the six-month period ended June 30, 2022, $35,000 of debentures were converted into 5,469 shares of common stock
at a price of $6.40 per share. Additionally, the Company issued 18,750 shares of common stock for services, and 10,000 shares of common
stock for services provided by one director who resigned from the Board in the same period.
Effective
March 9, 2022, the Company also effected a 40:1
reverse stock split and all share, price per share and per share numbers herein have been adjusted to reflect the reverse
stock split retrospectively.
During
the six-month period ended June 30, 2021, $125,007 of debentures and accrued expenses plus Bridge Notes with principal and accrued interest
of $1,447,315 for an aggregate of $1,572,315 of obligations were converted into 15,825 shares and 165,692 shares, respectively, of common
stock at a price of $8.80 per share. Further, $120,000 of Series A Stock was converted into 18,750 shares of common stock at a price
of $6.40 per share.
For
the three-month periods ended June 30, 2022 and 2021, the Company recognized $0 and
$41,174,
respectively, of stock-based compensation expense for shares of common stock and warrants issued
as consideration under several service agreements. For the six-month periods
ended June 30, 2022 and 2021, the Company recognized $254,751 and
$288,674 of
stock-based compensation expense for shares of common stock issued as consideration under several service
agreements.
Series
A Redeemable Convertible Preferred Stock (“Series A Stock”)
The
Company has 480
shares of Series A Stock issued and outstanding as of June 30, 2022, which currently are convertible at $6.40
per share of the Company’s common stock (the “Conversion Price”), which was adjusted to match the conversion price
of the Company’s Series B Preferred Stock. The Series A Stock bears a 6%
dividend per annum, calculable and payable per quarter in cash or additional shares of common stock as determined in the Certificate
of Designation. The Preferred Stock has no voting rights until converted to common stock and has a liquidation preference equal to
the aggregate purchase price of $480,000
plus accrued dividends. As of June 30, 2022 and December 31, 2021, the Company accrued preferred stock dividends of $226,800
and $213,580,
respectively.
The
Series A Stock has price protection provisions in the case that the Company issues any shares of stock not pursuant to an “Exempt
Issuance” at a price below the Conversion Price. Exempt Issuances include: (i) shares of Common Stock or common stock equivalents
issued pursuant to the original merger of the company or any funding contemplated by that transaction; (ii) any common stock or convertible
securities outstanding as of the date of closing; (iii) common stock or common stock equivalents issued in connection with strategic
acquisitions; (iv) shares of common stock or equivalents issued to employees, directors or consultants pursuant to a plan, subject to
limitations in amount and price; and (v) other similar transactions. The Certificate of Designation contains restrictive covenants not
to incur certain debt, repurchase shares of common stock, pay dividends or enter into certain transactions with affiliates without consent
of holders of 67% of the Series A Stock.
Management
has determined that the Series A Stock is more akin to a debt security than equity primarily because it contains a mandatory 2-year redemption
at the option of the holder, which only occurs if the Series A Stock is not converted to common stock. Therefore, management has presented
the Series A Stock outside of permanent equity as mezzanine equity, which does not factor into the totals of either liabilities or equity.
The
Series A Stock carries a 6% per annum dividend calculated on the stated value of the stock and is cumulative and payable quarterly beginning
July 1, 2016. These dividends are accrued at each reporting period. They add to the redemption value of the stock; however, as the Company
shows an accumulated deficit, the charge has been recognized in additional paid-in capital.
As
of December 31, 2021, the Series A Stock was in technical default for failure of the Company to redeem. On March 9, 2022, the Company
entered into a conversion notice and reservation of rights agreement with the two Series A Stockholders whereby such holders waived all
default interest, penalties and fees from the Company’s failure to redeem the Series A Stock, and agreed to convert such preferred
shares into common stock contingent upon the completion of the Company’s underwritten equity offering and uplisting to Nasdaq;
provided however, if such offering is completed at a lower price than $6.40 per share, the conversion price for the Series A Stock would
be reduced to that lower price, and further provided, if warrants are issued in the offering, the Series A Stockholder would receive
warrants on similar terms. In the second quarter of 2022, the Company terminated the offering and uplisting to Nasdaq due to general
market conditions, and therefore, the Series A Stock is still technically in default; however, the conversion agreement is valid until
March 9, 2023, and management plans to pursue the Nasdaq uplisting in the future.
Series
B Convertible Preferred Stock (“Series B Preferred Stock”)
In
December 2020, the Company filed an amendment to its Articles of Incorporation to authorize the issuance of up to 2,500
shares of Series B Preferred Stock, par value $0.001
per share, pursuant to a Certificate of Designation. The Series B Preferred Stock provides the holders a 10%
annual paid-in-kind dividend, a liquidation preference equal to the purchase price of the shares ($1,000
per share) followed by the right to participate with the common stockholders in the instance of a liquidation or other exit event,
and provides the holders the right to vote along with the common holders based on the common conversion amount of their holdings.
The shares of Series B Preferred Stock are convertible into common stock at a price of $6.40
per share, subject to anti-dilution protections in the case of certain issuances of securities below that conversion price. The
shares of Series B Preferred Stock are not redeemable.
In
January 2021, the Company closed a private offering of its Series B Preferred Stock for $1,000
per share, raising a total of $2,500,000,
inclusive of $156,000
in prior debt conversion and $23,000
of notes payable with directors converted to shares of Series B Preferred Stock and warrants. As of June 30, 2022 and 2021, 1,509
and 2,500
shares of Series B Preferred Stock were issued and outstanding, respectively. Between July 27 and August 24, 2021, 15 holders of an
aggregate of 991
shares of Series B Preferred Stock converted their preferred shares into 163,134
shares of common stock, which included $53,061
of accrued dividends. As of June 20, 2022, the Company has recorded $228,584
of accrued dividends which are presented on the condensed consolidated balance sheets.
Series
E-1 Preferred Stock
On
December 3, 2020, the Company filed an amendment to its Articles of Incorporation to authorize the issuance of up to 8,500 shares of
Series E-1 Preferred Stock (the “Series E-1 Stock”) pursuant to a Certificate of Designation. The shares of Series E-1 Stock
are incentive-based, vesting and forfeitable securities that provide the holders the right in the aggregate to receive an “earnout”
equal to 20% of the total consideration received by the Company in the instance of a sale or sub-license of its core licensed radiopharmaceutical
Technology, or sale or merger of the Company, which is paid on a priority, senior basis. In addition, the holders of the Series E-1 Stock
can convert their vested preferred stock at anytime or after an event resulting in an earnout payment, such as an acquisition of the
Company, into an aggregate of 212,500 common shares. The holders of the Series E-1 Stock have the right to vote along with the common
stockholders based on the common conversion amount of their holdings, and have the right to nominate two members of the Board of Directors.
On
December 30, 2020, 7,650 shares of Series E-1 Stock were issued to five individuals, including the Company’s Executive Chairman,
CEO and General Counsel which vest starting in July 2021 through January 2023 and are forfeitable by the holders prior to vesting. In
February 2021, the remaining 850 shares of Series E-1 Stock were issued to one newly-appointed director, vesting half in February 2022
and the balance in February 2023.
The
Company computed the total grant date fair value of the Series E-1 Stock to be approximately $6,528,000 using an option pricing model
and the following assumptions: (1) with respect to the shares granted in 2020: expected term of four years, dividend yield of -0-%, volatility
of 96.12%, and a risk-free rate of .27%; and (2) with respect to the shares granted in 2021: expected term of four years, dividend yield
of 0%, volatility of 96.12%, and a risk-free rate of 0.27%. The value of these shares will be recognized as stock-based compensation
expense over the vesting period through February 2023.
On
December 6, 2021, the Company entered into an Exchange Agreement and Plan of Reorganization (the “Exchange Agreement”)
with all E-1 Stockholders pursuant to which all shares of Series E-1 Stock were exchanged into an aggregate of 720,986
shares of common stock of the Company. The fair value of the Series E-1 Stock was determined to be approximately $8.65
million at the time of exchange, and approved for fairness by the independent chairman of the Compensation Committee. The common
stock issued in the exchange was based on a value of $12.00
per share using a 30-day weighted average closing price calculation, and were issued proportionately to each holder based on
their individual holdings of Series E-1 Stock. All shares of common stock issued to the shareholders are subject to the same vesting
schedules as were originally provided in each shareholder’s Series E-1 Stock issuance agreement, meaning that such shares of
common stock are forfeitable if certain conditions of employment are not met by certain holders. As of June 30, 2022, approximately 681,628
common shares are fully vested and approximately 39,358
common shares are unvested. No shares of Series E-1 Stock remained outstanding as of December 31, 2021.
During
the six months ending June 30, 2022, the Company recognized stock-based compensation to employees and directors totaling $428,450 related
to the Series E-1 Stock, which is included in payroll and related expenses on the consolidated statements of operations. As of June
30, 2022, $472,292 of unrecognized compensation remains which will be recognized over a vesting period through 2023 and
has been presented as deferred compensation on the condensed consolidated balance sheets.
Warrants
The
Company did not issue any warrants in the three or six months ended June 30, 2022. During the six months ended June 30, 2022, the
Company entered into two modifications relating to 11,875
common stock warrants issued to the lead investor in the Series B Preferred Stock offering, first to extend the term from January
15, 2022 to January 15, 2023, and second to reduce the exercise price from $18.00
to $10.00.
The Company incurred an incremental expense of $41,225
in the first quarter of 2022 for the modifications.
The
following is a summary of all outstanding common stock warrants as of June 30, 2022:
SCHEDULE OF STOCKHOLDERS' EQUITY NOTE, WARRANTS OR RIGHTS
| |
Number of Warrants | | |
Exercise price per share | | |
Average remaining term in years |
| |
| | |
| | |
|
Warrants issued in connection with issuance of Series B Preferred Stock to lead investor | |
| 11,875 | | |
$ | 10.00 | | |
0.54 years |
Warrants issued in connection with convertible notes | |
| 25,208 | | |
$ | 24.00 | | |
0.34 years |
NOTE
8 – STOCK OPTIONS
In
2016 to compensate officers, directors and other key service providers with equity grants, the Board approved the 2016 Omnibus Equity
Incentive Plan (“2016 Plan”), which initially allowed for 4,000 shares of common stock, stock options, stock rights (restricted
stock units), or stock appreciation rights to be granted by the Board in its discretion. This authorized amount was increased multiple
times by Board resolution, most recently to 200,000 shares on January 13, 2022. There are currently no shares available under the 2016
Plan for future issuance; however, the Board may increase the authorized shares under the 2016 Plan each year.
The
Company issued 150,000 stock options to purchase common stock to officers and directors of the Company during the six months ended June
30, 2022. These options have a 10 year term. The options have the following vesting schedules:
SCHEDULE OF VESTED DESCRIPTION
Vesting Description | |
Number of Options | |
| |
| 87,500 | |
50% 12 months after issuance and the balance 24 months after issuance | |
| 87,500 | |
100% 10 months after issuance | |
| 25,000 | |
34% 12 months after issuance, 33% 24 months after issuance, and the remaining 36 months after issuance | |
| 28,150 | |
Performance conditions set by Board of Directors | |
| 9,350 | |
A
summary of stock option activity and related information is as follows:
SUMMARY OF STOCK OPTION ACTIVITY
| |
Options | | |
Weighted Average Exercise Price | | |
Weighted Average Remaining Contractual Term | | |
Aggregate Intrinsic Value | |
Outstanding as of December 31, 2021 | |
| 27,815 | | |
$ | 30.46 | | |
| 7.90 | | |
$ | - | |
Granted | |
| 150,000 | | |
$ | 9.25 | | |
| 10.00 | | |
$ | - | |
Outstanding as of March 31, 2022 | |
| 177,815 | | |
$ | 12.57 | | |
| 9.56 | | |
$ | - | |
Granted | |
| - | | |
$ | - | | |
| - | | |
$ | - | |
Outstanding as of June 30, 2022 | |
| 177,815 | | |
$ | 12.57 | | |
| 9.31 | | |
$ | - | |
Exercisable as of June 30, 2022 | |
| 21,015 | | |
$ | 37.00 | | |
| 7.41 | | |
$ | - | |
The
aggregate intrinsic value of options exercised is the difference between the fair market value of the Company’s closing price of
our common stock at each reporting date, less the exercise price multiplied by the number of options granted which was nil at June 30,
2022.
As
of June 30, 2022, the unrecognized stock-based compensation of approximately $661,637 is
expected to be expensed over the next 12 to 36 months
based on the option vesting requirements. The weighted average fair value of options granted was $7.82
per share for the six months ended June
30, 2022. For the six-month period ended June 30, 2022, the stock-based compensation expense was $319,487 which
is included in compensation and related expenses.
We
estimate the fair value of stock-based awards on the date of grant using the Black-Scholes option pricing model using the fair market
value of our common stock on the date of grant and a number of other assumptions. These assumptions include estimates regarding the expected
term of the awards, estimates of the stock volatility over a duration that approximates the expected term of the awards, estimates of
the risk-free rate, and estimates of expected dividend rates.
The
assumptions that were used in Black-Scholes option pricing model for the six months ended June 30, 2022 were as follows:
SCHEDULE OF FAIR VALUE OF STOCK OPTIONS GRANTED USING THE ASSUMPTIONS
Expected term (years) | |
| 5.50 | |
Expected volatility | |
| 130.6% - 166.7 | % |
Risk-free interest rate | |
| 1.65% - 1.86 | % |
Expected dividend yield | |
| 0.0 | % |
NOTE
9 – COMMITMENTS AND CONTINGENCIES
Employment
Agreements
The
employment agreements as amended for the Company’s Executive Chairman and CEO each contain termination provisions whereby if they
are terminated without cause or following a material change, as defined therein, they will receive salary through the date of termination
plus an additional 24 months, bonus that would be earned during the full year when the termination became effective (or a lump sum of
50% of the full target bonus), all stock options shall vest and healthcare benefits will continue for 24 months. The Company’s
General Counsel’s employment agreement, as amended, contains an 18-month severance payment in the instance of a termination without
cause or following a material change, as defined therein.
Additionally, the management team are currently taking partial salary of their approved salary per their employment agreements and the
difference is being accrued starting as of December 1, 2021. As of June 30, 2022, the accrued salary for the management team was $588,805.
The
employment agreements, as amended, for the Company’s Executive Chairman and CEO each contain a transaction bonus in the instance
any of the Company’s assets are sold or sublicensed or if the Company or its subsidiaries is acquired, equal to 1.75% of the consideration
received by the Company. The employment agreement, as amended, for the Company’s General Counsel contains a similar transaction
bonus equal to 0.5% of consideration received by the Company.
License
Agreement
The
License Agreement for the Technology, as amended, between the Company’s wholly-owned subsidiary QSAM and IGL is for 20 years
or until the expiration of the multiple patents covered under the license and requires multiple milestone-based payments including:
up to $410,000
as CycloSam® advances through Phase 3 of clinical trials, and $2
million upon commercialization. IGL has also received 12,500
shares of the Company’s common stock as additional compensation. Upon commercialization, IGL will receive an on-going royalty
equal to 4.5%
of Net Sales, as defined in the License Agreement, and 5%
of any consideration we receive pursuant to a sublicense, sale of the asset, or sale of the QSAM subsidiary. The Company will also
pay for ongoing patent filing and maintenance fees, and has certain requirements to defend the patents against infringement
claims.
In
connection with the License Agreement, QSAM signed a two-year Consulting and Confidentiality Agreement (the “Consulting
Agreement”) with IGL, which provides IGL with payments of $8,500
per month starting 60 days after signing through April 2022. The Consulting Agreement is to provide QSAM with additional consulting
and advisory services from the Technology’s founders to assist in the clinical development of CycloSam. As of June 30, 2022,
the Company has paid $9,355
in expense reimbursements required under the agreement. As of June 30, 2021, the Company paid $60,000
under the License Agreement representing the full upfront license fee, as well $60,000
in expense reimbursements required under that agreement. The drug development costs to service providers including the fixed $8,500
monthly consulting fee, which has been reflected as research and development expense on the condensed consolidated statement of
operations was $95,988
and $147,453
for the six months ended June 30, 2022 and 2021, respectively.