NOTE
2 – GOING CONCERN AND MANAGEMENT’S PLANS
The
accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a
going concern, which assumes the realization of assets and satisfaction of liabilities and commitments in the normal course of
business. The Company experienced a net loss of $364,459 for the three months ended March 31, 2020, had a working capital deficit
of $487,189 and an accumulated deficit of $13,491,369 as of March 31, 2020. These factors raise substantial doubt about the Company’s
ability to continue as a going concern and to operate in the normal course of business. These unaudited condensed consolidated
financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts
or amounts and classification of liabilities that might result from this uncertainty.
In
2020, management intends to raise additional funds to support current operations and extend development of its product line. No
assurance can be given that the Company will be successful in this effort. If the Company is unable to raise additional funds
in 2020, it will be forced to severely curtail all operations.
NOTE
3 – INVESTMENT AND RESTRUCTURING AGREEMENT
On May 21, 2019 (the “Closing
Date”), pursuant to that certain Investment and Restructuring Agreement, dated April 11, 2019 (the “IAR Agreement”),
by and among the Company, YPH, LLC, (“YPH”), Stephen McCormack, the then Chief Executive Officer and a director of
the Company, Steven Gorlin, then a director of the Company, Charles Farrahar, then the Chief Financial Officer of the Company,
Athens Encapsulation Inc., (“AEI” and collectively with), Messrs. McCormack, Gorlin, Farrahar, the “AEI
Parties”, and certain additional investors (collectively, the “Additional Investors”):
|
●
|
Messrs. McCormack and Gorlin resigned from the Board of Directors
of the Company and from all positions as officers or employees of the Company.
|
|
|
|
|
●
|
Federico
Pier was appointed as the Executive Chairman of the Board of Directors of the Company.
Michael Yurkowsky and Frances Toneguzzo were appointed to the Board of Directors
of the Company. Ms. Toneguzzo was appointed as the Chief Executive Officer of the Company.
|
|
|
|
|
●
|
YPH
and the Additional Investors (together, the “Investors”) purchased an aggregate of 3,980,000 shares of common
stock of the Company at a purchase price of $0.25 per share and warrants to purchase 3,980,000 shares of common stock exercisable
from the date of their respective investment dates (ranging from July 14, 2019 to September 9, 2019) (the “Investment
Date”) until the third anniversary of the Investment Date for $0.50 per share. The Company received $971,500 net proceeds
from the sale of the common stock and warrants.
|
|
●
|
The
Company assigned all of the Company’s right, title and interest in the Master Service Agreement and related work orders
with its customer, Otsuka to AEI.
|
|
|
|
|
●
|
VI
assigned its lease to the Athens, Georgia Laboratory and office (the “Athens Facility”) to AEI.
|
|
|
|
|
●
|
The
Company contributed to AEI all physical assets located at the Athens Facility. These contributed assets did not include intellectual
property related to the use of CXCL12, and the AEI Parties agreed that neither they nor any affiliated party will use CXCL12
or any analogues in any of its activities. The Company retained the right to use any of the “encapsulation technology”
utilized or developed at the Athens Facility before the IAR Agreement was executed.
|
|
|
|
|
●
|
AEI assumed certain liabilities of the Company ,
including, but not limited to, $189,922 owed by the Company to Aperisys, Inc., an aggregate of $353,092 in advances made by
Messrs. Gorlin, Farrahar and McCormack to the Company an aggregate of $395,833 in accrued salaries owed by the Company
to Messrs. McCormack and Farrahar; and an aggregate of $150,395 in trade payables attributable to the Athens Facility
|
|
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|
|
●
|
AEI
issued an aggregate of 1,600 shares of AEI common stock (the “AEI Common Stock”)
to the officer and employees of AEI (the “AEI Shareholders”), representing
80% of the outstanding capital stock of AEI. The AEI Shareholders were Messrs.
Gorlin, McCormack, and Farrahar, each of which is a current shareholder of the
Company, and two of whom were former Directors of the Company.
|
|
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|
|
●
|
AEI
issued 400 shares of preferred stock (the “AEI Preferred Stock”), to the Company. Once AEI pays the
assumed liabilities noted above, the Certificate of Designation for the AEI Preferred Stock entitles the holder to receive
all distributions made by AEI on any of its equity securities up to a total of $4,000,000 (the “AEI Preferred Payment”). Following
the full payment of the AEI Preferred Payment, the AEI Preferred Stock shall automatically be converted into a number of shares
of AEI Common Stock such that it is equal to 20% of all issued and outstanding AEI Common Stock at such time.
|
|
|
|
|
●
|
Mr.
McCormack and the Company amended Mr. McCormack’s original option agreement dated March 20, 2017, to (i) reduce the
number of Mr. McCormack’s option shares from 1,440,000 to 600,000; and (ii) extend the exercise period of Mr. McCormack’s
options from three (3) months to three (3) years following the Closing Date.
|
Pursuant to the Financial
Accounting Standards Board’s (the “FASB”) Accounting Standards Codification (“ASC”) 205-20 Presentation
of Financial Statements: Discontinued Operations and amended by Accounting Standards Update (“ASU”) No.
2014-08, management has determined that this transaction meets the definition of presenting discontinued operations, as
the Company disposed of a component of its business (see Notes 4 and 9). During the quarter ended March 31, 2019, the results
of operations of this disposed business component have been presented as discontinued operations.
NOTE
4 – SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Basis
of Presentation and Principles of Consolidation
The accompanying condensed
consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United
States of America (“US GAAP”). The unaudited condensed consolidated financial statements of the Company include
the consolidated accounts of VLS and VI, its’ wholly owned subsidiary. All intercompany accounts and transactions
have been eliminated in consolidation.
Use
of Estimates
The preparation of financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements
and the reported amount of revenues and expenses during the reported period. Actual results could differ from those estimates.
Significant estimates for the three months ended March 31, 2020, and December 31, 2019, include useful life of intangible assets,
valuation allowance for deferred tax asset and non-cash equity transactions and stock-based compensation.
Cash
The Company considers all highly liquid investments with an original
term of three months or less to be cash equivalents. The Company held no cash equivalents as of March 31, 2020, and December 31,
2019. Cash balances may, at certain times, exceed federally insured limits. If the amount of a deposit at any time exceeds the
federally insured amount at a bank, the uninsured portion of the deposit could be lost, in whole or in part, if the bank were to
fail.
Intangible
Assets
Costs
of intangible assets are accounted for through the capitalization of those costs incurred in connection with developing or obtaining
such assets. Capitalized costs are included in intangible assets in the unaudited condensed consolidated balance sheets. The Company’s
intangible assets consist of costs incurred in connection with securing an Exclusive Patent License Agreement with The General
Hospital Corporation, d/b/a Massachusetts General Hospital (“MGH”), as amended (the “License Agreement”).
These costs are being amortized over the term of the License Agreement which is based on the remaining life of the related patents
being licensed.
The
Company reviews these intangible assets for possible impairment when events or changes in circumstances that the assets carrying
amount may not be recoverable. In evaluating the future benefit of its intangible assets, management performs an analysis of the
anticipated undiscounted future net cash flows of the intangible assets over the remaining estimated useful life. An impairment
loss is recorded if the carrying value of the asset exceeds the expected future cash flows
Long-Lived
Assets
The
Company reviews long-lived assets at least annually or when events or changes in circumstances reflect the fact that the recorded
value may not be recoverable for impairment and recognizes impairment losses on long-lived assets used in operations when indicators
of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’
carrying values.
Discontinued
Operations
In
accordance with ASC 205-20 Presentation of Financial Statements: Discontinued Operations, a disposal of a component of
an entity or a group of components of an entity is required to be reported as discontinued operations if the disposal represents
a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the components
of an entity meets the criteria in paragraph 205-20-45-10. In the period in which the component meets held-for-sale or discontinued
operations criteria the major current assets, other assets, current liabilities, and noncurrent liabilities shall be reported
as components of total assets and liabilities separate from those balances of the continuing operations. At the same time, the
results of all discontinued operations, less applicable income taxes (benefit), shall be reported as components of net income
(loss) separate from the net income (loss) of continuing operations.
The
Company disposed of a component of its business pursuant to the IAR Agreement (see Note 3) in May 2019, which met the definition
of a discontinued operation. Accordingly, the operating results of the business transferred are reported as a loss from discontinued
operations in the accompanying unaudited condensed consolidated statement of operations and statement of cash flows for the period
ended March 31, 2019. For additional information, see Note 9- Discontinued Operations.
Equity
Method Investment
The
Company accounts for investments in which the Company owns more than 20% or has the ability to exercise significant influence
of the investee, using the equity method in accordance with ASC Topic 323, Investments—Equity Method and Joint Ventures.
Under the equity method, an investor initially records an investment in the stock of an investee at cost and adjusts the carrying
amount of the investment to recognize the investor’s share of the earnings or losses of the investee after the date of acquisition.
The
amount of the adjustment is included in the determination of net income by the investor, and such amount reflects adjustments
similar to those made in preparing consolidated statements including adjustments to eliminate intercompany gains and losses, and
to amortize, if appropriate, any difference between investor cost and underlying equity in net assets of the investee at the date
of investment. The investment of an investor is also adjusted to reflect the investor’s share of changes in the investee’s
capital. Dividends received from an investee reduce the carrying amount of the investment. A series of operating losses of an
investee or other factors may indicate that a decrease in value of the investment has occurred which is other than temporary,
and which should be recognized even though the decrease in value is in excess of what would otherwise be recognized by application
of the equity method.
In
accordance with ASC 323-10-35-20 through 35-22, the investor ordinarily shall discontinue applying the equity method if the investment
(and net advances) is reduced to zero and shall not provide for additional losses unless the investor has guaranteed obligations
of the investee or is otherwise committed to provide further financial support for the investee. An investor shall, however, provide
for additional losses if the imminent return to profitable operations by an investee appears to be assured. For example, a material,
nonrecurring loss of an isolated nature may reduce an investment below zero even though the underlying profitable operating pattern
of an investee is unimpaired. If the investee subsequently reports net income, the investor shall resume applying the equity method
only after its share of that net income equals the share of net losses not recognized during the period the equity method was
suspended.
Equity
and cost method investments are classified as investments. The Company periodically evaluates its equity and cost method investments
for impairment due to declines considered to be other than temporary. If the Company determines that a decline in fair value is
other than temporary, then a charge to earnings is recorded as an impairment loss in the accompanying consolidated statements
of operations.
The Company’s equity
method investment consists of equity owned in AEI which was given to the Company as part of an investment and restructuring agreement
(see Note 3). Therefore, as of March 31, 2020, the Company has no cost basis in the investment. During the three months ended
March 31, 2020 and 2019, the Company did not have any proportionate share of net income from AEI.
Fair
Value of Financial Instruments
ASC
825, “Disclosures about Fair Value of Financial Instruments,” requires disclosure of fair value information about
financial instruments. ASC 820, “Fair Value Measurements” defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. Fair value estimates
discussed herein are based upon certain market assumptions and pertinent information available to management as of March 31, 2020.
The
carrying amounts of the Company’s financial assets and liabilities, such as cash, prepaid expenses, accounts payable and
accrued liabilities, payables with related parties, approximate their fair values because of the short maturity of these instruments.
Revenue
Recognition
Effective
January 1, 2018, the Company adopted ASC Topic 606, “Revenue from Contracts with Customers” (“ASC 606”)
and all the related amendments. The Company elected to adopt this guidance using the modified retrospective method. The adoption
of this guidance did not have a material effect on the Company’s consolidated financial position, results of operations
or cash flows.
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 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’s contracts with customers are generally on a contract and work order basis and represent obligations that are satisfied
at a point in time, as defined in the new guidance, generally upon delivery or has services are provided. Accordingly,
revenue for each sale is recognized when the Company has completed its performance obligations. Any costs incurred before this
point in time, are recorded as assets to be expensed during the period the related revenue is recognized.
Stock
Based Compensation
Stock-based
compensation is accounted for based on the requirements of ASC 718 – “Compensation –Stock Compensation,”
which requires recognition in the financial statements of the cost of employee, director and non-employee services received in
exchange for an award of equity instruments over the period the employee, director, or non-employee is required to perform the
services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee,
director, and non-employee services received in exchange for an award based on the grant-date fair value of the award. The Company
has elected to recognize forfeitures as they occur as permitted under ASU 2016-09 Improvements to Employee Share-Based Payment.
Research
and Development
Costs
and expenses that can be clearly identified as research and development are charged to expense as incurred. For the three months
ended March 31, 2020 and 2019, the Company recorded $94,048 and $0 of research and development expenses, respectively.
Income
Taxes
The
Company accounts for income taxes in accordance with ASC 740-10, Income Taxes. Deferred tax assets and liabilities are recognized
to reflect the estimated future tax effects, calculated at the tax rate expected to be in effect at the time of realization. A
valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion of the deferred
tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and
rates of the date of enactment.
ASC
740-10 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements
and provides guidance on recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure
and transition issues. Interest and penalties are classified as a component of interest and other expenses. To date, the Company
has not been assessed, nor paid, any interest or penalties.
Uncertain
tax positions are measured and recorded by establishing a threshold for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. Only tax positions meeting the more-likely-than-not recognition
threshold at the effective date may be recognized or continue to be recognized.
Earnings
(Loss) Per Share
The Company reports earnings
(loss) per share in accordance with ASC 260, “Earnings per Share.” Basic earnings (loss) per share is computed by
dividing net income (loss) by the weighted-average number of shares of common stock outstanding during each period. Diluted earnings
per share is computed by dividing net loss by the weighted-average number of shares of common stock, common stock equivalents
and other potentially dilutive securities outstanding during the period. As of March 31, 2020 and 2019, the Company’s dilutive
securities are convertible into approximately 17,688,006 and 17,672,656 shares of common stock, respectively. This amount
is not included in the computation of dilutive loss per share because their impact is antidilutive. The following table represents
the classes of dilutive securities as of March 31, 2020 and 2019:
|
|
March 31,
2020
|
|
|
March 31,
2019
|
|
Common stock to be issued
|
|
|
651,281
|
|
|
|
4,504,431
|
|
Convertible preferred stock
|
|
|
10,440,000
|
|
|
|
10,440,000
|
|
Stock options
|
|
|
2,450,000
|
|
|
|
2,641,500
|
|
Warrants to purchase common stock
|
|
|
4,146,725
|
|
|
|
86,725
|
|
|
|
|
17,688,006
|
|
|
|
17,672,656
|
|
Recent
Accounting Pronouncements
Management
does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material
effect on the accompanying unaudited condensed consolidated financial statements.
NOTE
5 – INTANGIBLE ASSETS
The
Company’s intangible assets consist of costs incurred in connection with the License Agreement with MGH, as amended (See
Note 7). The consideration paid for the rights included in the License Agreement was in the form of common stock shares. The estimated
value of the common stock is being amortized over the term of the License Agreement which is based on the remaining life of the
related patents being licensed which is approximately 16 years.
The
Company’s intangible assets consisted of the following at March 31, 2020, and December 31, 2019:
|
|
March 31,
2020
|
|
|
December 31, 2019
|
|
Licensed patents
|
|
$
|
492,514
|
|
|
$
|
492,514
|
|
Accumulated Amortization
|
|
|
(66,104
|
)
|
|
|
(58,241
|
)
|
Balance
|
|
$
|
426,410
|
|
|
$
|
434,273
|
|
The
Company recognized $7,862 and $7,821 of amortization expense related to the License Agreement with MGH for the three months
ended March 30, 2020, and 2019, respectively.
Future
expected amortization of intangible assets is as follows:
Fiscal year ending December 31,
|
|
|
|
2020 (months remaining)
|
|
$
|
23,437
|
|
2021
|
|
|
31,299
|
|
2022
|
|
|
31,299
|
|
2023
|
|
|
31,299
|
|
2024
|
|
|
31,299
|
|
Thereafter
|
|
|
277,777
|
|
|
|
$
|
426,410
|
|
NOTE
6 – RELATED PARTY TRANSACTIONS
Consulting
Agreement
On
June 21, 2019, the Company entered into a Consulting Agreement (the “Consulting Agreement”) with Mark Poznansky, MD,
(the “Consultant”) a stockholder and former Director. The Company engaged the Consultant to render consulting services
with respect to informing, guiding and supervising the development of antagonists to immune repellents or anti-fugetaxins for
the treatment of cancer. The initial term of the Consulting Agreement is for one year (the “Initial Term”) and the
Company agreed to pay the Consultant $3,000 per month commencing June 1, 2019, with the fee increasing to $6,000 per month commencing
on the 1st day of the month following the completion of a $5 million in fundraising by the Company. After the Initial
Term, the Consulting Agreement automatically renews for additional one-year periods, unless the Company terminates the Consulting
Agreement, upon not less than thirty (30) days- notice. The Company incurred expenses of $9,000 for the three months ended March
31, 2020, related to the Consulting Agreement which is included in professional fees on the unaudited condensed consolidated statements
of operations.
MGH
License Agreement
On May 8, 2013, VI
and MGH entered into the License Agreement, pursuant to which MGH granted to the Company, in the field of coating and transplanting
cells, tissues and devices for therapeutic purposes, on a worldwide basis: (i) an exclusive, royalty-bearing license under its
rights in patent rights (as defined in the License Agreement) to make, use, sell, lease, import and transfer products and processes
(each as defined in the License Agreement); (ii) a non-exclusive, sub-licensable (solely in the License Field and License Territory
(each as defined in the License Agreement)) royalty- bearing license to materials (as defined in the License Agreement) and to
make, have made, use, have used, materials for only the purpose of creating products, the transfer of products and to use, have
used and transfer processes; (iii) the right to grant sublicenses subject to and in accordance with the terms of the License Agreement,
and (iv) the nonexclusive right to use technological information (as defined in the License Agreement) disclosed by MGH to the
Company under the License Agreement, all subject to and in accordance with the License Agreement (the “License”).
As amended by the Seventh
Amendment to the License Agreement on December 22, 2017, the License Agreement requires that VI satisfy the following requirements
prior to the first sale of Products (“MGH License Milestones”), by certain dates which have passed. The table below
lists the MGH Milestones and the Company’s progress in satisfying or negotiating the extension of each milestone:
|
MILESTONE:
|
|
STATUS:
|
|
(i)
|
Provide
a detailed business and development plan.
|
|
The
Company has provided MGH with a completed Corporate pitch deck which outlines the Company’s
business and development plans has been provided to MGH.
|
|
(ii)
|
Raise $2 million
in a financing round.
|
|
The
Company has raised $1 million and is currently in the process of raising the second $1 million.
The Company and MGH are currently negotiating extending this milestone.
|
|
(iii)
|
Initiate
and finance research regarding the role of CXCL12 in minimizing fibrosis formation.
|
|
Milestone
completed.
|
|
(iv)
|
Initiate and
finance research regarding the role of CXCL12 in beta cell function and differentiation.
|
|
Dr. Poznansky’s
lab was focusing on this as part of the academic project. The Company therefore made the strategic decision to fund another
aspect of CXCL12 biology which focuses on the role of CXCL12 in wound healing. For the time being, the Company is excused
from meeting this milestone as it has provided an alternative milestone as well as a justification for not pursuing this particular
milestone.
|
The
Company and MGH have agreed to work together to restate the license agreement, incorporating all the relevant provisions from
the seven amendments and agreeing on a new set of milestones for future development.
The License Agreement also
requires VI to pay to MGH a one percent (1%) royalty rate on net sales related to the first license sub-field, which
is the treatment of Type 1 Diabetes. Future sub-fields shall carry a reasonable royalty rate, consistent with industry standards,
to be negotiated at the time the first such royalty payment shall become due with respect to the applicable Products and Processes
(as defined in the License Agreement).
The License Agreement additionally
requires VI to pay to MGH a $1.0 million “success payment” within 60 days after the first achievement of total
net sales of product or process equal to or to exceed $100,000,000 in any calendar year and $4,000,000 within sixty (60) days
after the first achievement of total net sales of product or process equal or exceed $250,000,000 in any calendar year. The Company
is also required to reimburse MGH’s expenses in connection with the preparation, filing, prosecution and maintenance of
all patent rights.
The
License Agreement expires on the later of (i) the date on which all issued patents and filed patent applications within the patent
rights have expired or been abandoned, and (ii) one (1) year after the last sale for which a royalty is due under the License
Agreement.
The License Agreement also
grants MGH the right to terminate the License Agreement if VI fails to make any payment due under the License Agreement
or defaults in the performance of any of its other obligations under the License Agreement, subject to certain notice and rights
to cure set forth therein. MGH may also terminate the License Agreement immediately upon written notice to VI if VI:
(i) shall make an assignment for the benefit of creditors; or (ii) or shall have a petition in bankruptcy filed for or against
it that is not dismissed within sixty (60) days of filing. As of the date of this filing, this License Agreement remains active
and the Company has not received any termination notice from MGH.
VI may terminate the
License Agreement prior to its expiration by giving ninety (90) days’ advance written notice to MGH, and upon such termination
shall, subject to the terms of the License Agreement, immediately cease all use and sales of Products and Processes.
The
Company incurred research and development expenses to MGH of $94,048 during the three months ended March 31, 2020, all of which
is in accounts payable as of March 31, 2020. The Company did not incur any research and development expenses to MGH for the three
months ended March 31, 2019.
During
the three months ended March 31, 2020 and 2019, there have not been any sales of product or process under this License Agreement.
Investment
and Restructuring Agreement (IAR Agreement)
As
discussed in Note 3, the Company transferred certain assets and liabilities to AEI, a company majority owned by three current
shareholders of the Company, two of which were also former Directors and one was an officer of the Company. As a result of the
IAR Agreement, the Company received 400 shares of preferred stock in AEI.
NOTE
7– COMMITMENTS AND CONTINGENCIES
Lease
Agreements
On March 1, 2014, the Company
entered into a rental agreement with the Board of Regents of the University System of Georgia (“UGA”). As of July
1, 2016, the Company rented approximately 1,413 square feet for a monthly rent of $2,590 per month. Effective August 1, 2017,
the Company rented approximately 2,771 square feet and the rent was increased to $5,542 per month and expiring July 1, 2019. The
Company did not incur any rent expense under the rental agreement for the three months ended March 31, 2020. Rent expense under
the rental agreement was $16,626 for the three months ended March 31,2019 and is included in discontinued operations on the unaudited
condensed consolidated statements of operations. The lease was assigned to AEI in May 2019.
On
June 3, 2017, the Company entered into an Equipment Lease Agreement (the “Lease Agreement”) for medical equipment
with a cost of $76,600 (the equipment cost). Pursuant to the Lease Agreement, the Company paid a deposit of $32,705 and agreed
to twenty-four (24) monthly payments (the term) of $1,756. The Company can acquire the equipment either a) after the first 6 monthly
payments for the equipment cost minus the sum of the deposit and 70% of the monthly payments, or b) by paying seven (7) additional
monthly payments at the end of the term. The Company did not incur any lease expense under the Lease Agreement for the three months
ended March 31, 2020. Equipment lease expense under the Lease Agreement was $5,815 for the three months ended March 31, 2019 and
is included in discontinued operations on the condensed consolidated statement of operations. The Company returned the equipment
upon the expiration of the lease in May 2019.
Legal
Matters
The
Company is not aware of any material, existing or pending legal proceedings against our Company, nor are we involved as a plaintiff
in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates,
or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.
MGH
License Agreement
As discussed in Note 7, the
Company executed a License Agreement with MGH. The License Agreement also requires VI to pay to MGH a one percent
(1%) royalty rate on Net Sales related to the first license sub-field, which is the treatment of Type 1 Diabetes. Future sub-fields
shall carry a reasonable royalty rate, consistent with industry standards, to be negotiated at the time the first such royalty
payment shall become due with respect to the applicable products and processes (as defined in the License Agreement). The License
Agreement additionally requires VI to pay to MGH a $1.0 million “success payment” within 60 days after the
first achievement of total net sales of product or process equal or exceed $100,000,000 in any calendar year and $4,000,000 within
sixty (60) days after the first achievement of total net sales of product or process equal or $250,000,000 in any calendar year.
The Company is also required to reimburse MGH’s expenses in connection with the preparation, filing, prosecution and maintenance
of all Patent Rights.
Consulting
Agreement
On
June 21, 2019, the Company entered into a Consulting Agreement (the “Consulting Agreement”) with C&H Capital,
Inc. (the “Consultant”). The Company engaged the Consultant to render consulting services to facilitate long range
strategic investor relations planning and other related services. The initial term of the Consulting Agreement is for one year
(the “Initial Term”) and the Company agreed to pay the Consultant $3,500 on the last business day for each month of
service. Either party may terminate the Consulting Agreement upon thirty (30) days prior written notice in the event the other
party violates a material provision of the Consulting Agreement and fails to cure such breach within ten (10) days of written
notice of such violation from the non-breaching party. The Company incurred expenses of $10,500 and $0, respectively, for the
three months ended March 31, 2020 and 2019 related to the Consulting Agreement and is included in professional fees on the consolidated
statement of operations.
COVID-19
In March 2020, the World Health Organization
declared COVID-19 a global pandemic and recommended containment and mitigation measures worldwide. We are monitoring this closely,
and although operations have not been materially affected by the COVID-19 outbreak to date, the ultimate duration and severity
of the outbreak and its impact on the economic environment and our business is uncertain. Accordingly, while we do not anticipate
an impact on our operations, we cannot estimate the duration of the pandemic and potential impact on our business. In addition,
a severe or prolonged economic downturn could result in a variety of risks to our business, including a possible delay in our
ability to raise money. At this time, the Company is unable to estimate the impact of this event on its operations.
NOTE
8 – STOCKHOLDERS’ EQUITY (DEFICIT)
Preferred
Stock
The Company has 20,000,000
authorized shares of preferred stock, $0.001 par value per share.
Series
A Preferred Stock
On December 19, 2017, the
Company amended its articles of incorporation by filing a certificate of designation with the Secretary of State of Florida
therein designating a class of preferred stock as Series A Preferred Stock, $0.001 par value per share, consisting of 3
million (3,000,000) shares. Each holder of shares of Series A Preferred Stock shall be entitled to the number of votes equal to
the number of votes held by the number of shares of common stock into which such share of Series A Preferred Stock could be converted,
and except as otherwise required by applicable law, shall have the voting rights and power equal to the voting rights and powers
of the common stock. The holders of the Series A Preferred Stock shall vote together with the holders of the common stock of the
Company as a single class and as single voting group upon all matters required to be submitted to a class or series vote pursuant
to the protective provisions of the Certificate of Designation or under applicable law. In the event of liquidation, dissolution
or winding up of the Corporation, either voluntarily or involuntarily, the holders of Series A Preferred Stock shall be entitled
to receive, prior and in preference to any common stock holders, distribution of any surplus funds equal to the greater of : the
sum of $1.67 per share or such amount per share as would have been payable had all shares been converted to common stock.
The holder of Series A Preferred
Stock may elect at any time to convert such shares into common stock of the Company. Each share of Series A Preferred Stock is
convertible into shares of common stock at a conversion Rate of 2:1 (the “Series A Conversion Rate”). The Series
A Conversion Rate shall be adjusted for stock splits, stock combinations, stock dividends or similar recapitalizations. Under
certain conditions, each share of Series A Preferred Stock shall automatically convert into shares of common stock at its then
Series A Conversion Rate.
The
holders of the Series A Preferred Stock shall be entitled to participate with the holders of the common stock in any dividends
paid or set aside for payment (other than dividends payable solely in shares of common stock) so that the holders of the Series
A Preferred Stock shall receive with respect to each share of Series A Preferred Stock an amount equal to (x) the dividend payable
with respect to each share of common stock multiplied by (y) the number of share of common stock into which such share of Series
A Preferred Stock is convertible as of the record date for such dividend. Any such dividend shall be paid with respect to all
then outstanding shares of common stock and Series A Preferred Stock on a pari passu basis and on as-converted basis. No dividends
shall be paid on the common stock or the Series B Preferred Stock unless an equivalent dividend is paid with respect to the Series
A Preferred Stock.
In
addition to any other rights and restrictions provided by applicable law, without first obtaining the affirmative vote or written
consent of the holders of a majority of the then-outstanding shares of Series A Preferred Stock, the Company shall not amend or
repeal any provision of, add any provision to, the Company’s Articles of Incorporation or the Series A Preferred Stock Certificate
of Designation if such action would adversely alter or change the preferences, rights, privileges or power of, or restrictions
provided for the benefit of, the Series A Preferred Stock. Unless otherwise prohibited by applicable law, the Board of Directors
of the Company shall have the authority to repeal any provision of, or add any provision to, the Company’s Articles of Incorporation
or Series A Preferred Stock Certificate of Designation if such action would not adversely alter or change the preferences, rights,
privileges or powers of, or restrictions provided for the benefit of the Series A Preferred Stock.
As
of March 31, 2020, and 2019, there were 3,000,000 shares of Series A Preferred Stock issued and outstanding.
Series
B Preferred Stock
On December 19, 2017, the
Company amended the articles of incorporation by filing a certificate of designation with the Secretary of State of Florida therein
designating a class of preferred stock as Series B Preferred Stock, $0.001 par value per share, consisting of 4.44 million
(4,440,000) shares (the “Series B Preferred Stock Certificate of Designation). Each holder of shares of Series B Preferred
Stock shall be entitled to the number of votes equal to the number of votes held by the number of shares of common stock into
which such share of Series B Preferred Stock could be converted, and except as otherwise required by applicable law, shall have
the voting rights and power equal to the voting rights and powers of the common stock. The holders of the Series B Preferred Stock
shall vote together with the holders of the common stock of the Company as a single class and as single voting group upon all
matters required to be submitted to a class or series vote pursuant to the protective provisions of the Series B Preferred Stock
Certificate of Designation or under applicable law. In the event of liquidation, dissolution or winding up of the Corporation,
either voluntarily or involuntarily, the holders of Series A Preferred Stock shall be entitled to receive, prior and in preference
to any common stock holders, distribution of any surplus funds equal to the greater of : the sum of $0.83 per share or such amount
per share as would have been payable had all shares been converted to common stock.
The holder of Series B Preferred
Stock may elect at any time to convert such sharers into common stock of the Company. Each share of Series B Preferred Stock is
convertible into shares of common stock at a conversion rate of 2:1 (the “Series B Conversion Rate”). The Series
B Conversion Rate shall be adjusted for stock splits, stock combinations, stock dividends or similar recapitalizations. Under
certain conditions, each share of Series B Preferred Stock shall automatically convert into shares of common stock at its then
Series B Conversion Rate.
The
holders of the Series B Preferred Stock shall be entitled to participate with the holders of the common stock in any dividends
paid or set aside for payment (other than dividends payable solely in shares of common stock) so that the holders of the Series
B Preferred Stock shall receive with respect to each share of Series B Preferred Stock an amount equal to (x) the dividend payable
with respect to each share of common stock multiplied by (y) the number of share of common stock into which such share of Series
B Preferred Stock is convertible as of the record date for such dividend. Any such dividend shall be paid with respect to all
then outstanding shares of common stock and Series B Preferred Stock on a pari passu basis and on as-converted basis. No dividends
shall be paid on the common stock or the Series B Preferred Stock unless an equivalent dividend is paid with respect to the Series
B Preferred Stock.
In
addition to any other rights and restrictions provided by applicable law, without first obtaining the affirmative vote or written
consent of the holders of a majority of the then-outstanding shares of Series B Preferred Stock, the Company shall not amend or
repeal any provision of, add any provision to, the Company’s Articles of Incorporation or the Series B Preferred Stock Certificate
of Designation if such action would adversely alter or change the preferences, rights, privileges or power of, or restrictions
provided for the benefit of, the Series B Preferred Stock. Unless otherwise prohibited by applicable law, the Board of Directors
of the Company shall have the authority to repeal any provision of, or add any provision to, the Company’s Articles of Incorporation
or Series B Preferred Stock Certificate of Designation if such action would not adversely alter or change the preferences, rights,
privileges or powers of, or restrictions provided for the benefit of the Series B Preferred Stock.
As
of March 31, 2020 and 2019, there were 4,440,000 shares of Series B Preferred Stock issued and outstanding.
Common
Stock
The Company has 300,000,000 authorized shares
of common stock, $0.001 par value per share. As of March 31, 2020, and December 31, 2019, there were 17,483,283 shares
of common stock outstanding.
Common
Stock to be issued
As of March 31, 2020 and
2019, there were 651,281 and 4,505,431, respectively, shares of common stock to be issued. As of March 31, 52020, 621,281
of the shares are to be issued under the IAR Agreements (see above), and 30,000 shares of common stock are to be issued to two
initial shareholders of VI.
During the period ended March 31, 2019, 891,551 shares of common
stock were to be issued pursuant to Stock Issuance and Release Agreement (“SRI”) executed by the Company to shareholders
who purchased shares in 2018 at $1.85 per share. The Company recorded a deemed dividend to stockholders of $160,479 for the shares
to be issued under the SRI Agreements, at $0.18 per share, based upon the estimated underlying value of the common stock of $0.18
per share based upon recent shares of common stock sold by the Company. As of March 31, 2019, the remaining common stock to be
issued consists of 3,612,880 shares issued to MGH pursuant to a License Agreement (see Notes 5, 6 and 7).
Stock
Options
The following table summarizes
activities related to stock options of the Company for the three months ended March 31, 2020:
|
|
Number of Options
|
|
|
Weighted-Average Exercise Price per Share
|
|
|
Weighted-Average Remaining Life (Years)
|
|
Outstanding at December 31, 2019
|
|
|
2,450,000
|
|
|
$
|
0.57
|
|
|
|
8.20
|
|
Outstanding at March 31, 2020
|
|
|
2,450,000
|
|
|
$
|
0.57
|
|
|
|
7.96
|
|
Exercisable at March 31,2020
|
|
|
2,075,000
|
|
|
$
|
0.63
|
|
|
|
7.73
|
|
The
Company did not grant any options to purchase shares of common stock during the three months ended March 31, 2020. The Company
recorded stock compensation expense of $5,408 and $0, respectively during the three months ended March 31, 2020 and 2019. As of
March 31, 2020, 375,000 options to purchase shares of common stock remain unvested and $48,668 of stock compensation expense remains
unrecognized and will be expensed over a weighted average period of 2.25 years.
Warrants
The
following table summarizes activities related to warrants of the Company for the three months ended March 31, 2020:
|
|
Number of Warrants
|
|
|
Weighted-Average Exercise Price per Share
|
|
|
Weighted-Average Remaining Life (Years)
|
|
Outstanding and exercisable at December 31, 2019
|
|
|
4,146,725
|
|
|
$
|
0.53
|
|
|
|
2.50
|
|
Outstanding and exercisable at March 31, 2020
|
|
|
4,146,725
|
|
|
$
|
0.53
|
|
|
|
2.25
|
|
The
Company did not issue any warrants during the three month period ended March 31,2020.
NOTE
9 – DISCONTINUED OPERATIONS
In April 2019, the Company’s
board of directors approved the IAR Agreement (See Note 3), whereby the Company, in effect transferred a segment of its
business and the related assets and liabilities to AEI, a related party. The transaction was completed on May 21, 2019.
ASC
205-20 “Discontinued Operations” establishes that the disposal or abandonment of a component of an entity or a group
of components of an entity should be reported in discontinued operations if the disposal represents a strategic shift that has
(or will have) a major effect on an entity’s operations and financial results. As a result, the component’s results
of operations as of March 31, 2019 have been reclassified as discontinued operations on the condensed consolidated statements
of operations. The results of operations of this component are separately reported as “discontinued operations” for
the three months ended March 31, 2020. There have been no transactions between the Company and AEI since the IAR Agreement.
A reconciliation of the major
classes of line items constituting the loss from discontinued operations, net of income taxes as is presented in the unaudited
condensed consolidated statements of operations for the three months ended March 31, 2020 and 2019 are summarized below:
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
50,000
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Personnel costs
|
|
|
—
|
|
|
|
206,805
|
|
Travel expenses
|
|
|
—
|
|
|
|
20,653
|
|
Laboratory expenses
|
|
|
—
|
|
|
|
51,322
|
|
General and administrative expenses
|
|
|
—
|
|
|
|
50,282
|
|
Total operating expenses
|
|
|
—
|
|
|
|
329,062
|
|
Loss from discontinued operations
|
|
$
|
—
|
|
|
$
|
(279,062
|
)
|
There were no carrying amounts
of major classes of assets and liabilities of the Company classified as discontinued operations in the unaudited condensed consolidated
balance sheets at March 31, 2020 and December 31, 2019.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The
following discussion and analysis of our financial condition and results of operations should be read in conjunction with the
consolidated financial statements and the notes thereto appearing in Part I, Item 1 of this Quarterly Report. Historical results
and trends that might appear in this Quarterly Report should not be interpreted as being indicative of future operations.
Overview
Vicapsys Life Sciences, Inc.
(“VLS”) was incorporated in the State of Florida on July 8, 1997 under the name All Product Distribution Corp. On
August 19, 1998, the Company changed its name to Phage Therapeutics International, Inc. On November 13, 2007, the Company changed
its name to SSGI, Inc. On September 13, 2017, the Company changed its name to Vicapsys Life Sciences, Inc., effected a 1-for-100
reverse stock split of its outstanding common stock, increased the Company’s authorized capital stock to 300,000,000
shares of common stock, par value $0.001 per share, and 20,000,000 shares of “blank check” preferred stock, par value
$0.001 per share. On December 22, 2017, pursuant to a Share Exchange Agreement (the “Exchange Agreement”) by and among
VLS, Michael W. Yurkowsky, ViCapsys, Inc. (“VI”) and the shareholders of VI, a private company, VI became a wholly
owned subsidiary of VLS. We refer to VLS and VI together as the “Company”.
On
May 21, 2019 the Company closed an Investment and Restructuring Agreement (see Note 3 to the unaudited consolidated financial
statements).
The Company’s
strategy is to develop and commercialize, on a worldwide basis, various intellectual property rights (patents, patent applications,
know how, etc.) relating to a series of encapsulated products that incorporate proprietary derivatives of the chemokine CXCL12
for creating a zone of immunoprotection around cells, tissues, organs and devices for therapeutic purposes. The product name VICAPSYN™
is the Company’s proprietary product line that is applied to transplantation therapies and related stem-cell applications
in the transplantation field.
COVID-19
In
March 2020, the World Health Organization declared COVID-19 a global pandemic and recommended containment and mitigation measures
worldwide. We are monitoring this closely, and although operations have not been materially affected by the COVID-19 outbreak
to date, the ultimate duration and severity of the outbreak and its impact on the economic environment and our business is uncertain.
Accordingly, while we do not anticipate an impact on our operations, we cannot estimate the duration of the pandemic and potential
impact on our business. In addition, a severe or prolonged economic downturn could result in a variety of risks to our business,
including a possible delay in our ability to raise money. At this time, the Company is unable to estimate the impact of this event
on its operations.
Results
of Operations - Three Months Ended March 31, 2020 and 2019
Revenues
The
Company did not have any revenues from continuing operations for the three months ended March 31, 2020 and 2019.
Operating
Expenses
We classify our operating
expenses from continuing operations into four categories: personnel costs, research and development expenses, professional
fees, and general and administrative expenses. The Company’s total operating expenses for the three months ended March 31,
2020 were $364,459, compared to $163,595 for the three months ended March 31, 2019. The increase was mainly due to the
reorganization of VI under the Investment and Restructuring Agreement in May 2019, resulting in a decrease in personnel
costs from $137,418 for the three months ended March 31, 2019 to $99,078 for the three months ended March 31, 2020, an
increase in professional fees from $17,457 for the three months ended March 31, 2019 to $157,248 for the three months ended
March 31, 2020 due to increased consulting services and other professional fees related being a public company, an increase in
general and administrative expenses from $8,720 for the three months ended March 31, 2019 to $14,085 for the three months ended
March 31, 2020, and an increase in research and development expenses of $0 for the three months ended March 31, 2019 to $94,048
for the three months ended March 31, 2020. The increase in research and development expenses is attributable to reaching the completion
of certain milestones of sponsored projects with MGH.
Funding
Requirements
We anticipate that substantial
additional equity or debt financings or funding from collaborative agreements or from foundations, government grants or other
sources, will be needed to complete preclinical and animal testing necessary to file an Investigational New Drug Application
with the U.S. Food and Drug Administration, and that further funding beyond such amounts will be required to commence
trials and other activities necessary to begin the process of development and regulatory approval of a product for the continued
growth of the Company. Additional capital will also be required for the clinical development of the recently discovered anti-fibrotic
applications and corporate partnerships will be necessary to move Company products into advanced clinical development and commercialization.
We also anticipate our cash expenditures will increase as we continue to operate as a publicly traded entity.
Liquidity
and Capital Resources
At
March 31, 2020, we had $30,948 of cash on hand and an accumulated deficit of $13,491,369.
We do not believe that we
have enough cash on hand to operate our business during the next 12 months. We anticipate we will need to raise an additional
$1 million through the issuance of debt or equity securities to sustain base operations during the next 12 months, excluding development
work. There can be no assurance that we will be able to obtain additional funding on commercially reasonable terms, or at all.
To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests
of our common stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that
adversely affect the rights of our common stockholders. Debt financing, if available, may involve agreements that include conversion
discounts or covenants limiting or restricting our ability to take specific actions, such as incurring debt, making capital expenditures
or declaring dividends. If we raise additional funds through government or other third-party funding, marketing and distribution
arrangements or other collaborations, or strategic alliances or licensing arrangements with third parties, we may have to relinquish
valuable rights to our future revenue streams, products or therapeutic candidates or to grant licenses on terms that may not be
favorable to us.
To
date, we have financed our operations through our sale of equity and debt securities. Failure to generate revenue or to raise
funds could cause us to go out of business, which would result in the complete loss of your investment.
We
have no revenues as of the date of this quarterly report, and no substantial revenues are anticipated until we have implemented
our full plan of operations. To implement our strategy to grow and expand per our business plan, we intend to generate working
capital via a private placement of equity or debt securities, or secure a loan. If we are unsuccessful in raising capital, we
could be required to cease business operations and investors would lose all of their investment.
We have no agreements or commitments
for any of the above-listed financing options, and we have no material commitments for the next 12 months. We will however
require additional capital to meet our liquidity needs.
Additionally, we will have to meet all the financial disclosure
and reporting requirements associated with being a publicly reporting company. Our management will have to spend additional time
on policies and procedures to make sure our Company is compliant with various regulatory requirements.
This
additional corporate governance time required of management could limit the amount of time management has to implement our business
plan and may impede the speed of our operations.
Working
Capital (Deficit) Surplus
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Current Assets
|
|
$
|
30,948
|
|
|
$
|
264,166
|
|
Current Liabilities
|
|
|
518,137
|
|
|
|
396,482
|
|
Working Capital (Deficit) Surplus
|
|
$
|
(487,189
|
)
|
|
$
|
132,316
|
|
Cash
Flows
Cash
activity for the three months ended March 31, 2020 and 2019 is summarized as follows:
|
|
Three
Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Net Cash used in operating
activities – continued operations
|
|
$
|
(233,218
|
)
|
|
$
|
(142,358
|
)
|
Net Cash used in operating activities –
discontinued operations
|
|
|
—
|
|
|
|
(45,380
|
)
|
Net Cash used
in operating activities
|
|
|
(233,218
|
)
|
|
|
(187,738)
|
|
Cash provided
by financing activities – discontinued operations
|
|
|
—
|
|
|
|
104,500
|
|
Net decrease in
cash
|
|
$
|
(233,218
|
)
|
|
$
|
(83,238
|
)
|
As
of March 31, 2020, the Company had $30,498 of cash on hand.
Off-Balance
Sheet Arrangements
We
do not have any off-balance sheet arrangements as defined in Regulation S-K Item 303(a)(4) during the periods presented, investments
in special-purpose entities or undisclosed borrowings or debt. Additionally, we are not a party to any derivative contracts or
synthetic leases.
Contractual
Obligations
MGH
License Agreement
The Company executed a License
Agreement with MGH. The License Agreement also requires VI to pay to MGH a one (1%) royalty rate on net sales related to
the first license sub-field, which is the treatment of Type 1 Diabetes. Future sub-fields shall carry a reasonable royalty rate,
consistent with industry standards, to be negotiated at the time the first such royalty payment shall become due with respect
to the applicable Products and Processes (as defined in the License Agreement). The License Agreement additionally requires ViCapsys
to pay to MGH a $1.0 million “success payment” within 60 days after the first achievement of total net sales of product
or process equal or exceed $100,000,000 in any calendar year and $4,000,000 within sixty (60) days after the first achievement
of total Net Sales of Product or process equal or exceed $250,000,000 in any calendar year. The Company is also required to reimburse
MGH’s expenses in connection with the preparation, filing, prosecution and maintenance of all Patent Rights.
Critical
Accounting Policies and Estimates
Our
discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation
of these consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, expenses, and related disclosure of contingent assets and liabilities. We evaluate, on
an ongoing basis, our estimates and judgments, including those related to the useful life of the assets. We base our estimates
on historical experience and assumptions that we believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates.
The
methods, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results
that we report in our consolidated financial statements. The Securities and Exchange Commission (the “SEC”), considers
an entity’s most critical accounting policies to be those policies that are both most important to the portrayal of a company’s
financial condition and results of operations and those that require management’s most difficult, subjective or complex
judgments, often as a result of the need to make estimates about matters that are inherently uncertain at the time of estimation.
We
believe the following critical accounting policies, among others, require significant judgments and estimates used in the preparation
of our interim condensed consolidated financial statements.
Our
significant accounting policies are described in more detail in the notes to our consolidated financial statements for the fiscal
year ended December 31, 2019, included in the Company’s Annual Report filed on Form 10/A.
Recent Accounting Pronouncements
Management does not believe that any recently
issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying unaudited
condensed consolidated financial statements.