UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the quarterly period ended
For the transition period from ______ to _______
Commission
File Number:
(Exact name of registrant as specified in its charter)
| (State or Other Jurisdiction of | (I.R.S. Employer | |
| Incorporation or Organization) | Identification No.) |
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Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Not applicable. |
Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
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has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant
was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| ☐ | Large accelerated filer | ☐ | Accelerated filer |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
Indicate
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As of August 14, 2024, the registrant had shares of common stock ($ par value) outstanding.
MARIZYME, INC.
FORM 10-Q
TABLE OF CONTENTS
| Page | ||
| PART I - FINANCIAL INFORMATION | ||
| ITEM 1. | Condensed Consolidated Financial Statements. | 3 |
| ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. | 19 |
| ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk. | 28 |
| ITEM 4. | Controls and Procedures. | 29 |
| PART II - OTHER INFORMATION | ||
| ITEM 1. | Legal Proceedings. | 30 |
| ITEM 1A. | Risk Factors. | 30 |
| ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds. | 30 |
| ITEM 3. | Defaults Upon Senior Securities. | 30 |
| ITEM 4. | Mine Safety Disclosures. | 30 |
| ITEM 5. | Other Information. | 30 |
| ITEM 6. | Exhibits. | 31 |
| Signatures | 32 | |
| 2 |
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MARIZYME, INC.
Condensed Consolidated Balance Sheets
| June 30, 2024 | December 31, 2023 | |||||||
| (unaudited) | ||||||||
| ASSETS: | ||||||||
| Current | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable | ||||||||
| Other receivables | ||||||||
| Prepaid expenses | ||||||||
| Inventory | ||||||||
| Total current assets | ||||||||
| Non-current | ||||||||
| Property, plant and equipment, net | ||||||||
| Operating lease right-of-use assets, net | ||||||||
| Intangible assets, net | ||||||||
| Prepaid royalties, non-current | ||||||||
| Deposits | ||||||||
| Goodwill | ||||||||
| Total non-current assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT): | ||||||||
| Current | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Notes payable | ||||||||
| Due to related parties | ||||||||
| Convertible notes, net - Units Private Placement | ||||||||
| Convertible notes, net - OID | ||||||||
| Operating lease obligations | ||||||||
| Total current liabilities | ||||||||
| Non-current | ||||||||
| Operating lease obligations, net of current portion | ||||||||
| Agreement obligation | ||||||||
| Contingent liabilities | ||||||||
| Total non-current liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 10) | ||||||||
| Stockholders’ equity (deficit): | ||||||||
| Preferred stock, $ par value, shares authorized, shares issued and outstanding as of June 30, 2024 and December 31, 2023 | ||||||||
| Common stock, par value $, shares authorized, issued and outstanding shares - at June 30, 2024 and December 31, 2023 | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity (deficit) | ( | ) | ( | ) | ||||
| Total liabilities and stockholders’ equity (deficit) | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 3 |
MARIZYME, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Direct cost of revenue | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Professional
fees (includes related party amounts of $ | ||||||||||||||||
| Salary expenses | ||||||||||||||||
| Research and development | ||||||||||||||||
| Stock-based compensation | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Royalty expense | ||||||||||||||||
| Other general and administrative expenses | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Total operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense) | ||||||||||||||||
| Interest and accretion expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income | ||||||||||||||||
| Change in fair value of contingent liabilities | ( | ) | ||||||||||||||
| Gain (loss) on debt extinguishment | ( | ) | ( | ) | ||||||||||||
| Borrowing costs | ( | ) | ( | ) | ||||||||||||
| Loss on issuance of debt | ( | ) | ( | ) | ||||||||||||
| Total other expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Loss per share – basic and diluted | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||
| Weighted average number of shares of common stock outstanding – basic and diluted | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 4 |
MARIZYME, INC.
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit)
Three and Six Months Ended June 30, 2024 and 2023
(Unaudited)
| Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Stock-based compensation expense | - | |||||||||||||||||||
| Issuance of shares | ||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance, March 31, 2023 (unaudited) | ( | ) | ||||||||||||||||||
| Stock-based compensation expense | - | |||||||||||||||||||
| Issuance of shares | ||||||||||||||||||||
| Exercise of warrants | ||||||||||||||||||||
| Issuance of warrants on debt extinguishment | - | |||||||||||||||||||
| Issuance of warrants on promissory note | - | |||||||||||||||||||
| Warrants cancelled in debt extinguishment | - | ( | ) | ( | ) | |||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance, June 30, 2023 (unaudited) | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ Equity | |||||||||||||||||
| Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||
| Balance, December 31, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Stock-based compensation expense | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance, March 31, 2024 (unaudited) | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Stock-based compensation expense | - | |||||||||||||||||||
| Modification of warrants | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance, June 30, 2024 (unaudited) | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 5 |
MARIZYME, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| Six Months Ended June 30, | ||||||||
| 2024 | 2023 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of ROU asset | ||||||||
| Stock-based compensation | ||||||||
| Interest and accretion on convertible notes and notes payable | ||||||||
| Change in fair value of contingent liabilities | ( | ) | ||||||
| Gain (loss) on debt extinguishment | ( | ) | ||||||
| Loss on issuance of debt | ||||||||
| Shares issued as part of the Confidential Settlement Agreement | ||||||||
| Shares issued for services | ||||||||
| Warrants issued as part of promissory note agreement | ||||||||
| Borrowing costs | ||||||||
| Change in operating assets and liabilities: | ||||||||
| Accounts and other receivable | ( | ) | ||||||
| Prepaid expenses | ( | ) | ||||||
| Inventory | ( | ) | ||||||
| Accounts payable and accrued expenses | ||||||||
| Due to related parties | ||||||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of OID Convertible Notes, net of issuance cost | ||||||||
| Proceeds from shares issued for exercise of warrants | ||||||||
| Proceeds from promissory notes | ||||||||
| Repayments of promissory notes | ( | ) | ( | ) | ||||
| Proceeds from agreement | ||||||||
| Net cash provided by financing activities | ||||||||
| Net change in cash | ( | ) | ( | ) | ||||
| Cash at beginning of period | ||||||||
| Cash at end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Debt discount issued in connection with warrants modification | $ | $ | ||||||
| Derivative liabilities and debt discount issued in connection with convertible notes | $ | $ | ||||||
| Warrants and debt discount issued in connection with convertible notes | $ | $ | ||||||
| Settlement of notes payable with convertible notes | $ | $ | ||||||
| Warrants cancelled in debt extinguishment | $ | $ | ||||||
| Shares issued on conversion of convertible notes | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 6 |
MARIZYME, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2024
NOTE 1 – DESCRIPTION OF BUSINESS
Maryzime, Inc. (the “Company” or “Marizyme”) is a Nevada corporation originally incorporated on March 20, 2007, under the name SWAV Enterprises, Ltd. On September 6, 2010, the Company name was changed to GBS Enterprises Inc. and from 2010 to September 2018 the Company was in the software products and advisory services business for email and instant messaging applications. The Company divested that business between December 2016 and September 2018 and focused on the acquisition of life science technologies.
On March 21, 2018, the Company’s name was changed to Marizyme, Inc., to reflect the new life sciences focus. Marizyme’s common stock is currently quoted on the OTCQB tier of OTC Markets Group, Inc. under the symbol “MRZM”.
NOTE 2 – GOING CONCERN
The
Company’s unaudited condensed consolidated financial statements are prepared using accounting principles generally accepted in
the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities
in the normal course of business. However, the Company does not have an established source of revenues sufficient to cover its operating
costs, which requires the Company to rely on investing and financing activities in order to continue as a going concern. The Company,
since its inception, has incurred recurring operating losses and negative cash flows from operations and has an accumulated deficit of
$
Under the going concern assumption, an entity is ordinarily viewed as continuing its business for the foreseeable future with neither the intention or necessity of liquidation, ceasing trading, or seeking protection from creditors pursuant to the laws and regulations. Accordingly, assets and liabilities are recorded on the basis that the entity will be able to realize its assets and discharge its liabilities in the normal course of business.
The ability of the Company to continue as a going concern is dependent upon its ability to continue to successfully develop its intangible assets, meet its debt obligations until such time future profitable revenues are achieved, and raise funds beyond its working capital balance in order to finance future development of its intangible assets.
During
the next twelve months from the date the unaudited condensed consolidated financial statements were issued, the Company’s
foreseeable cash requirements will relate to continuous operations of its business, maintaining its good standing and making the
required filings with the Securities and Exchange Commission (the “SEC”), and the payment of expenses associated with its product development. The
Company may experience a cash shortfall and be required to raise additional capital. Management intends to raise additional funds by
way of a private or public offering. In July 2024, the Company executed a promissory note in favor of Qualigen Therapeutics, Inc.,
which had previously engaged in an agreement with the Company to advance the commercialization of DuraGraft™ (see Note 11).
Under the terms of the promissory note, Qualigen lent the Company $
The unaudited condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements include the consolidated accounts of the Company and its wholly owned subsidiaries: My Health Logic Inc (“My Health Logic” or “MHL”), Somahlution, Inc. (“Somahlution”), Somaceutica, Inc. (“Somaceutica”), (collectively – “Somahlution”), Marizyme Sciences, Inc. (“Marizyme Sciences”), and DuraGraft, Inc. All intercompany transactions have been eliminated on consolidation.
The accompanying unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The unaudited condensed consolidated financial statements presented in this Quarterly Report should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K filed with the SEC on May 13, 2024 (the “2023 Form 10-K”). The condensed consolidated balance sheet as of December 31, 2023 was derived from audited consolidated financial statements included in the 2023 Form 10-K but does not include all disclosures required by U.S. GAAP for complete financial statements. The Company’s significant accounting policies are described in Note 1 to those consolidated financial statements.
Interim results may not be indicative of the results that may be expected for the full year or any future periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted from these interim financial statements. The unaudited condensed consolidated financial statements reflect all adjustments which in the opinion of management are necessary to fairly present the results of operations, financial condition, cash flows and stockholders’ equity (deficit) for the periods indicated. Except as otherwise disclosed, all such adjustments are of a normal recurring nature.
| 7 |
Use of Estimates
The preparation of the unaudited condensed consolidated financial statements in accordance with U.S. GAAP requires management to make use of certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the unaudited condensed consolidated financial statements and the reported amounts of revenue and expenses during the reported periods. The Company bases its estimates on historical experience and on various other assumptions that management believes are reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. Significant estimates are related to the recoverability of long-term assets including intangible assets and goodwill, amortization expense, valuation of warrants, stock-based compensation, and contingent liabilities.
Fair Value Measurements
The Company uses the fair value hierarchy to measure the value of its financial instruments. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources, while unobservable inputs reflect a reporting entity’s pricing based upon its own market assumptions. The basis for fair value measurements for each level within the hierarchy is described below:
| ● | Level 1 – Quoted prices for identical assets or liabilities in active markets. |
| ● | Level 2 – Quoted prices for identical or similar assets and liabilities in markets that are not active; or other model-derived valuations whose inputs are directly or indirectly observable or whose significant value drivers are observable. |
| ● | Level 3 – Valuations derived from valuation techniques in which one or more significant inputs to the valuation model are unobservable and for which assumptions are used based on management estimates. |
The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and considers counterparty credit risk in its assessment of fair value.
The carrying amounts of certain accounts and other receivables, accounts payable and accrued expenses, note payable, and amounts due to related parties approximate fair value due to the short-term nature of these instruments.
The fair value of lease obligations is determined using discounted cash flows based on the expected amounts and timing of the cash flows discounted using a market rate of interest adjusted for appropriate credit risk.
Contingent Liabilities
The contingent liabilities assumed on the acquisition of Somahlution in 2020 consist of present values of royalty payments, performance warrants and pediatric voucher warrants, future rare pediatric voucher sales, and liquidation preference. Management measured these contingencies in accordance with Level 3 of the fair value hierarchy.
| i. | The
performance warrants and pediatric vouchers warrants liabilities were valued using a Monte Carlo simulation model utilizing the following
weighted average assumptions: risk free rate of %, expected volatility of %, expected dividend of $, and expected life
of years. For the three and six months ended June 30, 2024, changes in these assumptions resulted in a $ | |
| ii. | The
present value of royalty payments was measured using the scenario-based methodology. In assessing the value attributed to the royalty
payments, the estimated future cash flows were discounted to their present value using a pre-tax discount rate that reflects current
market assessments of the time value of money and the risks specific to the revenue from net sales of the product. The cash flows
derived from the Company’s fifteen-year strategic plan are based on managements’ expectations of market growth, industry
reports and trends, and past performances. The discounted cash flow model included projections surrounding revenue, discount rates,
and growth rates. The discount rates used to calculate the present value of royalty payments reflect specific risks of the Company
and market conditions and the mid-range was estimated at | |
| iii. | Rare
pediatric voucher sales liability was valued based on the scenario-based methodology where the estimated future cash flows are discounted
to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the
risks specific to the asset – | |
| iv. | The
present value of liquidation preference liability, included in the contingent consideration, was determined using the Black-Scholes
option pricing method and represents the fair value of the maximum payment amount according to the agreement. The following assumptions
were used in the Black-Scholes option pricing model: risk free rate of %, expected volatility of %, expected dividend of
$, and expected life of years. |
Warrants
The
detachable warrants attached to the OID Convertible Notes (as such term is hereinafter defined, see Note 7) are classified as equity.
These warrants were valued using the Black-Scholes pricing model. The following weighted average assumptions were used in the Black-Scholes
model: a risk-free rate of %,
expected volatility of %,
expected dividend yield of $,
and an expected life of 0.17 years. During the three and six months ended June 30, 2024, the Company extended the maturity dates of certain
OID Warrants (as such term is hereinafter defined, see Note 7), as part of modification of OID Convertible Notes that resulted in a substantive
modification and extinguishment of old debt. As a result, the Company recognized an incremental fair value increase of $
Goodwill, Intangible Assets and Impairment
The Company’s Level 3 measurements include the fair value assessment of assets such as IPR&D intangibles, goodwill, and particularly when considering potential impairments. The significant unobservable inputs used in the fair value measurements of these assets primarily include management’s assumptions regarding future cash flows and discount rates.
| 8 |
As
part of the acquisition of Somahlution in 2020, the Company
acquired Goodwill attributed to the workforce and profitability of the acquired business. A residual method methodology was used to estimate
the fair market value goodwill. A pre-tax discount rate based on weighted average cost of capital of
Additionally,
as part of the acquisition of Somahlution in 2020, the Company acquired IPR&D
intangible asset “Cyto Protectant Life Sciences” with indefinite economic life. The fair value of IRP&D was determined
based on Multi-Period Excess Earning Method valuation approach, using discount rate of
For impairment testing, the Company uses a discounted cash flow (DCF) model to estimate the fair value of IPR&D intangibles and goodwill. The key assumptions used in the DCF model include projected cash flows, discount rate and terminal value growth rate. These inputs are highly subjective and require significant management judgment. Changes in these assumptions could have a significant impact on the fair value and any resulting impairment charge.
The Company has no financial assets measured at fair value on a recurring basis. None of the Company’s non-financial assets or liabilities are recorded at fair value on a non-recurring basis. No transfers between levels have occurred during the periods presented.
Marizyme measures the following financial instruments at fair value on a recurring basis. As of June 30, 2024, and December 31, 2023, the fair values of these financial instruments were as follows:
| Fair Value Hierarchy | ||||||||||||
| June 30, 2024 | Level 1 | Level 2 | Level 3 | |||||||||
| Liabilities | ||||||||||||
| Contingent liabilities | $ | $ | $ | |||||||||
| Total | $ | $ | $ | |||||||||
| Fair Value Hierarchy | ||||||||||||
| December 31, 2023 | Level 1 | Level 2 | Level 3 | |||||||||
| Liabilities | ||||||||||||
| Contingent liabilities | $ | $ | $ | |||||||||
| Total | $ | $ | $ | |||||||||
The following table provides a roll forward of all liabilities measured at fair value using Level 3 significant unobservable inputs:
| Contingent Liabilities | ||||
| Balance at December 31, 2023 | $ | |||
| Change in fair value of contingent liabilities | ||||
| Balance at June 30, 2024 | $ | |||
Research and Development Expenses and Accruals
All research and development costs are expensed in the period incurred and consist primarily of salaries, payroll taxes, and employee benefits, for individuals involved in research and development efforts, external research and development costs incurred under agreements with contract research organizations and consultants to conduct and support the Company’s ongoing clinical trials of DuraGraft, and costs related to manufacturing DuraGraft for clinical trials. The Company has entered into various research and development contracts with various organizations. Payments of these activities are based on the terms of the individual agreements which matches to the pattern of costs incurred. Payments made in advance are reflected in the accompanying condensed consolidated balance sheets as prepaid expenses. The Company records accruals for estimated costs incurred for ongoing research and development activities. When evaluating the adequacy of the accrued liabilities, the Company analyzes progress of the services, including the phase or completion of events, invoices received and contracted costs. Significant judgments and estimates may be required in determining the prepaid or accrued balances at the end of any reporting period. Actual results could differ from the Company’s estimates.
| 9 |
Stock-based compensation expense for employees and directors is recognized in the unaudited condensed consolidated statements of operations based on estimated amounts, including the grant date fair value and the expected service period. For stock options, the Company estimates the grant date fair value using a Black-Scholes valuation model, which requires the use of multiple subjective inputs including estimated future volatility, expected forfeitures and the expected term of the awards. The Company estimates the expected future volatility based on the stock’s historical price volatility. The stock’s future volatility may differ from the estimated volatility at the grant date. For restricted stock unit (“RSU”) equity awards, the Company estimates the grant date fair value using its closing stock price on the date of grant. The Company recognizes the effect of forfeitures in compensation expense when the forfeitures occur. The estimated forfeiture rates may differ from actual forfeiture rates which would affect the amount of expense recognized during the period. The Company recognizes the value of the awards over the awards’ requisite service or performance periods. The requisite service period is generally the time over which share-based awards vest.
New Accounting Standards and Updates from the Securities and Exchange Commission
In August 2020, the FASB issued ASU No. 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): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”). ASU 2020-06 will simplify the accounting for convertible instruments by reducing the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting models results in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Convertible instruments that continue to be subject to separation models are (i) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (ii) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. ASU 2020-06 also amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. ASU 2020-06 will be effective for the Company for fiscal years beginning after December 15, 2023. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company has fully adopted ASU 2020-06 as of January 1, 2023, and this adoption does not have a material impact on the way the Company is accounting for its debt.
NOTE 4 – LEASES
On
December 11, 2020, the Company entered into a
Effective
April 1, 2022, the Company amended its lease agreement for administrative office and laboratories to add an additional
The
assets and liabilities from the lease were recognized at the lease commencement date based on the present value of remaining lease payments
over the lease term using the discount rate of
The
total rent expense for the three and six months ended June 30, 2024 was $
The following table summarizes supplemental condensed consolidated balance sheet information related to the operating leases as of June 30, 2024, and December 31, 2023:
| June 30, 2024 | December 31, 2023 | |||||||
| Right-of-use asset | $ | $ | ||||||
| Operating lease liabilities, current | $ | $ | ||||||
| Operating lease liabilities, non-current | ||||||||
| Total operating lease liabilities | $ | $ | ||||||
As of June 30, 2024, the maturities of the lease liabilities for the periods ending December 31, are as follows:
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| Total lease payments | $ | |||
| Less: Present value discount | ( | ) | ||
| Total | $ |
NOTE 5 – INTANGIBLE ASSETS
Krillase
As
part of the asset acquisition of ACB Holding AB, Reg. No. 559119-5762, completed on September 12, 2018, Marizyme acquired all rights,
titles, and interest in the Krillase technology, a group of intangible assets valued at $
At
December 31, 2023, management determined that the carrying value of Krillase exceeded its estimated recoverable amount of $ as of
December 31, 2023. Impairment of $
| 10 |
DuraGraft
As
part of the Somahlution acquisition in 2020, Marizyme purchased of intangible assets valued at $
At
December 31, 2023, management determined that the carrying value of DuraGraft intangible assets exceeded its recoverable amount. Impairment
of $
My Health Logic
As
part of the My Health Logic (“MHL”) acquisition in 2021, Marizyme purchased
MHL’s lab-on-chip technology platform and its patient-centric, digital point-of-care diagnostic device, MATLOC, fair valued at
an aggregate amount of $
Additionally,
as part of the My Health Logic acquisition in 2021, the Company recognized goodwill of $
| June 30, 2024 | ||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||
| Patents in process | $ | $ | $ | |||||||||
| DuraGraft patent | ( | ) | ||||||||||
| DuraGraft - Distributor relationship | ( | ) | ||||||||||
| DuraGraft IPR&D - Cyto Protectant Life Sciences | ||||||||||||
| $ | $ | ( | ) | $ | ||||||||
| December 31, 2023 | ||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Impairment | Net Carrying Amount | |||||||||||||
| Krillase intangible assets | $ | $ | $ | ( | ) | $ | ||||||||||
| Patents in process | ||||||||||||||||
| DuraGraft patent | ( | ) | ||||||||||||||
| DuraGraft - Distributor relationship | ( | ) | ||||||||||||||
| DuraGraft IPR&D - Cyto Protectant Life Sciences | ( | ) | ||||||||||||||
| My Health Logic - Trade name | ( | ) | ( | ) | ||||||||||||
| My Health Logic - Biotechnology | ( | ) | ( | ) | ||||||||||||
| My Health Logic - Software | ( | ) | ( | ) | ||||||||||||
| Total intangibles | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||
| Goodwill | DuraGraft | My Health Logic | Total | |||||||||
| Balance, December 31, 2023 and June 30, 2024 | $ | $ | $ | |||||||||
The following changes to the Company’s intangible assets had taken place in the periods indicated:
| Balance, December 31, 2022 | $ | |||
| Impairment | ( | ) | ||
| Amortization expense | ( | ) | ||
| Balance, December 31, 2023 | $ | |||
| Amortization expense | ( | ) | ||
| Balance, June 30, 2024 | $ |
| 11 |
Future
amortizations for DuraGraft intangible assets for the next five years will be $
NOTE 6 – NOTES PAYABLE
a)
On October 23, 2023, the Company issued a note payable
to Hub International for $
b)
On December 28, 2022, the Company issued a promissory note to Hexin for the principal amount of $
c)
On February 2, 2023, the Company issued an unsecured promissory note to Walleye Opportunities Master Fund Ltd. (the “Walleye Promissory
Note”) for $
d)
As part of the My Health Logic Inc. acquisition, completed in November 2021, Marizyme assumed an aggregate of $
e)
As of June 30, 2024, the Company has outstanding borrowings under notes payable to Mr. Richmond in the principal amount of $
f)
As of June 30, 2024, the Company has outstanding borrowings under a note payable to Santander Bank: Sullivan & Worcester LLP in the
principal amount of $
g)
As of June 30, 2024, the Company has outstanding borrowings under a note payable in the principal amount of $
h)
As of June 30, 2024, the Company has outstanding borrowings under a note payable to Dr. Vithalbhai Dhaduk in the principal amount of
$
| 12 |
NOTE 7 - CONVERTIBLE PROMISSORY NOTES AND WARRANTS
From May 2021 to August 2022, the Company conducted a private placement (the “Units Private Placement”) of units (the “Units”) consisting of 10% secured convertible promissory notes (the “Convertible Notes”) and accompanying warrants (the “Class C Warrants”), as were modified or amended from time to time.
In
2021, the Company issued an aggregate of Units for the proceeds of $
In
2023, the Company amended the conversion price of the Convertible Notes and the exercise price of the Class C Warrants to $
The
Company determined that the terms of the new securities were substantially different from the original securities, and, as such the transaction
was accounted for as an extinguishment of debt and the new securities accounted for as a new debt issuance. As a result of this substantial
modification, a total of Units outstanding were replaced with an aggregate of pro rata Units, and a loss on debt
extinguishment of $
Additionally,
in 2023 due to the non-repayment of the initial principal amount of $
Additionally,
in 2023, the Company issued an aggregate of Units for the proceeds of $
During
the three and six months ended June 30, 2024, the Company amended certain Convertible Note with original maturity dates of March 24, 2024 and
June 17, 2024, to extend their term until March 24, 2025 and June 17, 2025, respectively. In connection with the extension of the maturity
date for the outstanding Convertible Notes, the Company executed a substantial modification that led to the extinguishment of the existing
Convertible Notes and the issuance of new Convertible Notes. This modification resulted in a gain on extinguishment of $
During
the three and six months ended June 30, 2024, the Company recognized interest and accretion expense of $
The Company determined that the optional conversion feature attached to the Convertible Notes did not meet the definition of derivative liability and that the detachable warrants issued did not meet the definition of a liability and therefore was accounted for as an equity instrument.
The fair value of the warrants issued have been recorded as debt discount and is being amortized to interest and accretion expense using the effective interest method over the term of the Convertible Notes.
The following table summarizes supplemental balance sheet information related to the convertible notes, net of debt discount outstanding, as of June 30, 2024 and December 31, 2023:
| Balance, December 31, 2022 | $ | |||
| Debt accretion on Original securities | ||||
| Debt extinguishment | ( | ) | ||
| Convertible notes issued - new securities | ||||
| Debt discount | ( | ) | ||
| Debt accretion on New Securities | ||||
| Mandatory Default Amount | ||||
| Conversion of debt | ( | ) | ||
| Extinguishment of debt | ( | ) | ||
| Convertible notes issued with extended maturity date | ||||
| Debt discount | ( | ) | ||
| Debt accretion | ||||
| Balance, December 31, 2023 | $ | |||
| Debt accretion | ||||
| Extinguishment of debt | ( | ) | ||
| Convertible notes issued with extended maturity date | ||||
| Debt discount | ( | ) | ||
| Balance, June 30, 2024 | $ |
| 13 |
June 30, 2024 | December 31, 2023 | |||||||
| Convertible notes - total principal | $ | $ | ||||||
| Unamortized issuance costs and discount | ( | ) | ( | ) | ||||
| Convertible Notes, Net of Debt Discount | $ | $ | ||||||
| June 30, 2024 | December 31, 2023 | |||||||
| Current portion | $ | $ | ||||||
| Non-current portion | ||||||||
| Convertible Notes, Net of Debt Discount | $ | $ | ||||||
2023 Convertible Notes and Warrants
In
2023, the Company conducted five separate closings (the “2023 OID Units Closings”) of a private placement of up to $
Pursuant
to the 2023 OID Units Closings, the Company issued OID Units in aggregate, for the total proceeds of $
The
Company determined that the optional conversion feature attached to the OID Convertible Notes did not meet the definition of derivative
liability and that the detachable warrants originally issued met the definition of a liability and therefore was accounted for as a derivative
liability instrument. The warrants were fair valued at $
During
the three and six months ended June 30, 2024, the Company extended the maturity date of certain OID Convertible Notes. While some
extensions were deemed minor, the majority of the extended contracts were deemed substantive. This triggered the extinguishment of
the existing OID Convertible Notes and the issuance of new OID Convertible Notes. Additionally, the detachable warrants attached to
the OID Convertible Notes had their maturity extended by two years. As a result, for the three and six months ended June 30, 2024,
the Company recognized an incremental fair value increase of $
During
the three and six months ended June 30, 2024, the Company recognized interest and accretion expense of $
| 14 |
The following table summarizes supplemental balance sheet information related to the OID Convertible Notes, net of debt discount outstanding, as of June 30, 2024 and December 31, 2023:
| OID Convertible Notes, Net of Debt Discount | ||||
| Balance, December 31, 2022 | $ | |||
| Issuance of convertible notes | ||||
| Issuance cost | ( | ) | ||
| Debt discount | ( | ) | ||
| Debt accretion | ||||
| Balance, December 31, 2023 | $ | |||
| Debt accretion | ||||
| Extinguishment of debt | ( | ) | ||
| Unamortized debt discount - issuance costs | ( | ) | ||
| Convertible note issued with extended maturity date | ||||
| Debt discount | ( | ) | ||
| Balance, June 30, 2024 | $ | |||
| June 30, 2024 | December 31, 2023 | |||||||
| Convertible notes - total principal | $ | $ | ||||||
| Unamortized issuance costs and discount | ( | ) | ( | ) | ||||
| Convertible Notes, Net of Debt Discount | $ | $ | ||||||
| June 30, 2024 | December 31, 2023 | |||||||
| Current portion | $ | $ | ||||||
| Non-current portion | $ | $ | ||||||
| Convertible Notes, Net of Debt Discount | $ | $ | ||||||
2023 Convertible Notes Terms
2023 Warrants Terms
| 15 |
NOTE 8 – STOCKHOLDERS’ EQUITY (DEFICIT)
| a) | Preferred stock |
The Company is authorized to issue a total number of shares of “blank check” preferred stock with a par value of $. As of June 30, 2024, and December 31, 2023, there were shares of preferred stock issued or outstanding.
| b) | Common stock |
The Company is authorized to issue a total number of shares of common stock with a par value of $.
As of June 30, 2024, there were (December 31, 2023 - ) shares of common stock issued and outstanding. During the three and six months ended June 30, 2024, the Company did not issue any shares of common stock.
| c) | Options |
On May 18, 2021, the Company’s Board of Directors approved the Marizyme, Inc. Amended and Restated 2021 Stock Incentive Plan (“SIP”). The SIP incorporates stock options issued prior to May 18, 2021. The SIP authorized options for issuance. On December 27, 2022, the Board of Directors requested that stockholders ratify an amendment to the SIP to increase the maximum number of shares of common stock available for issuance pursuant to awards granted under the SIP by to , which was approved by the stockholders. As of June 30, 2024, there remains options available for issuance (December 31, 2023 – ).
During the three and six months ended June 30, 2024, the Company granted (December 31, 2023 – ) share purchase options to directors of the Company.
| Number of Options | Weighted Average Exercise Price | Weighted Average Contractual Life | Total Intrinsic Value | |||||||||||||
| Outstanding at December 31, 2022 | $ | $ | ||||||||||||||
| Granted/forfeited | - | - | ||||||||||||||
| Outstanding at December 31, 2023 | ||||||||||||||||
| Forfeited | ( | ) | - | - | ||||||||||||
| Expired | ( | ) | - | |||||||||||||
| Outstanding at June 30, 2024 | ||||||||||||||||
| Exercisable at June 30, 2024 | $ | $ | ||||||||||||||
| Exercise Price | Number of Options Outstanding | Number of Options Exercisable | Weighted Average Remaining Contractual Years | Intrinsic Value | ||||||||||||||
| $ | $ | |||||||||||||||||
| $ | ||||||||||||||||||
| 16 |
| d) | Restricted Share Units |
During
the year ended December 31, 2021, the Company granted restricted share awards totaling shares of common stock to directors, senior
officers, and consultants, contingent upon underlying performance conditions. As of June 30, 2024, the Company determined that only two
out of four performance conditions have been met.
The following performance conditions attached to the restricted share awards were achieved:
| ● | The
Company will raise financing for the gross proceeds that equal or exceed $ | |
| ● | The Company will complete valuation reports for acquisition of Somahlution and My Health Logic. |
| e) | Warrants |
As
of June 30, 2024 and December 31, 2023, there were
| Number | Weighted Average Price | |||||||
| Balance, December 31, 2022 | $ | |||||||
| Warrants modified pursuant to debt extinguishment (Note 6) | ||||||||
| Issued pursuant to debt agreements (Note 6) | ||||||||
| Issued | ||||||||
| Exercised | ( | ) | ||||||
| Balance, December 31, 2023 and June 30, 2024 | $ | |||||||
The
detachable warrants attached to the OID Convertible Notes (see Note 7) are classified as equity. These warrants were valued using
the Black-Scholes pricing model. During the three and six months ended June 30, 2024, the Company extended the maturity dates of
certain OID Warrants (see Note 7), resulting in a series of substantive modifications. As a result, the Company recognized
an incremental fair value increase of $
| f) | Stock-based compensation |
During the three and six months ended June 30, 2024, the Company recorded $ and $ in non-cash share-based compensation, respectively (June 30, 2023 - $ and $, respectively).
NOTE 9 – RELATED PARTY TRANSACTIONS
At June 30, 2024, the Company owed an aggregate of $
For
the three and six months ended June 30, 2024, the Company incurred $
During
the three and six months ended June 30, 2024, the Company also incurred $
Additionally,
as part of the Somahlution acquisition in 2020, the Company recorded a prepaid royalty to the shareholders of Somahlution. The former
primary beneficial owner is Dr. Vithal Dhaduk, currently a director, and significant shareholder of the Company. During the three and
six months ended June 30, 2024, the Company accrued $ and $
During
the year ended December 31, 2023, the Company and stockholders of Somahlution agreed to reduce the prepaid royalty balance by 50% or
by $
| 17 |
NOTE 10 – COMMITMENTS AND CONTINGENCIES
Contingencies
a) As part of the DuraGraft Acquisition, completed on July 31, 2020, the Company entered into the Agreement with Somahlution stockholders, whereby Marizyme is legally obligated to pay royalties on all net sales for Somahlution, Inc. The royalties associated with the Agreement are calculated as follows:
Royalties on U.S. sales equal to:
| ● | ||
| ● | ||
| ● |
Royalties on sales outside of the U.S.:
| ● | ||
| ● | ||
| ● |
The
royalties are in perpetuity. During the three and six months ended June 30, 2024, the Company had not earned any revenues from Krillase,
however the Company did incur sales of the DuraGraft products outside of the U.S., on which $ and $
Upon receiving FDA clearance for the DuraGraft product and insurance reimbursement approval on the products pursuant to section 2(b) of the Asset Purchase Agreement dated December 15, 2019, the Company will:
| ● | Issue performance warrants with a strike price determined based on the average of the closing prices of the Company’s common stock for the 30 calendar days following the date of the public announcement of the FDA approval; and | |
| ● | Upon
liquidation of all or substantially all of the assets relating to DuraGraft, the Company will pay |
The Company has entered into arrangements for office and laboratories spaces. At June 30, 2024, minimum lease payments in relation to lease commitments are payable as described in Note 4.
NOTE 11 – AGREEMENT OBLIGATION
In
April 2024, the Company entered into an agreement (the “Agreement”) with Qualigen Therapeutics, Inc. (“Qualigen”)
to support the commercialization of DuraGraft™. Under the Agreement, Qualigen paid the Company an exclusivity fee of $
In
return, Qualigen expects an investment return equal to two times (2x) the Funding Amount (the “Investment Return”). Upon
the commercial launch of DuraGraft™ in the United States, the Company is obligated to pay Qualigen up to a cumulative total equal
to the Investment Return, calculated at
As part of the agreement, the Company established a wholly owned subsidiary, DuraGraft, Inc., during the six months ended June 30, 2024, to facilitate the product’s commercialization.
The
Exclusivity Fee was recognized as other income in the condensed consolidated statement of operations for the six months ended June 30,
2024, as it represented payment for exclusive negotiation rights. The Funding Amount was accounted for as a debt liability, due to the
significant continuing involvement by the Company and the limitation on Qualigen’s rate of return. The obligation to repay the
Investment Return amount in case of agreement cancellation further supports this classification. Given the uncertainty in the timing
and amount of future revenue streams, the effective interest rate could not be determined. Therefore, the difference of $
NOTE 12 - SUBSEQUENT EVENTS
The Company has evaluated events that occurred through August 14, 2024, the date that the financial statements were issued, and determined that except than as set forth below, there have been no events that have occurred that would require adjustments to the Company’s disclosures in the financial statements.
| 1. | On
July 12, 2024, the Company executed a Promissory Note (“Note”) in favor of Qualigen Therapeutics, Inc. (the “Lender”)
in the aggregate principal amount of $ | |
| The Company may prepay all or any part of the outstanding principal or interest due on the Note, at any time, in whole or in part, without premium or penalty. In the event of a default by the Company in the payment of the principal and interest, the Note provides that the Lender will have liquidation preference and a first right of recovery in any future bankruptcy or insolvency proceeding. | ||
| 2. | On
July 19, 2024, the Company repaid $ |
| 18 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion covers the three and six months ended June 30, 2024 and the subsequent period up to the date of issuance of this Quarterly Report on Form 10-Q. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the unaudited interim financial statements and notes thereto included in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and notes thereto for the year ended December 31, 2023 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Form 10-K”). You should review the disclosure under the heading “Risk Factors” in this Quarterly Report on Form 10-Q and the 2023 Form 10-K for a discussion of important factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements.
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 under Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements other than statements of historical facts contained in this quarterly report, including statements regarding our future results of operations and financial position, business strategy, research and development plans and costs, the timing and likelihood of regulatory filings and approvals, commercialization plans, pricing and reimbursement, the potential to develop future product candidates, the timing and likelihood of success of the plans and objectives of management for future operations, and future results of anticipated product development efforts, are forward-looking statements. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “should,” “estimate,” or “continue,” and similar expressions or variations. The forward-looking statements in this quarterly report are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, operating results, business strategy, short-term and long-term business operations and objectives. These forward-looking statements speak only as of the date of this quarterly report and are subject to a number of risks, uncertainties and assumptions, including those described in the Part II, Item 1A under the heading “Risk Factors.” The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.
OVERVIEW
Marizyme is a medical technology company changing the landscape of cardiac care by delivering innovative solutions for coronary artery bypass graft (CABG) surgery.
Since October 2023, DuraGraft has been authorized for marketing by the U.S. Food and Drug Administration, or FDA, for use as an intra-operative vascular conduit storage and flushing solution used during CABG surgeries in the United States, subject to applicable risks, mitigation requirements, and control provisions. Since August 2014, DuraGraft has also had the CE marking required to be sold in the EEA, and DuraGraft has therefore been assessed as meeting the EEA safety, health, and environmental protection requirements.
Having received FDA authorization for marketing of DuraGraft, we are proceeding with our plans to commercialize DuraGraft in the United States and continue to generate international revenue growth from sales of DuraGraft. In the U.S. marketplace, we intend to employ a small direct sales force focusing on marketing and sales to hospital integrated networks. We have also begun the process of developing the U.S. CABG market for DuraGraft with select clinical studies, the development of known opinion leaders, or KOLs, the promotion of existing publications, and digital marketing. We will also seek to develop and commercialize additional applications for the technology underlying DuraGraft.
Our DuraGraft commercialization plan using its CE marking and existing distribution partners in select European and Asian countries resumed in the second quarter of 2022, with a targeted approach based on market access, existing KOLs, clinical data and revenue penetration. In Europe and elsewhere, we will continue our DuraGraft marketing efforts relying on our DuraGraft CE marking and our distribution partners. The CE marking signifies that DuraGraft may be sold in the EEA and that DuraGraft has been assessed as meeting safety, health, and environmental protection requirements. We are currently working with local distributors of cardiovascular disease-related products, in accordance with local regulatory requirements, to sell and increase the market share of DuraGraft in Spain, Austria, Switzerland, Germany, Chile, Turkey, Italy, and the UK among others.
We also continue to focus on the development of MAR-FG-001, a technology for use in fat grafting procedures formulated as a tumescent solution base for protecting adipose tissue during adipose tissue harvesting and storage.
We have either paused or significantly slowed down the development of our other pipeline technologies, including Krillase and MATLOC. Our MATLOC CKD point-of-care device is still being developed through a Sponsored Research Agreement, or SRA. An SRA is an agreement (which may be classified as a grant, contract or cooperative agreement) under which one party (the “Sponsor”) provides funding to a second party to support the performance of a specified research project or related activity. The Sponsor may be a foundation, government agency, for-profit entity, research institute, or another university. Apart from the SRA, no additional capital is going to the Krillase or MATLOC pipeline technologies.
In the near term, we expect to generate revenue primarily from the sale of DuraGraft through the expansion of our international marketing efforts by our distribution partners in Europe and in other countries that accept CE marking. We anticipate that once we commence marketing and sales operations for DuraGraft in the U.S., we will be able to generate sustainable revenue growth and continue the expansion of DuraGraft and expedite the development of MAR-FG-001 into medical products.
| 19 |
Our Competitive Strengths
We believe that the following competitive strength will enable us to compete effectively:
| ● | Superior, first-in-class vascular graft storage and flushing solution. DuraGraft is the first and only medical product that has received authorization by the FDA for marketing for use as an intra-operative vascular conduit storage and flushing solution used during CABG surgeries. DuraGraft is also the only product certified for marketing in Europe and other jurisdictions for this indication. |
Our Growth Strategies
We strive to grow our business by pursuing the following key growth strategies:
| ● | Commercialize DuraGraft. | |
| ● | Develop MAR-FG-001 fat grafting technology and related products. |
Our net loss was approximately $4.1 million and $10.3 million for the three and six months ended June 30, 2024, respectively (June 30, 2023 - $20.6 million and $23.1 million, respectively). We expect to incur significant expenses and operating losses over the next several years. Accordingly, we will need additional financing to support our continuing operations. We will seek to fund our operations through public or private equity offerings, debt financings, government or other third-party funding, collaborations and licensing arrangements. Adequate additional financing may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would impact our going concern and would have a negative impact on our financial condition and our ability to pursue our business strategy and continue as a going concern. We will need to generate significant revenues to achieve profitability, and we may never do so.
Principal Factors Affecting Our Financial Performance
Our operating results are primarily affected by the following factors:
| ● | our ability to generate revenue from sales of our products; |
| ● | our ability to obtain FDA approval for our products; |
| ● | our ability to access additional capital and the size and timing of subsequent financings, if any; |
| ● | the costs of acquiring and utilizing data, technology, and/or intellectual property to successfully reach our goals and to remain competitive; |
| ● | personnel and facilities costs in any region in which we seek to introduce and market our products; |
| ● | the costs of sales, marketing, and customer acquisition; |
| ● | the average price for our products that will be paid by consumers; |
| ● | the number of our products ordered per quarter; |
| ● | costs to manufacture our products; |
| ● | the costs of compliance with any unforeseen regulatory obstacles or governmental mandates in any states or countries in which we seek to operate; and |
| ● | the costs of any additional clinical studies which are deemed necessary for us to remain viable and competitive in any region of the world. |
Smaller Reporting Company
We are a “smaller reporting company” as defined in Rule 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements. We will remain a smaller reporting company until the last day of the fiscal year in which (1) the market value of our shares held by non-affiliates equals or exceeds $250 million as of the prior June 30th, or (2) our annual revenues equaled or exceeded $100 million during such completed fiscal year and the market value of our shares held by non-affiliates equals or exceeds $700 million as of the prior June 30th.
FINANCIAL OPERATIONS REVIEW
Components of Results of Operations
Revenue
Revenue represents gross product sales less service fees and product returns. For our distribution partner channel, we recognize revenue for product sales at the time of delivery of the product to our distribution partner. As our products have an expiration date, if a product expires, we will replace the product at no charge. Currently, all of our revenue is generated from the sale of DuraGraft in European and Asian markets where the product has the required regulatory approvals.
Direct Cost of Revenue
Direct cost of revenue include primarily product costs, which include all costs directly related to the purchase of raw materials, charges from our contract manufacturing organizations, and manufacturing overhead costs, as well as shipping and distribution charges. Direct cost of revenue also include losses from excess, slow-moving or obsolete inventory and inventory purchase commitments, if any.
| 20 |
Research and Development
All research and development costs are expensed in the period incurred and consist primarily of salaries, payroll taxes, and employee benefits, those individuals involved in research and development efforts, external research and development costs incurred under agreements with contract research organizations and consultants to conduct and support the Company’s ongoing clinical trials of DuraGraft, and costs related to manufacturing DuraGraft for clinical trials. The Company has entered into various research and development contracts with various organizations and other companies.
Professional Fees
Professional fees include legal fees relating to intellectual property development, due diligence and corporate matters, and consulting fees for accounting, finance, and valuation services. Professional fees paid related parties relate to certain consulting services. We anticipate increased expenses related to audit, legal, regulatory, and tax-related services associated with maintaining compliance with SEC requirements, and with listing and maintaining compliance with Nasdaq, if our common stock should be uplisted to trade on the Nasdaq for which there can be no assurance.
Salaries and Stock-Based Compensation
Salaries consist of compensation and related personnel costs. Stock-based compensation represents the fair value of equity-settled share awards on stock options granted by the Company to its employees, officers, directors, and consultants. The fair value of awards is calculated using the Black-Scholes option pricing model, which considers the following factors: exercise price, current market price of the underlying shares, expected life, risk-free interest rate, expected volatility, dividend yield, and forfeiture rate.
Other General and Administrative Expenses
Other general and administrative expenses consist principally of marketing and selling expenses, facility costs, administrative and office expenses, director and officer insurance premiums, and investor relations costs associated with operating a public company.
Other Income (Expense)
Other income and expenses consist of mark-to-market adjustments on contingent liabilities assumed on the acquisition of the Somahlution Assets and interest and accretion expenses related to our Convertible Notes.
| 21 |
RESULTS OF OPERATIONS
Comparison of the Three Months Ended June 30, 2024 and 2023
The following table summarizes our results of operations for the three months ended June 30, 2024 and 2023:
| Three Months Ended June 30, | ||||||||||||
| 2024 | 2023 | Change | ||||||||||
| Revenue | $ | - | $ | 184,739 | $ | (184,739 | ) | |||||
| Direct cost of revenue | - | 49,611 | (49,611 | ) | ||||||||
| Gross profit | - | 135,128 | (135,128 | ) | ||||||||
| Operating expenses: | ||||||||||||
| Direct costs of revenue | ||||||||||||
| Professional fees | 338,676 | 511,844 | (173,168 | ) | ||||||||
| Salary expenses | 355,525 | 335,004 | 20,521 | |||||||||
| Research and development | 312,333 | 691,393 | (379,060 | ) | ||||||||
| Stock-based compensation | 41,588 | 160,762 | (119,174 | ) | ||||||||
| Depreciation and amortization | 121,277 | 210,293 | (89,016 | ) | ||||||||
| Royalty expense | - | 162,065 | (162,065 | ) | ||||||||
| Other general and administrative expenses | 419,961 | 2,867,749 | (2,447,788 | ) | ||||||||
| Total operating expenses | 1,589,360 | 4,939,110 | (3,349,750 | ) | ||||||||
| Total operating loss | $ | (1,589,360 | ) | $ | (4,803,982 | ) | $ | 3,214,622 | ||||
| Other income (expenses): | ||||||||||||
| Interest and accretion expense | (2,938,416 | ) | (13,424,169 | ) | 10,485,753 | |||||||
| Other income | 200,000 | - | 200,000 | |||||||||
| Change in fair value of contingent liabilities | 88,000 | 714,000 | (626,000 | ) | ||||||||
| Gain (loss) on debt extinguishment | 667,200 | (684,682 | ) | (1,351,882 | ) | |||||||
| Borrowing costs | (500,000 | ) | - | (500,000 | ) | |||||||
| Loss on issuance of debt | - | (2,377,569 | ) | 2,377,569 | ||||||||
| Net loss | $ | (4,072,576 | ) | $ | (20,576,402 | ) | $ | 16,503,826 | ||||
Revenue
We recognized no revenue for the three months ended June 30, 2024, compared to $0.18 million for the same period in 2023. This decrease is attributed to a halt in inventory production during the three months ended June 30, 2024, due to constraints on the Company’s financial resources.
Direct Costs of Revenue
During the period ended June 30, 2024, we incurred no direct costs of revenue, a decrease of approximately $0.05 million, or 100%, compared to $0.05 million in direct costs of revenue incurred during the three months ended June 30, 2023. The decrease in cost of goods sold was due to the absence of sales and no inventory production during the three months ended June 30, 2024, compared to the corresponding period in 2023.
Professional Fees
Professional fees decreased by approximately $0.2 million or 33.8% to approximately $0.3 million in the three months ended June 30, 2024 compared to approximately $0.5 million in the three months ended June 30, 2023. The decrease is primarily attributed to higher professional fees incurred in the comparative period, driven by spending on consulting for DuraGraft FDA regulatory and clinical support.
Salary Expenses
Salary expenses in the three months ended June 30, 2024 were approximately $0.4 million, an approximately $0.02 million or 6.1% increase from the comparative quarter. This increase can be attributed to a lower portion of salaries being reclassified to research and development expenses, as the Company reduced its R&D efforts in the latter half of fiscal 2023.
Research and Development
Research and development expenses in the three months ended June 30, 2024 were approximately $0.3 million, approximately a $0.4 million or 54.8% decrease from the comparative period. This reduction in research and development expenses is primarily attributed to the Company’s financing constraints that led to the suspension of European study on DuraGraft as well Company’s decision to suspend expenditures related to FDA approvals for MATLOC and Krillase-related assets during the third quarter of 2023.
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Stock-Based Compensation
Stock-based compensation decreased by $0.1 million or 74.1% to approximately $0.04 million for the three months ended June 30, 2024 from approximately $0.2 million in the comparative quarter ended June 30, 2023. This decrease is primarily due to a significant portion of options completing their vesting period in the second quarter of 2023, with no new options granted since the end of fiscal year 2022.
Depreciation and Amortization
Depreciation and amortization decreased to approximately $0.1 million for the three months ended June 30, 2024, down from approximately $0.2 million in the comparative quarter ended June 30, 2023, representing a 42.3% decrease period over period. This decrease is attributed to the impairment of My Health Logic intangible assets at the end of fiscal 2023, which were previously amortized during the comparative quarter.
Royalty Expense
During the comparative quarter ended June 30, 2023, the Company recorded an aggregate of $0.16 million in royalty expenses. This included $0.01 million in royalties payable on sales of DuraGraft outside of the U.S. and $0.15 million recorded as a 50% reduction of the prepaid royalty balance owed to the former beneficial owners of Somahlution. No royalties were accrued in the current period, as there were no sales of DuraGraft during the three months ended June 30, 2024.
Other General and Administrative Expenses
Other general and administrative expenses decreased by approximately $2.4 million, or 85.4%, to approximately $0.4 million for the three months ended June 30, 2024. This decrease is primarily attributed to the valuation of Class E and Class F Warrants issued in the comparative period.
Other Income (Expenses)
In the three months ended June 30, 2024, the Company incurred approximately $2.9 million in interest and accretion costs related to convertible notes issued at a discount as part of its Units Private Placement. This represents a decrease of $10.5 million, or 78.1%, compared to $13.4 million in the comparative quarter ended June 30, 2023. The significant decrease is primarily due to the events in the comparative period: the Company failed to repay the initial principal amount of $1.0 million under the Walleye Promissory Note by its maturity date of May 7, 2023, leading to a default under the Convertible Notes on the same date. This default resulted in a default amount of approximately $7.3 million being accreted to the principal of the Convertible Notes.
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In the three months ended June 30, 2024, the Company recognized an Exclusivity Fee of $0.2 million under other income, pursuant to the agreement with Qualigen. No such income was recognized in the comparative quarter ended June 30, 2023. Additionally, in accordance with the agreement with Qualigen, the Company also recognized $0.5 million in borrowing costs incurred to secure the funding from Qualigen.
Additionally, the Company recognized a $0.1 million fair value gain from mark-to-market adjustments on the contingent liabilities assumed from the acquisition of the Somahlution assets, due to changes in the fair value of the contingent consideration. This represents a decrease of $0.6 million compared to the $0.7 million fair value gain recognized in the quarter ended June 30, 2023.
In the three months ended June 30, 2024, the Company recorded a $0.7 million gain on the extinguishment of Convertible Notes and OID Convertible Notes due to the amendment of the maturity dates for certain Notes and warrants attached to those Notes. This represents a $1.4 million increase, or 197.4% compared to $0.7 million loss in the comparative quarter ended June 30, 2023.
Lastly, in the comparative quarter ended June 30, 2023, the Company recorded a loss of $2.4 million on issuance of OID Convertible Notes due to the fair value of Class E and Class F warrants exceeding the value of the debt principal. No such loss was recorded in the current quarter ended June 30, 2024.
Comparison of the Six Months Ended June 30, 2024 and 2023
The following table summarizes our results of operations for the six months ended June 30, 2024 and 2023:
| Six Months Ended June 30, | ||||||||||||
| 2024 | 2023 | Change | ||||||||||
| Revenue | $ | 32,855 | $ | 313,713 | $ | (280,858 | ) | |||||
| Direct cost of revenue | 9,647 | 88,886 | (79,239 | ) | ||||||||
| Gross profit | 23,208 | 224,827 | (201,619 | ) | ||||||||
| Operating expenses: | ||||||||||||
| Direct costs of revenue | ||||||||||||
| Professional fees | 602,772 | 896,650 | (293,878 | ) | ||||||||
| Salary expenses | 665,684 | 601,972 | 63,712 | |||||||||
| Research and development | 634,200 | 1,297,390 | (663,190 | ) | ||||||||
| Stock-based compensation | 95,852 | 371,728 | (275,876 | ) | ||||||||
| Depreciation and amortization | 230,054 | 420,631 | (190,577 | ) | ||||||||
| Royalty expense | 1,957 | 198,248 | (196,291 | ) | ||||||||
| Other general and administrative expenses | 754,141 | 3,375,073 | (2,620,932 | ) | ||||||||
| Total operating expenses | 2,984,660 | 7,161,692 | (4,177,032 | ) | ||||||||
| Total operating loss | $ | (2,961,452 | ) | $ | (6,936,865 | ) | $ | 3,975,413 | ||||
| Other income (expenses): | ||||||||||||
| Interest and accretion expense | (7,100,246 | ) | (15,121,870 | ) | 8,021,624 | |||||||
| Other income | 200,000 | - | 200,000 | |||||||||
| Change in fair value of contingent liabilities | (497,000 | ) | 1,990,000 | (2,487,000 | ) | |||||||
| Gain (loss) on debt extinguishment | 559,830 | (684,682 | ) | 1,244,512 | ||||||||
| Borrowing costs | (500,000 | ) | - | (500,000 | ) | |||||||
| Loss on issuance of debt | - | (2,377,569 | ) | 2,377,569 | ||||||||
| Net loss | $ | (10,298,868 | ) | $ | (23,130,986 | ) | $ | 12,832,118 | ||||
Revenue
We recognized revenue of $0.03 million for the six months ended June 30, 2024, compared to $0.3 million for the six months ended June 30, 2023. The decrease is attributed to a halt in inventory production during the first half of 2024 due to constraints on the Company’s financial resources.
Direct Costs of Revenue
During the six months ended June 30, 2024, we incurred $0.01 million in direct costs of revenue, a decrease of $0.08 million, or 81.9%, compared to approximately $0.09 million in direct costs of revenue during the six months ended June 30, 2023. This decrease in cost of sales is attributed to the minimal sales during the six months ended June 30, 2024, compared to the corresponding period in 2023.
Professional Fees
Professional fees decreased by approximately $0.3 million or 32.8% to approximately $0.6 million in the six months ended June 30, 2024 compared to approximately $0.9 million in the six months ended June 30, 2023. The decrease is primarily attributed to higher professional fees incurred in the prior period, driven by spending on consulting for DuraGraft FDA regulatory and clinical support.
Salary Expenses
Salary expenses in the six months ended June 30, 2024 were approximately $0.7 million, an approximately $0.06 million or 10.6% increase from the comparative period. This increase can be attributed to a lower portion of salaries being reclassified to research and development expenses, as the Company reduced its R&D efforts in the latter half of fiscal 2023.
Research and Development
“Research and development expenses for the six months ended June 30, 2024, were approximately $0.6 million, representing a decrease of approximately $0.7 million, or 51.1%, from the comparative period. This reduction is primarily attributed to the Company’s financing constraints that led to the suspension of the European study on DuraGraft and the decision to suspend expenditures related to FDA approvals for MATLOC and Krillase-related assets during the third quarter of 2023.
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Stock-Based Compensation
Stock-based compensation decreased by $0.3 million, amounting to approximately $0.1 million for the six months ended June 30, 2024, compared to approximately $0.4 million for the same period in 2023, representing a 74.2% decrease year over year. This decline is primarily due to a significant portion of options completing their vesting period in the second quarter of 2023 and the absence of new option grants since the end of fiscal year 2022.
Depreciation and Amortization
Depreciation and amortization decreased to approximately $0.2 million for the six months ended June 30, 2024, down from approximately $0.4 million in the comparative period ended June 30, 2023, representing a 45.3% decrease period over period. This decrease was attributed to the impairment of MATLOC intangible assets at the end of fiscal 2023, which were amortized during the comparative period ended June 30, 2023.
Royalty Expense
During the six months ended June 30, 2024, the Company recorded $0.002 million in royalty expenses, compared to $0.2 million in the same period in 2023. For the six months ended June 30, 2023, $0.05 million in royalties payable was incurred on sales of DuraGraft outside the U.S., while the remaining $0.15 million in royalty expenses was recorded as a 50% reduction of the prepaid royalty balance owed to the former beneficial owners of Somahlution. Minimal royalties were accrued in the current period ended June 30, 2024, due to minimal sales of DuraGraft during this time.
Other General and Administrative Expenses
Other general and administrative expenses decreased by $2.6 million, or 77.7%, to approximately $0.8 million for the six months ended June 30, 2024. This decrease is primarily attributed to the expensing of $0.5 million in deferred offering costs due to adjustments to the Convertible Notes in the comparative period, $0.7 million in deferred offering costs related to the Company’s withdrawal of its registration statement for a public offering in April 2023, and the $1.3 million valuation of Class E and Class F Warrants issued in the comparative period.
Other Income (Expenses)
In the six months ended June 30, 2024, the Company incurred approximately $7.1 million in interest and accretion costs related to convertible notes issued at a discount as part of its Units Private Placement. This represents a decrease of $8.0 million, or 53.0%, compared to $15.1 million in the comparative period ended June 30, 2023. The significant decrease is primarily due to the events in the comparative period: the Company failed to repay the initial principal amount of $1.0 million under the Walleye Promissory Note by its maturity date of May 7, 2023, leading to a default under the Convertible Notes on the same date. This default resulted in a default amount of approximately $7.3 million being accreted to the principal of the Convertible Notes.
In the six months ended June 30, 2024, pursuant to the agreement with Qualigen, the Company recognized the Exclusivity Fee of $0.2 million under other income. No such income was recognized in the comparative period ended June 30, 2023. Additionally, in accordance with the agreement with Qualigen, the Company also recognized $0.5 million in borrowing costs incurred to secure the funding from Qualigen.
Additionally, the Company recognized a $0.4 million fair value loss from mark-to-market adjustments on the contingent liabilities assumed from the acquisition of the Somahlution assets, due to changes in the fair value of the contingent consideration. This represents a decrease of $2.4 million compared to the $2.0 million fair value gain recognized in the six months ended June 30, 2023.
In the six months ended June 30, 2024, the Company recorded a $0.6 million gain on the extinguishment of Convertible Notes and OID Convertible Notes due to the amendment of the maturity dates for certain Notes and warrants attached to those Notes. This represents a $1.2 million increase, or 181.8% compared to $0.7 million loss in the comparative period ended June 30, 2023.
Lastly, in the comparative period ended June 30, 2023, the Company also recorded a loss of $2.4 million on issuance of OID Convertible Notes due to the fair value of Class E and Class F warrants exceeding the value of the debt principal. No such loss was recorded in the six months ended June 30, 2024.
LIQUIDITY AND CAPITAL RESOURCES
To date, we have incurred significant net losses and negative cash flows from operations. As of June 30, 2024, we had available cash of approximately $0.005 million and accumulated deficit of approximately $161.0 million. We have funded our operations primarily from capital raises.
Debt
As of June 30, 2024, the Company had outstanding convertible notes with varying maturities for an aggregate principal amount of $26.7 million, all payable within approximately 12 months. Future interest payments associated with the convertible notes total $8.7 million.
The Company also issues unsecured short-term promissory notes for operational purposes. As of June 30, 2024, the Company had $1.5 million of promissory notes outstanding, all of which were payable within 12 months.
Additionally, as part of the Agreement with Qualigen to support the commercialization of DuraGraft™, the Company recorded a long-term Agreement Obligation of $1.0 million.
Leases
The Company has lease arrangements for office and laboratories facilities. As of June 30, 2024, the Company had fixed lease payment obligations of $0.9 million, with $0.4 million payable within 12 months.
Funding Requirements and Other Liquidity Matters
We expect to continue to incur expenses and operating losses for the foreseeable future. We anticipate that our expenses will increase as a result of the following operational and business development efforts:
| ● | Increase our expertise and knowledge through hiring and retaining qualified operational, financial and management personnel, who are expected to develop build efficient infrastructure to support development and commercialization of therapies and devices; | |
| ● | Increase in research and development and legal support as we continue to develop our products, conduct clinical trials and pursue FDA clearances; | |
| ● | Expand our product portfolio through the identification and acquisition of additional life science assets; and | |
| ● | Seek to increase awareness about our products to boost sales and distributions internationally. |
Until such time, if ever, as we can generate substantial product revenues to support our cost structure, the Company will continue to have to raise funds beyond its current working capital balance in order to finance future development of products, potential acquisitions, and meet its debt obligations until such time as future profitable revenues are achieved.
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We expect to finance our cash needs through a combination of private and public equity offerings, debt financings, government or other third-party funding, and collaborations arrangements. To the extent that we raise additional capital through the sale of common stock, convertible securities or other equity securities, the ownership interest of our stockholders may be materially diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the interests of our common stockholders. Debt financing and preferred equity financing, if available, would result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting our stockholders’ ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, that could adversely impact our ability to conduct our business. Securing additional financing could require a substantial amount of time and attention from our management and may divert a disproportionate amount of their attention away from day-to-day activities, which may adversely affect our management’s ability to oversee the development or acquisition of our products.
If we raise additional funds through collaborations, strategic alliances or marketing, distribution, or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves or cease operations, liquidate our assets, reorganize the Company, or a combination of the foregoing. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
Cash Flows
| Six months ended June 30, | ||||||||||||
| 2024 | 2023 | Change | ||||||||||
| Net Cash provided by/(used in): | ||||||||||||
| Operating activities | $ | (1,541,855 | ) | $ | (2,318,013 | ) | $ | 776,158 | ||||
| Financing activities | 1,398,612 | 2,012,374 | (613,762 | ) | ||||||||
| Net change in cash | $ | (143,243 | ) | $ | (305,639 | ) | $ | 162,396 | ||||
Operating Activities
Net cash used in operating activities was approximately $1.5 million and $2.3 million for the six months ended June 30, 2024 and 2023, respectively. The decrease in cash flows spent on operating activities is primarily attributable to differences in the timing of payments to our vendors and receipts from our customers.
Financing Activities
Net cash provided by financing activities for the six months ended June 30, 2024, was approximately $1.4 million. This amount includes $1.0 million raised from the issuance of promissory notes, with approximately $0.1 million repaid during the period. Additionally, $0.5 million was raised from the agreement with Qualigen. In comparison, for the six months ended June 30, 2023, net cash provided by financing activities was $2.0 million. This included $0.9 million from the issuance of an OID Convertible Note, $1.0 million from the issuance of the Walleye Promissory Note, and approximately $0.3 million from the exercise of Somahlution Warrants.
Going Concern
The Company, since its inception, has incurred recurring operating losses and negative cash flows from operations and has an accumulated deficit of $161.6 million at June 30, 2024 (December 31, 2023 - $151.3 million). Additionally, the Company has negative working capital of approximately $22.6 million (December 31, 2023 - $19.6 million) and $0.005 million (December 31, 2023 - $0.1 million) of cash on hand, which is not sufficient to fund operations for the next twelve months. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
The accompanying condensed consolidated financial statements have been prepared in conformity with U.S. GAAP, which contemplate continuation of the Company as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business. The ability of the Company to continue its operations is dependent on the execution of management’s plans, which include the raising of capital through the debt and/or equity markets, until such time that funds provided by operations are sufficient to fund working capital requirements. If the Company were not to continue as a going concern, it would likely not be able to realize its assets at values comparable to the carrying value or the fair value estimates reflected in the balances set out in the preparation of the consolidated financial statements.
There can be no assurances that the Company will be successful in generating additional cash from the equity/debt markets or other sources to be used for operations. The consolidated financial statements do not include any adjustments relating to the recoverability of assets and classification of assets and liabilities that might be necessary. Based on the Company’s current resources, the Company will not be able to continue to operate without additional immediate funding. Should the Company not be successful in obtaining the necessary financing to fund its operations, the Company would need to curtail certain or all operational activities and/or contemplate the sale of its assets, if necessary.
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Off-Balance Sheet Arrangements
As of June 30, 2024, the Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in our financial statements and accompanying notes. We evaluate these estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in “Note 3 – Summary of Significant Accounting Policies”, included in “Item 1. Financial Statements” of this Quarterly Report on Form 10-Q, we believe that the following accounting policies are the most critical for fully understanding and evaluating our financial condition and results of operations.
Impairment
| ● | Impairment of long-lived assets: The Company reviews long-lived assets, including property, plant and equipment, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than the carrying amount. The impairment loss, if recognized, would be based on the excess of the carrying value of the impaired asset over its respective fair value. | |
| ● | Goodwill: Goodwill is recorded at the time of purchase for the excess of the amount of the purchase price over the fair values of the identifiable assets acquired and liabilities assumed. The fair value is determined using the estimated discounted future cash flows of the reporting unit. Goodwill is not amortized and instead is tested at least annually for impairment, or more frequently when events or changes in circumstances indicate that goodwill might be impaired. This impairment test is performed annually at December 31. Future adverse changes in market conditions or poor operating results of underlying assets could result in an inability to recover the carrying value of the goodwill, thereby possibly requiring an impairment charge. | |
| ● | In-process research and development assets: IPR&D assets are reviewed for impairment annually, or sooner if events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable, and upon establishment of technological feasibility or regulatory approval. An impairment loss, if any, is calculated by comparing the fair value of the asset to its carrying value. If the asset’s carrying value exceeds its fair value, an impairment loss is recorded for the difference and its carrying value is reduced accordingly. Similar to the impairment test for goodwill, the Company may perform a qualitative approach for testing indefinite-lived intangible assets for impairment. |
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Fair Value of Derivative and Contingent Liabilities
Our derivative and contingent liabilities are revalued at each reporting period with changes in the fair value of the liabilities recorded as a component of other income (expense) in the statements of operations. There are significant judgments and estimates inherent in the determination of the fair value of these liabilities. If we had made different assumptions including, among others, those related to the timing and probability of various corporate scenarios, discount rates, volatilities and exit valuations, the carrying values of our derivative and contingent liabilities, and our net loss and net loss per common share could have been significantly different.
Stock-Based Compensation Expense
Stock-based compensation expense for employees and directors is recognized in the Statement of Operations based on estimated amounts, including the grant date fair value and the expected service period. For stock options, we estimate the grant date fair value using a Black-Scholes valuation model, which requires the use of multiple subjective inputs including estimated future volatility, expected forfeitures and the expected term of the awards. We estimate the expected future volatility based on the stock’s historical price volatility. The stock’s future volatility may differ from the estimated volatility at the grant date. For restricted stock unit (“RSU”) equity awards, we estimate the grant date fair value using our closing stock price on the date of grant. We recognize the effect of forfeitures in compensation expense when the forfeitures occur. The estimated forfeiture rates may differ from actual forfeiture rates which would affect the amount of expense recognized during the period. We recognize the value of the awards over the awards’ requisite service or performance periods. The requisite service period is generally the time over which our share-based awards vest.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Disclosure controls and procedures are defined in Rule 13a-15(e) under the Exchange Act to mean controls and other procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
At the end of the period covered by this Quarterly Report on Form 10-Q an evaluation was carried out under the supervision of and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operations of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of June 30, 2024. This conclusion was based on the material weaknesses in our internal control over financial reporting as further described below.
Material Weaknesses
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected and corrected on a timely basis. The following material weakness was previously reported in our Annual Report on Form 10-K for the year ended December 31, 2023 and has remained unchanged for the six months ended June 30, 2024:
| ● | We did not have sufficient resources with appropriate knowledge, experience and/or training commensurate with our financial reporting requirements to assist us in our timely and efficient preparation and review over our financial reporting. |
To remediate the material weakness described above, since December 31, 2023, management has added, or intends to add, controls to further enhance and revise the design of the existing controls, including the following:
| ● | Implementing reassessed design and operation of internal controls over financial reporting and reviewing procedures over the preparation of our financial statements. | |
| ● | Engaging of permanent accounting personnel and consultants to provide support during our quarterly and annual preparation, review, and reporting of our financial statements. | |
| ● | Appointing of qualified personnel to the key management roles to provide oversight and develop stronger controls, policies and procedures. | |
| ● | Maintaining adequate internal qualified personnel to properly supervise and review the information provided by the outside consulting technical experts to ensure certain significant complex transactions and technical matters were properly accounted for. |
We cannot assure you that these ongoing or planned measures in response to the material weakness in our internal control over financial reporting will be sufficient to remediate such material weakness or to avoid potential future material weaknesses.
Changes in Internal Control Over Financial Reporting
As discussed above, the management is working on remediating the material weakness in internal control over financial reporting identified above. In the six months ended June 30, 2024, the Company took the following steps in order to improve its internal controls over financial reporting:
| ● | Implemented controls around operation of internal control over financial reporting and reviewing procedures over the preparation of our financial statements such that our management believes that the Company had adequate policies and procedures in place to ensure the timely, effective review of assumptions used in measuring the fair value of certain financial instruments. |
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.
ITEM 1A. RISK FACTORS.
Except as set forth below, there have been no material changes to the risk factors disclosed in the 2023 Form 10-K.
We have incurred losses since inception, and we anticipate that we will incur continued losses for the foreseeable future. Moreover, our independent registered public accounting firm’s report, contained herein, includes an explanatory paragraph that expresses substantial doubt about our ability to continue as a going concern, indicating the possibility that we may not be able to operate in the future.
As of June 30, 2024, we have an accumulated deficit of $161.6 million and incurred a net loss of $10.3 million for the six months ended June 30, 2024. As of December 31, 2023 and December 31, 2022, the Company had an accumulated deficit of approximately $151.3 million and $86.0 million, respectively. We expect to incur significant and increasing operating losses for the next several years as we expand our acquisition efforts, continue clinical trials, acquire, or license technologies, advance other medical devices into clinical development, complete clinical trials, seek regulatory approval and, if we receive FDA approval, commercialize our products. Primarily because of our losses incurred to date, our expected continued future losses, and limited cash balances, our independent registered public accounting firm has included in its report an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is contingent upon, among other factors, the sale of the shares of common stock or obtaining alternate financing. We cannot provide any assurance that we will be able to raise additional capital.
If we are unable to secure additional capital, we may be required to curtail our research and development initiatives and take additional measures to reduce costs in order to conserve our cash in amounts sufficient to sustain operations and meet our obligations. These measures could cause significant delays in our clinical and regulatory efforts, which are critical to the realization of our business plan. The accompanying financial statements do not include any adjustments that may be necessary should we be unable to continue as a going concern. It is not possible for us to predict currently the potential success of our business. The revenue and income potential of our proposed business and operations are currently unknown. If we cannot continue as a viable entity, you may lose some or all your investment in our company.
Management has determined that disclosure controls and procedures and internal control over financial reporting were not effective, identified a material weakness in our internal controls, and a failure to remediate it or any future ineffectiveness of internal controls could have a material adverse effect on the Company’s business and the price of its securities.
Our management determined that our disclosure controls and procedures and internal control over financial reporting, or ICFR, were not effective at June 30, 2024 due to a material weakness in ICFR as of December 31, 2023.
A “material weakness” is a deficiency, or a combination of deficiencies, in ICFR, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. As previously reported, we have taken, and plan to continue to take, measures to remediate the Company’s internal weaknesses in ICFR. However, the implementation of these measures may not address any control deficiencies in our ICFR. Our failure to address any control deficiencies could result in inaccuracies in our financial statements and could also impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis. Moreover, effective ICFR is important to prevent fraud. Failure to report its financial information on an accurate or timely basis may thereby subject the Company to adverse regulatory consequences, including sanctions by the SEC or violations of applicable securities exchange or quotation service listing rules. There could also be a negative reaction in the financial markets due to a loss of investor confidence in the Company and the lack of timeliness or reliability of its financial statements. Confidence in the reliability of the Company’s financial statements may suffer due to the Company’s reporting of a material weakness in its ICFR. This could materially adversely affect the Company’s business, financial condition, results of operations and prospects and lead to a decline in the price of its common stock.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During the three-month period ended June 30, 2024, we did not conduct any unregistered sales of our equity securities that were not previously disclosed in a current report on Form 8-K and we did not repurchase any of our common stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
During the second quarter of 2024, none of
our directors or executive officers
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ITEM 6. EXHIBITS
The following exhibits are filed as part of this report or incorporated by reference:
* Filed herewith
** Furnished herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: August 14, 2024 | MARIZYME, INC. | |
| /s/ David Barthel | ||
| Name: | David Barthel | |
| Title: | Chief Executive Officer | |
| (Principal Executive Officer) | ||
| /s/ George Kovalyov | ||
| Name: | George Kovalyov | |
| Title: | Chief Financial Officer | |
| (Principal Accounting and Financial Officer) | ||
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