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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended September 30, 2023

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period from _________ to _________

 

Commission file number: 000-21990

 

Oncotelic Therapeutics, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   13-3679168

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

29397 Agoura Road, Suite 107

Agoura Hills, CA

  91301
(Address of principal executive offices)   (Zip Code)

 

(650) 635-7000

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of exchange on which registered
None   OTLC   N/A

 

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 Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

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 such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” a “smaller reporting company” and an “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   Accelerated filer
         
Non-accelerated filer   Smaller reporting company
         
      Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act: ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No

 

As of November 14, 2023, there were 399,184,128 shares of the registrant’s common stock outstanding.

 

 

 

 
 

 

ONCOTELIC THERAPEUTICS, INC. AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2023

 

TABLE OF CONTENTS

 

    Page
     
PART I. FINANCIAL INFORMATION 3
     
ITEM 1. Financial Statements (unaudited) 3
     
  Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022 3
     
  Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2023 and 2022 4
     
  Consolidated Statements of Changes in Stockholders’ Equity for the Three Months and Nine Months Ended September 30, 2023 and 2022 6
     
  Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 and 2022 7
     
  Notes to Consolidated Financial Statements 8
     
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 40
     
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 53
     
ITEM 4. Controls and Procedures 53
     
PART II. OTHER INFORMATION 55
     
ITEM 1. Legal Proceedings 55
     
ITEM 1A. Risk Factors 55
     
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 55
     
ITEM 3. Defaults Upon Senior Securities 55
     
ITEM 4. Mine Safety Disclosures 55
     
ITEM 5. Other Information 55
     
ITEM 6. Exhibits, Financial Statement Schedules 55
     
SIGNATURES 56

 

 2 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ONCOTELIC THERAPEUTICS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

   September 30,   December 31, 
   2023   2022 
         
ASSETS          
Current assets:          
Cash  $268,022   $241,452 
Restricted cash   20,000    20,000 
Accounts receivable   18,976    19,748 
Prepaid & other current assets   58,546    21,964 
           
Total current assets   365,544    303,164 
           
In process R&D   1,101,760    1,101,760 
Goodwill, net of impairment   5,988,230    12,071,376 
Investment in GMP Bio at fair value   22,640,519    22,640,519 
Total assets  $30,096,053   $36,116,819 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable and accrued liabilities  $2,439,812   $2,510,864 
Accounts payable - related party   343,673    332,432 
Contingent consideration   2,625,000    2,625,000 
Derivative liability on notes   218,898    198,140 
Convertible and short-term debt, net of costs   9,651,615    10,091,923 
Convertible debt and short-term debt - related party, net of costs   1,832,410    1,165,048 
           
Total current liabilities   17,111,408    16,923,407 
           
Convertible long-term debt, net of costs   

899,099

    - 
           
Commitments and contingencies (Note 12)   -    - 
           
Stockholders’ equity:          
Common stock, $.01 par value; 750,000,000 shares authorized; 398,159,128 and 391,846,880 issued and outstanding, respectively   3,981,589    3,918,469 
Additional paid-in capital   41,348,213    41,416,632 
Accumulated deficit   (32,780,753)   (25,926,069)
Total Oncotelic Therapeutics, Inc. stockholders’ equity   12,549,049    19,409,032 
Non-controlling interests   (463,503)   (215,620)
           
Total stockholders’ equity   12,085,546    19,193,412 
Total liabilities and stockholders’ equity  $30,096,053   $36,116,819 

 

The accompanying footnotes are an integral part of these unaudited consolidated financial statements.

 

 3 

 

ONCOTELIC THERAPEUTICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

                 
   For the Three Months Ended September 30,   For the Nine Months Ended September 30, 
   2023   2022   2023   2022 
                 
Service revenue  $70,000   $-   $70,000   $- 
Total Revenue   70,000    -    70,000    - 
                     
Operating expenses:                    
Research and development  $21,221   $1,700   $50,148   $690,705 
General and administrative   34,301    593,739    471,258    4,505,256 
Goodwill impairment (See note 2 and 3)   

-

    

-

    6,083,146    

-

 
Total operating expenses   55,522    595,439    6,604,552    5,195,961 
                     
Income (Loss) from operations   14,478    (595,439)   (6,534,552)   (5,195,961)
Other income (expense):                    
Interest expense, net   (185,424)   (606,824)   (837,100)   (1,999,164)
Gain on derecognition of non-financial asset   -    -    -    16,951,477 
Reimbursement for expenses - related party   -    237,165    72,246    484,657 
Change in fair value of derivative on debt   306,836    105,662    (20,758)   37,740 
Loss on debt conversion   (94,829)   -    (94,829)   (257,810)
Total other income (expense)   26,583    (263,997)   (880,441)   15,216,900 
Net income (loss) before non-controlling interests   41,061    (859,436)   (7,414,993)   10,020,939 
Net loss attributable to non-controlling interests   (74,248)   (81,501)   (247,883)   (363,465)
Net income (loss) attributable to Oncotelic Therapeutics, Inc.  $115,309   $(777,935)  $(7,167,110)  $10,384,404 
                     
Basic net loss per share attributable to common stock  $0.00   $(0.00)  $(0.02)  $0.03 
Basic weighted average common stock outstanding   397,777,482    386,751,480    395,237,893    385,610,191 
                     
Diluted net loss per share attributable to common stock  $0.00   $(0.00)  $(0.02)  $0.02 
Diluted weighted average common stock outstanding   397,777,482    386,751,480    395,237,893    420,738,409 

 

The accompanying footnotes are an integral part of these unaudited consolidated financial statements.

 

 4 

 

ONCOTELIC THERAPEUTICS, INC. AND SUBSIDIARIES

Consolidated STATEMENT of STOCKHOLDERS’ EQUITY

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023

(Unaudited)

 

   Shares   Amount   Capital   Deficit   Interests   Equity 
   Common Stock  

Additional

Paid-in

   Accumulated   Non controlling   Stockholders’ 
   Shares   Amount   Capital   Deficit   Interests   Equity 
                         
Balance at January 1, 2023   391,846,880   $3,918,469   $41,416,632   $(25,926,069)  $(215,620)  $19,193,412 
Adoption of ASU 2020-06             (521,749)   312,426         (209,323)
Common shares issued upon partial conversion of debt   1,025,000    10,250    61,499    -    -    71,749 
Net loss                  (525,419)   (80,625)   (606,044)
Balance at March 31, 2023   392,871,880    3,928,719    40,956,382    (26,139,062)   (296,245)   18,449,794 
                               
Common shares issued in connection with debt conversion   4,659,710    46,597    279,566    -    -    326,163 
Net loss   -    -    -    (6,757,000)   (93,010)   (6,850,010)
Balance as of June 30, 2023   397,531,590   $3,975,316   $41,235,948   $(32,896,062)  $(389,255)  $11,925,947 
                               
Common shares issued in connection with debt conversion   627,538    6,273    28,994    -    

-

    35,267 

Warrants issued in connection with private placement

   

-

    

-

    83,271    

-

    

-

    83,271 
Net income (loss)   -    -    

-

    115,309    (74,248)   41,061 
Balance as of September 30, 2023   398,159,128   $3,981,589   $41,348,213   $(32,780,753)  $(463,503)  $12,085,546 

 

The accompanying footnotes are an integral part of these unaudited consolidated financial statements.

 

 5 

 

ONCOTELIC THERAPEUTICS, INC. AND SUBSIDIARIES

Consolidated STATEMENT of STOCKHOLDERS’ EQUITY

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022

 

   Common Stock  

Additional

Paid-in

   Accumulated   Non controlling   Stockholders’ 
   Shares   Amount   Capital   Deficit   Interests   Equity 
                         
Balance at January 1, 2022   375,288,146   $3,752,881   $35,223,842   $(31,021,050)  $202,758   $8,158,431 
                               
Common shares issued upon cashless exercise of warrants   3,041,958    30,420    (30,420)   -    -    - 
Common shares issued for cash   300,000    3,000    48,805              51,805 
Stock compensation expense   -    -    297,360    -    -    297,360 
Warrants issued in connection with
note extension
   -    -    2,905,316    -    -    2,905,316 
Net loss                  (4,849,781)   (240,540)   (5,090,321)
Balance at March 31, 2022   378,630,104    3,786,301    38,444,903    (35,870,831)   (37,782)   6,322,591 
                               
Beneficial Conversion Feature on
convertible debt
   -    -    570,717    -    -    570,717 
Warrants issued in connection with debt issuance   -    -    368,375    -    -    368,375 
Common shares issued for cash   300,000    3,000    43,822    -    -    46,822 
Common shares issued in connection with debt conversion   4,525,000    45,250    286,001    -    -    331,251 
Common shares issued upon cashless exercise of warrants   2,586,758    25,867    (25,867)   -    -    - 
Stock compensation expense   -    -    25,196    -    -    25,196 
Contribution from shareholder for payment of
liabilities
   -    -    644,463    -    -    644,463 
Net income (loss)   -    -    -    16,012,119    (41,424)   15,970,695 
Balance at June 30, 2022   386,041,862   $3,860,418   $40,357,610   $(19,858,712)  $(79,206)  $24,280,110 
                               
Common shares issued for cash   700,000    7,000    53,193    -    -    60,193 
Common shares issued in connection with debt conversion   3,453,571    34,536    207,214              241,750 
Stock compensation expense             303,687              303,687 
Net loss                 $(777,935)  $(81,501)   (859,436)
Balance at September 30, 2022   390,195,433   $3,901,954   $40,921,704   $(20,636,647)  $(160,707)  $24,026,304 

 

The accompanying footnotes are an integral part of these unaudited consolidated financial statements.

 

 6 

 

ONCOTELIC THERAPEUTICS, INC. AND SUBSIDIARIES

Consolidated STATEMENTS OF CASH FLOWS

(Unaudited)

 

   2023   2022 
  

For the Nine Months Ended

September 30,

 
   2023   2022 
Cash flows from operating activities:          
Net income (loss)  $(7,414,993)  $10,020,939 
Adjustments to reconcile net income (loss) to net cash used in operating activities:          
Gain on derecognition of non-financial asset   -   $(16,951,477)
Goodwill impairment   6,083,146    

-

 
Amortization of debt discount and deferred finance costs   -    1,560,173 
Amortization of intangible assets   -    12,841 
Warrants issued in connection with private placement   -    2,905,316 
Stock compensation expense   -    626,243 
Change in fair value of derivative   20,758    (37,740)
Loss on debt conversion   94,829    257,810 
Changes in operating assets and liabilities:          
Prepaid expenses and other current assets   (39,768)   384 
Accounts payable and accrued expenses   367,348    287,590 
Accounts payable to related party   (59,750)   (53,961)
Net cash used in operating activities   (948,430)   (1,371,882)
           
Cash flows from financing activities:          
Repayment to private placement debt holders   (100,000)   (25,000)
Proceeds from sales of common stock   -    158,820 
Proceeds from convertible debt   

-

    983,175 
Proceeds from short term loans, others   1,110,000    500,000 
Repaid to note holders   

-

    (500,000)
Repaid to others   (35,000)   (60,000)
Net cash provided by financing activities   975,000    1,056,995 
           
Net increase (decrease) in cash   26,570    (314,887)
           
Cash and restricted cash - beginning of period   261,452    588,769 
           
Cash and restricted cash - end of period  $288,022   $273,882 
           
Supplemental cash flow information:          
Cash paid for:          
Interest paid  $296,186   $328,181 
Income taxes paid  $-   $- 
Non-cash investing and financing activities:          
Warrants issued in connection with private placement  $83,271   $3,273,691 
Common shares issued upon conversion of debt  $433,179   $573,001 
Non-cash cost upon sale of common stock  $-   $79,180 
Adoption of ASU 2020-06, net  $(209,323)  $- 
Beneficial Conversion Feature on convertible debt and restricted common shares  $-   $570,717 

 

The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.

 

 7 

 

ONCOTELIC THERAPEUTICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

 

Description of Business

 

Oncotelic Therapeutics, Inc. (“Oncotelic”), was formed in the State of New York in 1988 as OXiGENE, Inc., was reincorporated in the State of Delaware in 1992, and changed its name to Mateon Therapeutics, Inc. in 2016, and Oncotelic Therapeutics, Inc. in November 2020. Oncotelic conducts business activities through itself and its wholly owned subsidiaries, Oncotelic, Inc., a Delaware corporation, PointR Data, Inc. (“PointR”), a Delaware corporation; Pet2DAO, Inc (“Pet2DAO”), a Delaware corporation and EdgePoint AI, Inc. (“Edgepoint”), a Delaware corporation for which there are non-controlling interests, (Oncotelic, Oncotelic Inc., PointR, Pet2DAO and Edgepoint are collectively called the “Company” or “We”). The Company completed a reverse merger with Oncotelic Inc in April 2019, a merger with PointR in November 2019 and formed Pet@DAO in 2022 and a subsidiary - Edgepoint in February 2020. For more information on these mergers, refer to our 2022 Annual Report on Form 10-K filed with the SEC on April 14, 2023 or our 2022 Annual Report on form 10-K/A filed with the SEC on April 20, 2023.

 

The Company is currently developing OT-101, through its joint venture (“JV”) with Dragon Overseas Capital Limited (“Dragon”) and GMP Biotechnology Limited (“GMP Bio”), both affiliates of Golden Mountain Partners (“GMP”), for various cancers and COVID-19, Artemisinin for COVID-19 and AI technologies for clinical development and manufacturing. The Company is also independently planning to develop OT-101 for certain animal health indications and contemplating using crypto currencies for that platform. The Company has acquired apomorphine for Parkinson’s Disease, erectile dysfunction and female sexual dysfunction. In addition, the Company is evaluating the further development of its product candidates OXi4503 as a treatment for acute myeloid leukemia and myelodysplastic syndromes and CA4P in combination with a checkpoint inhibitor for the treatment of advanced metastatic melanoma.

 

The Company is primarily a cancer immunotherapy company dedicated to the development of first in class self-immunization protocol (“SIP™”) candidates for difficult to treat cancers. The Company’s proprietary SIP™ candidates are expected to offer advantages over other immunotherapies because they do not require extraction of the tumor or isolation of the antigens, and they have the potential for broad-spectrum applicability for multiple cancer types. The Company’s proprietary product candidates have shown promising clinical activity in phase 2 trials for the treatment of gliomas and pancreatic cancers. The Company aims to translate its unique insights, which span more than three decades of original work using RNA therapeutics, into the deployment of antisense as a RNA therapeutic for diseases which are caused by TGF-β overexpression, starting with cancer and expanding to Duchenne Muscular Dystrophy (“DMD”) and others. OT-101, is being developed as a broad-spectrum anti-cancer drug that can also be used in combination with other standard cancer therapies to establish an effective multi-modality treatment strategy for difficult-to-treat cancers. The JV plans to initiate phase 2 and 3 clinical trials for OT-101 in both high-grade glioma and pancreatic cancer, and any other indications that may evolve, for human pharmaceutical needs. The JV will also be sponsoring many investigator-initiated studies for OT-101 for other oncology indications. The Company is evaluating the further development of its product candidates OXi4503 as a treatment for acute myeloid leukemia and myelodysplastic syndromes and CA4P in combination with a checkpoint inhibitor for the treatment of advanced metastatic melanoma. The JV is also developing OT-101 for the various epidemics and pandemics, similar to the current corona virus (“COVID-19”) pandemic. In this connection, the Company entered into an agreement and supplemental agreement with GMP for a total of $1.2 million to render services and was paid for the development of OT-101. The Company is working with the Biomedical Advanced Research and Development Authority to conduct an observational study to evaluate the effects of long Covid-19 and has been provided a grant of up to $0.75 million for the study. In 2020 and 2021, the Company was developing Artemisinin as a potential therapy for COVID-19. Artemisinin, purified from a plant Artemisia annua. For more information on GMP and Artemisinin, refer to our 2022 Annual report on Form 10-K/A filed with the SEC on April 20, 2023.

 

 8 

 

In November 2022, the Company formed a Decentralized autonomous organization (“DAO”) entity, Pet2DAO, Inc. (“Pet2DAO”), as a wholly owned subsidiary. A DAO is an emerging form of legal structure, that has no central governing body, and whose members share a common goal to act in the best interest of the entity. Pet2DAO is a DAO technology company, integrating the strong governance of traditional corporations with the innovative DAO architecture. The Company will look to engage stakeholders, to build value through the DAO, while maintaining the rigor of traditional corporations, including governance, compliance, and accountability through a team of veterans in public companies with innovators in AI, blockchain and Web3. Pet2DAO will initially be looking to develop products for the animal health space. The Company will initially issue regular tokens and non-fungible tokens (“NFT” and cumulatively “Tokens”) of Pet2DAO called PDAO to its employees, shareholders, and key opinion leaders (“KOLs’) and use the Tokens to propose and vote on various animal health related programs. In the future, the Company will evaluate and plan to register these tokens with the SEC to make such Tokens freely tradable at a future point in time.

 

Fundraising

 

Private Placement 2 & JH Darbie Financing

 

In July 2023, the Company entered into a series of subscription agreements with 15 accredited investors which resulted in a conversion of a gross amount of $1.0 million, consisting of 40 notes, under the prior JH Darbie Financing into new debt to the Company. JH Darbie and the Company are parties to a March 2023 placement agent agreement (“Agreement”) pursuant to which JH Darbie has the right to sell/convert a minimum of 10 Units and a maximum of 200 Units on a best-efforts basis. Further, in October 2023, the Company entered into a series of subscription agreements with 27 accredited investors which resulted in a conversion of a gross amount of $1.05 million, consisting of 42 notes, under the prior JH Darbie Financing into new debt to the Company. For more information on the new JH Darbie Financing, refer to Note 8 of these Notes to the Consolidated Financial Statements.

 

J.H. Darbie Financing Notes & Issuance of Oncotelic Warrants

 

In February 2022, the Company and 99 out of 100 of the Investors agreed to extend the maturity date of the notes connected to the Units from March 31, 2022 to March 31, 2023. In addition, the Company issued approximately 33 million warrants to purchase $50,000 of shares of common stock of the Company in connection with agreeing to extend the maturity date by one year. The issuance of the additional warrants resulted in the Company recording an expense of approximately $2.9 million in the Company’s statement of operations during the year ended December 31, 2022. For more information on the JD Darbie financing, refer to Note 7 of these unaudited Notes to the Consolidated Financial Statements.

 

Equity Purchase Agreement

 

In May 2021, the Company entered into an Equity Purchase Agreement (the “EPL”) and Registration Rights Agreement (the “Registration Rights Agreement”) with Peak One Opportunity Fund, L.P. (“Peak One”), pursuant to which the Company shall have the right, but not the obligation, to direct Peak One to purchase up to $10.0 million (the “Maximum Commitment Amount”) in shares of the common stock, par value $0.01 per share (“Common Stock”) in multiple tranches. For more information on the EPL, refer to Note 9 of the Notes to the Consolidated Financial Statements.

 

November/December 2021 and March 2022 Notes

 

In November / December 2021, the Company entered into various Securities Purchase Agreements with Talos Victory Fund, LLC (the (“Talos”), Mast Hill Fund, LP (“Mast”), FirstFire Global Opportunities Fund, LLC (“FirstFire”), Blue Lake Partners, LLC (“Blue Lake”) and Fourth Man, LLC (“Fourth Man”), pursuant to which the Company issued convertible promissory notes in the aggregate principal amount of $0.25 million each, aggregating gross $1.25 million (the “Notes”), and which Notes were convertible into shares of the Company’s common stock, par value $0.01 per share (“Common Stock”). In June 2022, Mast fully converted their November 2021 Note, for which the company issued 4,025,000 shares of Common Stock. In July 2023, the remainder of the principal of approximately $42,000 including accrued and default interest and penalty, was fully converted into 627,538 shares of the Company’s Common Stock.

 

 9 

 

In March 2022, the Company entered into a Securities Purchase Agreement with Fourth Man, pursuant to which the Company issued convertible promissory note in the aggregate principal amount of $0.25 million, which Note is convertible into shares of the Company’s Common Stock. As of September 30, 2023, this note is in default and available for conversion to OTLC shares due to cross default provision contained in November / December 2021 Notes. In October 2023, Fourth Man converted a portion of the March 2022 debt, including interest, default penalty and conversion fee, of approximately $71,000 for 1,025,000 shares of the Company’s Common Stock.

 

For more information on the debt financing of the Company, refer to Note 5 of the Notes to the Consolidated Financial Statements.

 

May 2022 Note

 

In May 2022, the Company entered into a Securities Purchase Agreement with Mast, pursuant to which the Company issued convertible promissory notes in the aggregate principal amount of $0.6 million, which note is convertible into shares of the Company’s Common Stock. As of September 30, 2023, this note is in default and available for conversion to OTLC shares. For more information on the debt financing of the Company, refer to Note 5 of the Notes to the Consolidated Financial Statements.

 

June 2022 Note

 

In June 2022, the Company entered into a Securities Purchase Agreement with Blue Lake, pursuant to which the Company issued convertible promissory notes in the aggregate principal amount of $0.34 million, which note is convertible into shares of the Company’s Common Stock. As of September 30, 2023, this note is in default and available for conversion to OTLC shares. For more information on the debt financing of the Company, refer to Note 5 of the Notes to the Consolidated Financial Statements.

 

GMP Note purchase agreements and unsecured notes

 

In August 2021 the Company, the Company’s Chief Executive Officer (the “CEO”), and GMP executed a letter of intent and a non-binding term sheet (the “Term Sheet”), which Term Sheet included certain binding terms relating to a standstill agreement and the issuance of a convertible promissory note (as more fully described below).

 

Between June 2020 and January 2022, the Company entered into various purchase agreements and promissory notes with GMP, cumulatively totaling $4.5 million.

 

For more information on the GMP debt financing, refer to Note 5 of the unaudited Notes to the Consolidated Financial Statements.

 

Joint Venture with GMP Bio

 

In March 2022, the Company formalized a joint venture (“JV”) with Dragon Overseas Capital Limited (“Dragon”) and GMP Biotechnology Limited (“GMP Bio”), both affiliates of GMP. Although no assurances can be given, the Company and GMP currently intend to conduct an initial public offering of the JV, at a future date, on either the Hong Kong Exchange or other stock exchange.

 

For more information on the JV, refer to Note 6 of the unaudited Notes to the Consolidated Financial Statements.

 

 10 

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Oncotelic, its wholly owned subsidiaries, Oncotelic Inc. and PointR, and our non-controlled interest entity Edgepoint. Intercompany accounts and transactions have been eliminated in consolidation.

 

Basis of Presentation

 

The accompanying consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission including Form 10-Q and Regulation S-X. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly state the operating results for the respective periods. Certain information and footnote disclosures normally present in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been omitted pursuant to such rules and regulations.

 

Liquidity and Going Concern

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred net accumulated losses of approximately $32.8 million since inception of Oncotelic Inc., as the Company’s historical financial statements before the Merger have been replaced with the historical financial statements of Oncotelic Inc. The Company also has a negative working capital of approximately $17.6 million at September 30, 2023, of which approximately $2.6 million contingent liability of issuance of common shares of the Company to PointR shareholders upon achievement of certain milestones in accordance with the PointR Merger Agreement. The Company has negative cash flows from operations for the nine months ended September 30, 2023 of approximately $0.9 million. These conditions raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year from the date of this filing Management expects to incur significantly lower costs and losses in the foreseeable future, as a majority of the costs related with the development of OT-101 will be incurred by the JV, but the Company also recognizes the need to raise capital to remain viable. The accompanying consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.

 

The Company’s long-term plans include continued development of its current pipeline of products, in addition to continue the development of OT-101, which is exclusively out-licensed to the JV and the JV will be responsible for the cash required to support the development in entirety, to generate sufficient revenues, through either technology transfer or product sales, to cover its anticipated expenses. Until the Company is able to generate sufficient revenues from its current pipeline, the Company plans on funding its operations through the sale of equity and/or the issuance of debt, combined with or without warrants or other equity instruments.

 

Although no assurances can be given as to the Company’s ability to deliver on its revenue plans, or that unforeseen expenses may arise, management believes that the potential equity and debt financing or other potential financing will provide the necessary funding for the Company to continue as a going concern. Also, management cannot guarantee any potential debt or equity financing will be available on favorable terms or at all. As such, management does not believe the Company has sufficient cash for 12 months from the date of this report. If adequate funds are not available on acceptable terms, or at all, the Company will need to curtail operations, or cease operations completely.

 

 11 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Use of Estimates

 

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, equity-based transactions and disclosure of contingent liabilities at the date of the financial statements and revenues and expense during the reporting period. Actual results could materially differ from those estimates.

 

The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of the financial statements. Significant estimates include the valuation of goodwill and intangible assets for impairment, deferred tax asset and valuation allowance, and fair value of financial instruments.

 

Cash

 

As of September 30, 2023, and December 31, 2022 the Company held all its cash in banks. The Company considers investments in highly liquid instruments with a maturity of three months or less to be cash equivalents. The Company did not have any cash equivalents as of September 30, 2023 and December 31, 2022, respectively. Restricted cash consists of certificates of deposits held at banks as collateral for various purposes.

 

Debt issuance Costs and Debt discount

 

Issuance costs are specific incremental costs that are (1) paid to third parties and (2) directly attributable to the issuance of a debt or equity instrument. The issuance costs attributable to the initial sale of the instrument are offset against the associated proceeds in the determination of the instrument’s initial net carrying amount.

 

Debt issuance costs and debt discounts are being amortized over the lives of the related financings on a basis that approximates the effective interest method. Costs and discounts are presented as a reduction of the related debt in the accompanying balance sheets if related to the issuance of debt or presented as a reduction of additional paid in capital if related to the issuance of an equity instrument. The Company applies the relative fair value to allocate the issuance costs among freestanding instruments that form part of the same transaction.

 

If the Company amends the terms of its convertible notes, the Company reviews and applies the guidance per ASC 470-60 Troubled debt restructurings and ASC 470-50 Debt-Modifications and Extinguishments, evaluates and concludes whether the terms of the agreements were or were not substantially different as of a particular reporting date and accounts the transaction as a debt modification or a troubled debt restructuring.

 

Fair Value of Financial Instruments

 

The carrying value of cash, accounts payable and accrued expense approximate their fair values based on the short-term maturity of these instruments. As defined in ASC 820, “Fair Value Measurements and Disclosures,” fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement). This fair value measurement framework applies at both initial and subsequent measurement.

 

 12 

 

The three levels of the fair value hierarchy defined by ASC 820 are as follows:

 

Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.
   
Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.
   
Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

 

Investment in equity securities

 

The following table summarizes the cumulative gross unrealized gains and losses and fair values for long-term investments accounted for at fair value under the fair value option, with the unrealized gains and losses reported within earnings on the Condensed Consolidated Statements of Operation as of September 30, 2023 and December 31, 2022:

 

   Initial Book Value   Cumulative
Gross
Unrealized
Gains
   Cumulative
Gross
Unrealized
Losses
   Fair
Value
 
September 30, 2023 and December 30, 2022                    
Investment in GMP Bio (equity securities)  $22,640,519   $-   $-   $22,640,519 
Total  $22,640,519   $-   $-   $22,640,519 

 

The table below sets forth a summary of the recording of the initial value of the long-term value of investment in equity securities of GMP Bio, based on a third-party valuation report, and changes in the fair value of such equity securities, if such change occurs, as a Level 3 fair value as of September 30, 2023 and December 31, 2022:

 

  

September 30,

2023

  

December 31,

2022

 
Balance at January 1, 2023 and 2022  $22,640,519   $- 
Contribution at cost basis   -    5,689,042 
Gain on derecognition of non-financial asset   -    16,591,477 
Change in fair value   -    - 
           
Balance at September 30, 2023 and December 31, 2022  $22,640,519   $22,640,519 

 

 13 

 

Derivative Liability

 

The Company has certain derivative liabilities associated with its 2019 bridge financing Convertible Notes (see Note 5), consisted of conversion feature derivatives at September 30, 2023 and December 31, 2022, are Level 3 fair value measurements.

 

The table below sets forth a summary of the changes in the fair value of the Company’s derivative liabilities classified as Level 3 as of September 30, 2023 and December 31, 2022:

 

   September 30, 2023
Conversion Feature
   December 31, 2022
Conversion Feature
 
Balance at January 1, 2023 and 2022  $198,140   $340,290 
Change in fair value   20,758    (142,150)
           
Balance at September 30, 2023 and December 31, 2022  $218,898   $198,140 

 

As of September 30, 2023, and December 31, 2022, the Company estimated the fair value of the conversion feature derivatives embedded in the convertible debentures based on assumptions used in the Black-Scholes valuation model. The key valuation assumptions used consists, in part, of the price of the Company’s Common Stock, a risk-free interest rate based on the yield of a Treasury note and expected volatility of the Company’s Common Stock all as of the measurement dates. The Company used the following assumptions to estimate fair value of the derivatives as of September 30, 2023 and December 31, 2022:

 

Key Assumptions for fair value of conversions  September 30, 2023   December 31, 2022 
Risk free interest   5.38%    0.17% -4.00%
Market price of share  $0.03   $ 0.05- 0.23 
Life of instrument in years   0.01     0.01-0.33 
Volatility   213.9%    99.80%-116.51%
Dividend yield   0%    0%

 

When the Company changes its valuation inputs for measuring financial liabilities at fair value, either due to changes in current market conditions or other factors, it may need to transfer those liabilities to another level in the hierarchy based on the new inputs used. The Company recognizes these transfers at the end of the reporting period that the transfers occur. For the periods ended September 30, 2023 and December 31, 2022, there were no transfers of financial assets or financial liabilities between the hierarchy levels.

 

The $2,625,000 of contingent consideration, of shares issuable to PointR shareholders, which was recorded and associated with the PointR Merger, is also classified as Level 3 fair value measurements. The Company initially recorded the contingency based on a valuation conducted by a third-party valuation expert. The valuation was based on a probability of the completion of certain milestones by PointR for the shareholders to earn additional shares. The Company evaluated the probability of the earning of the milestones and concluded that the probability of achievement of the milestones had not changed, primarily due to the shifting of focus by the Company to develop AI technologies for the COVID-19 pandemic. As such, the Company did not record any change to the valuation during the nine months ended September 30, 2023 or 2022, respectively.

 

 14 

 

Net Income (Loss) Per Share

 

Basic net income (loss) per common share is computed by dividing the net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share includes the effect of Common Stock equivalents (notes convertible into Common Stock, stock options and warrants) when, under either the treasury or if-converted method, such inclusion in the computation would be dilutive. For the nine months ended September 30, 2023, and the three months ended September 30, 2022, no equivalent shares of the Common Stock were included as the Company had incurred losses during those periods and addition of such stock equivalents in the computation would have been anti-dilutive. During the three months ended September 30, 2023, the Company did not include any dilutive shares of Common Stock equivalents in the calculation of diluted income per share, as the exercise price of the debt instruments was higher than the weighted average price of the Common Stock of the Company as of September 30, 2023. Also, during the nine months ended September 2022, approximately 35.1 million shares of Common Stock equivalents on account of convertible debt, stock options and warrants were included in the calculation of diluted net income (loss).

 

Stock-Based Compensation

 

The Company applies the provisions of ASC 718, Compensation—Stock Compensation (“ASC 718”), which requires the measurement and recognition of compensation expense for all stock-based awards made to employees, including employee stock options, in the statements of operations.

 

For stock options issued to employees, members of the Board of Directors (the “Board”) and consultants for their services, the Company estimates the grant date fair value of each option using the Black-Scholes option pricing model. The use of the Black-Scholes option pricing model requires management to make assumptions with respect to the expected term of the option, the expected volatility of the Common Stock consistent with the expected life of the option, risk-free interest rates and expected dividend yields of the Common Stock. For awards subject to service-based vesting conditions, including those with a graded vesting schedule, the Company recognizes stock-based compensation expense equal to the grant date fair value of stock options on a straight-line basis over the requisite service period, which is generally the vesting term. Forfeitures are recorded as they are incurred as opposed to being estimated at the time of grant and revised.

 

For warrants issued in connection with fund raising activities, the Company estimates the grant date fair value of each warrant using the Black-Scholes pricing model. The use of the Black-Scholes option pricing model requires management to make assumptions with respect to the expected term of the warrant, the expected volatility of the Common Stock consistent with the expected life of the warrant, risk-free interest rates and expected dividend yields of the Common Stock. If the warrants are issued upon termination or cancellation of prior issued warrants, then the Company estimates the grant date fair value of the new warrants using the Black-Scholes pricing model and evaluates whether the new warrants are deemed as equity instruments or liability instruments. If the warrants are deemed to be equity instruments, the Company records stock compensation expense and an addition to additional paid in capital. If, however, the warrants are deemed to be liability instruments, then the fair value is treated as a deemed dividend and credited to additional paid in capital.

 

Impairment of Long-Lived Assets

 

The Company reviews long-lived assets, including definite-lived intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of these assets is determined by comparing the forecasted undiscounted net cash flows of the operation to which the assets relate to the carrying amount. If the operation is determined to be unable to recover the carrying amount of its assets, then these assets are written down first, followed by other long-lived assets of the operation to fair value. Fair value is determined based on discounted cash flows or appraised values, depending on the nature of the assets. For the three and nine months ended September 30, 2023 and 2022, respectively, there were no impairment losses recognized for long-lived assets.

 

Intangible Assets

 

The Company records its intangible assets at cost in accordance with ASC 350, Intangibles – Goodwill and Other. The Company reviews the intangible assets for impairment on an annual basis or if events or changes in circumstances indicate it is more likely than not that they are impaired. These events could include a significant change in the business climate, legal factors, a decline in operating performance, competition, sale or disposition of a significant portion of the business, or other factors. If the review indicates the impairment, an impairment loss would be recorded for the difference of the value recorded and the new value. For the three and nine months ended September 30, 2023 and 2022, respectively, there were no impairment losses recognized for intangible assets. When we sell or contribute properties to unconsolidated arrangements and retain a non-controlling ownership interest in such assets, we recognize the difference between the consideration received and the carrying amount of the asset sold or contributed. For the nine months ended September 30, 2022, we derecognized the intangibles of approximately $0.8 million associated with OT-101 upon the transfer of our non-financial asset as a capital contribution for our 45% ownership in the JV.

 

 15 

 

Goodwill

 

Goodwill represents the excess of the purchase price of acquired business over the estimated fair value of the identifiable net assets acquired. Goodwill is not amortized but is tested for impairment at least once annually, at the reporting unit level or more frequently if events or changes in circumstances indicate that the asset might be impaired. The goodwill impairment test is applied by performing a qualitative assessment before calculating the fair value of the reporting unit. If, on the basis of qualitative factors, it is considered not more likely than not that the fair value of the reporting unit is less than the carrying amount, further testing of goodwill for impairment would not be required. Otherwise, goodwill impairment is tested using a two-step approach.

 

The first step involves comparing the fair value of the reporting unit to its carrying amount. If the fair value of the reporting unit is determined to be greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount is determined to be greater than the fair value, the second step must be completed to measure the amount of impairment, if any. The second step involves calculating the implied fair value of goodwill by deducting the fair value of all tangible and intangible assets, excluding goodwill, of the reporting unit from the fair value of the reporting unit as determined in step one. The implied fair value of the goodwill in this step is compared to the carrying value of goodwill. If the implied fair value of the goodwill is less than the carrying value of the goodwill, an impairment loss equivalent to the difference is recorded. For the three and nine months ended September 30, 2023, we recorded an impairment loss of approximately $6.1 million on our goodwill. No similar impairment loss was recorded on our goodwill was recorded during the three and nine months ended September 30, 2022. For the year ended December 31, 2022 we had recorded an impairment loss of approximately $4.1 million on our goodwill and derecognized the goodwill of approximately $4.8 million associated with OT-101 upon the transfer of our non-financial asset as a capital contribution for our 45% ownership in the JV. For more information on goodwill and impairment, refer to Note 3 to these Notes to the Consolidated Financial Statements.

 

Derivative Financial Instruments Indexed to the Company’s Common Stock

 

We have generally issued derivative financial instruments, such as warrants, in connection with our equity offerings. We evaluate the terms of these derivative financial instruments in order to determine their accounting treatment in our financial statements. Key considerations include whether the financial instruments are freestanding and whether they contain conditional obligations. If the warrants are freestanding, do not contain conditional obligations and meet other classification criteria, we account for the warrants as an equity instrument. However, if the warrants contain conditional obligations, then we account for the warrants as a liability until the conditional obligations are met or are no longer relevant. Because no established market prices exist for the warrants that we issue in connection with our equity offerings, we must estimate the fair value of the warrants, which is as inherently subjective as it is for stock options, and for similar reasons as noted in the stock-based compensation section above. For financial instruments which are accounted for as a liability, we report any changes in their estimated fair values as gains or losses in our Consolidated Statement of Income.

 

Convertible Instruments

 

The Company evaluates and accounts for conversion options embedded in its convertible instruments in accordance with ASC 815 “Derivatives and Hedging”.

 

ASC 815 generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free-standing derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur, and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. Professional standards also provide an exception to this rule when the host instrument is deemed to be conventional as defined under professional standards as “The Meaning of Conventional Convertible Debt Instrument.”

 

 16 

 

The Company accounts for convertible instruments (when it has determined that the embedded conversion options should not be bifurcated from their host instruments) in accordance with ASC 470-20 “Debt – Debt with Conversion and Other Options.” Accordingly, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying Common Stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Original issue discounts under these arrangements are amortized over the term of the related debt to their earliest date of redemption. The Company also records when necessary deemed dividends for the intrinsic value of conversion options embedded in preferred shares based upon the differences between the fair value of the underlying Common Stock at the commitment date of the note transaction and the effective conversion price embedded in the note.

 

ASC 815-40 “Derivatives and Hedging – Contracts in Entity’s Own Equity” provides that, among other things, generally, if an event is not within the entity’s control could or require net cash settlement, then the contract shall be classified as an asset or a liability.

 

Variable Interest Entity (VIE) Accounting

 

The Company evaluates its ownership, contractual relationships and other interests in entities to determine the nature and extent of the interests, whether such interests are variable interests and whether the entities are VIEs in accordance with ASC 810, Consolidations. These evaluations can be complex and involve Management judgment as well as the use of estimates and assumptions based on available historical information, among other factors. Based on these evaluations, if the Company determines that it is the primary beneficiary of a VIE, the entity is consolidated into the financial statements. At September 30, 2023 and December 31, 2022, the Company identified EdgePoint to be the Company’s sole VIE. At September 30, 2023 and December 31, 2022, the Company’s ownership percentage of EdgePoint was 29% and 29%, respectively. The VIE’s net assets were less than $0.1 million at September 30, 2023 and December 31, 2022, respectively.

 

Investments - Equity Method

 

The Company accounts for equity method investments at cost, adjusted for the Company’s share of the investee’s earnings or losses, which are reflected in the consolidated statements of operations. The Company periodically reviews the investments for other than temporary declines in fair value below cost and more frequently when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The Investment in GMP Bio represents the investment into equity securities for which the Company elected the fair value option pursuant to ASC 825-10-15 and subsequent fair value changes in the GMP Bio shares shall be included in the result from other income. Refer to Note 6 to these Notes to the Consolidated Financial Statements.

 

Joint Venture agreement

 

We have equity interest in unconsolidated arrangement that is primarily engaged in the business of drug discovery, development, and commercialization, including but not limited to development and commercialization of TGF-beta therapeutics as well as establishing and operating contract development and manufacturing organization (“CDMO”) facilities and capabilities. The Company first reviews the arrangement to determine if it meets the definition of an accounting joint venture pursuant to ASC 323-10-20. In order to meet the definition of a joint venture, the arrangement must have all of the following characteristics, (i) the arrangement is organized within a separate legal entity, (ii) the entity is under the joint control of the venturers, (iii) the venturers must be able to exercise joint control through their equity investments, (iv) the qualitative characteristics of the entity, including its purpose and design must be consistent with the definition of a joint venture.

 

We consolidate arrangements that are considered to be VIEs where we are the primary beneficiary. We analyze our investments in joint ventures to determine if the joint venture is considered a VIE and would require consolidation. We (i) evaluate the sufficiency of the total equity investment at risk, (ii) review the voting rights and decision-making authority of the equity investment holders as a group and whether there are limited partners (or similar owning entities) that lack substantive participating or kick out rights, guaranteed returns, protection against losses, or capping of residual returns within the group and (iii) establish whether activities within the venture are on behalf of an investor with disproportionately few voting rights in making this VIE determination.

 

 17 

 

To the extent that we own interests in a VIE and we (i) have the power to direct the activities that most significantly impact the economic performance of the VIE and (ii) have the obligation or rights to absorb losses or receive benefits that could potentially be significant to the VIE, then we would be determined to be the primary beneficiary and would consolidate the VIE. To the extent that we own interests in a VIE, then at each reporting period, we re-assess our conclusions as to which, if any, party within the VIE is considered the primary beneficiary.

 

To the extent that our arrangements do not qualify as VIEs, they are consolidated if we control them through majority ownership interests or if we are the managing entity (general partner or managing member) and our partner does not have substantive participating rights. Control is further demonstrated by our ability to unilaterally make significant operating decisions, refinance debt, and sell the assets of the joint venture without the consent of the non-managing entity and the inability of the non-managing entity to remove us from our role as the managing entity.

 

We use the equity method of accounting for those arrangements where we exercise significant influence but do not have control. Under the equity method of accounting, our investment in each arrangement is included on our consolidated balance sheet; however, the assets and liabilities of the joint ventures for which we use the equity method are not included on our consolidated balance sheet.

 

When we sell or contribute properties to unconsolidated arrangements and retain a non-controlling ownership interest in such assets, we recognize the difference between the consideration received and the carrying amount of the asset sold or contributed when its derecognition criteria are met. The equity method investment we retain in such partial sale transactions is noncash consideration and is measured at fair value. As a result, the accounting for a partial sale will result in the recognition of a full gain or loss.

 

When circumstances indicate there may have been a reduction in the value of an equity investment, we evaluate whether the loss in value is other than temporary. If we conclude it is other than temporary, we recognize an impairment charge to reflect the equity investment at fair value.

 

The Company elected the fair value option under the fair value option Subsection of Section 825-10-15 to account for its equity-method investment as the Company believes that the fair value option is most appropriate for a company in the biotechnology industry, The fair value option is more appropriate for companies that are involved in extensive and usually very expensive research and development efforts, which are not appropriately reflected in the market value or reflective of the true value of the development activities of the company.

 

Embedded debt costs in convertible debt instruments

 

In August 2020, the FASB issued “ASU 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40)” (“ASU 2020-06”) which simplifies the accounting for convertible instruments. The guidance removes certain accounting models which separate the embedded conversion features from the host contract for convertible instruments. Either a modified retrospective method of transition or a fully retrospective method of transition was permissible for the adoption of this standard. Update No. 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption was permitted no earlier than the fiscal year beginning after December 15, 2020. The Company has adopted ASU 2020-06 effective January 1, 2023 and has removed the effects of any embedded conversion features from certain of our convertible instruments.

 

Revenue Recognition

 

The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers (Topic 606).

 

Under Topic 606, the Company recognizes revenue when its customers obtain control of the promised good or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. The Company applies the following five-step: (i) identify the contract(s) with a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation(s) in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation.

 

 18 

 

At contract inception, once the contract is determined to be within the scope of Topic 606, the Company identifies the performance obligation(s) in the contract by assessing whether the goods or services promised within each contract are distinct. The Company then recognizes revenue for the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

 

The Company anticipates generating revenues from rendering services to other third-party customers for the development of certain drug products and/or in connection with certain out-licensing agreements. In the case of services rendered for development of the drugs, revenue is recognized upon the achievement of the performance obligations or over time on a straight-line basis over the extended service period. In the case of out-licensing contracts, the Company records revenues either upon achievement of certain pre-defined milestones, when there is no obligation of the Company achieve any performance obligations in connection with the said pre-defined milestones, or upon achievement of the performance obligations if the milestones require the Company to provide the performance obligations.

 

The Company occasionally collects advance payments from customers toward commitments to provide services or performance obligations, in which case the advance payment is recorded as a liability until the obligations are fulfilled and revenue is recognized.

 

Research & Development Costs

 

In accordance with ASC 730-10-25 “Research and Development”, research and development costs are charged to expense as and when incurred.

 

Recent Accounting Pronouncements

 

In August 2020, the FASB issued “ASU 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40)” (“ASU 2020-06”) which simplifies the accounting for convertible instruments. The guidance removes certain accounting models which separate the embedded conversion features from the host contract for convertible instruments. Either a modified retrospective method of transition or a fully retrospective method of transition was permissible for the adoption of this standard. Update No. 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption was permitted no earlier than the fiscal year beginning after December 15, 2020. The Company has adopted ASU 2020-06 effective January 1, 2023 and as of the nine months ended September 30, 2023, the Company recorded approximately $0.5 million as a reduction to the additional paid in capital and added approximately $0.3 million to the opening retained earnings in accordance with the authoritative guidance under ASU 2020-06.

 

All other newly issued but not yet effective accounting pronouncements have been deemed to be not applicable or immaterial to the Company.

 

NOTE 3 - INTANGIBLE ASSETS AND GOODWILL

 

Goodwill from 2019 Reverse Merger with Oncotelic and PointR

 

The Company completed the merger with Oncotelic Inc. (“Merger”) in April 2019. The Company completed the merger with PointR Data Inc (“PointR Merger”) in November 2019. For more details, refer to our 2020 Annual Report on Form 10-K for the year ended December 31, 2020 filed by the Company on April 15, 2021.

 

The Oncotelic merger gave rise to Goodwill of approximately $4.9 million. Upon the non-financial sale of our asset as contribution to our equity method investment, we derecognized the balance of the carrying value of our goodwill of approximately $4.9 million from the Oncotelic Merger in accordance with our policy and authoritative accounting guidance.

 

Further, we added goodwill of $16,182,456 upon the completion of the Merger with PointR.

 

 19 

 

We have one operating segment and reporting unit. Accordingly, our review of goodwill impairment indicators was performed at the entity-wide level. In performing our annual impairment assessment, we determined if we should qualitatively assess whether it was more likely than not the fair value of goodwill was less than its carrying amount (the qualitative impairment test). The factors we considered in the assessment included our market capitalization, general macroeconomic conditions, conditions specific to the industry and market and whether there had been sustained declines in our share price. If we concluded, it was more likely than not, the fair value of the reporting unit was less than its carrying amount, or elected not to use the qualitative impairment test, a quantitative impairment test would be performed.

 

We used, and will continue to use, our market capitalization as an indicator of fair value. While we believe the fair value measurement need not be based solely on the quoted market price of an individual share of our Common Stock, and that we also could consider the impact of a control premium in measuring the fair value of its reporting unit. In the absence of any other valuation metrics, the Company believed using a control premium utilized would not be appropriate under the current circumstances. We also considered some other market comparable’ trends in our stock price, as well as the industry, over a period of two successive quarters and prospective quarter to evaluate whether the fair value of our reporting unit was greater than our carrying amount. As such, we performed a quantitative impairment assessment of goodwill for our single reporting unit at the end of 2022, due to a sustained decline in our market capitalization and an increase in negative economic outlook for biotech markets We estimated and reconciled the fair value of our reporting unit utilizing our market capitalization based on the stock price of our Common Stock as of December 31, 2022. Before completing our goodwill impairment test, we first tested our indefinite-lived intangible asset then our remaining long-lived assets for impairment. We concluded our indefinite-lived intangible assets were not impaired. Based on the market capitalization, we further concluded the fair value of our single reporting unit was less than its carrying value and therefore recognized an impairment charge of approximately $4.1 million during the year ended December 31, 2022. The calculation of the impairment charge included substantial fact-based determinations and estimates.

 

A summary of our goodwill as of September 30, 2023 and December 31, 2022 is shown below:

 

   September 30,   December 31, 
   2023   2022 
Balance at beginning of the year  $12,071,376   $21,062,455 
Less: Derecognition upon recording of gain on non-financial asset   -    (4,880,000)
Less: Goodwill impairment due to market capitalization   (6,083,146)   (4,111,079)
           
Balance at the end of the period  $5,988,230   $12,071,376 

 

In general, the goodwill is tested on an annual impairment date of December 31, unless we observe any further deterioration in our market capitalization, in which case we may, depending on the materiality of the impairment, record an impairment at the end of other reporting periods. Since we observed a significant drop in the stock price of our Common Stock, we assessed that an additional impairment needed to be recorded, solely based on the market capitalization of our stock as of September 30, 2023 as compared to December 31, 2022. As such, the Company concluded that an additional impairment was required to be recorded for the nine months ended September 30, 2023 of approximately $6.1 million. No similar impairment was recorded during the nine months ended September 30, 2022.

 

Assignment and Assumption Agreement with Autotelic, Inc.

 

In April 2018, Oncotelic Inc. entered into an Assignment and Assumption Agreement (the “Assignment Agreement”) with Autotelic Inc., an affiliate company, and Autotelic LLC, an affiliate company, pursuant to which Oncotelic acquired the rights to all intellectual property (“IP”) related to a patented product. As consideration for the Assignment Agreement, Oncotelic Inc. issued 204,798 shares of its Common Stock for a value of $819,191. The Assignment Agreement also provides that Oncotelic Inc. shall be responsible for all costs related to the IP, including development and maintenance, going forward. After the formation of the JV with Dragon, the costs of development and maintenance are now the responsibility of the JV.

 

 20 

 

In-Process Research & Development (“IPR&D”) Summary

 

The IPR&D assets were acquired in the PointR Merger during the year ended December 31, 2019. Since January 2021, the Company has determined that the IPR&D should be reported as an indefinitely lived asset and therefore will evaluate, on an annual basis, for any impairment on the IPR&D and will record an impairment if identified. The balance of IPR&D as of September 30, 2023 and December 31, 2022 was $1,101,760. For more information on the IPR&D, please refer to our 2022 Annual Report on Form 10-K filed with the SEC on April 14, 2023 or our Amended 2022 Annual Report on Form 10-K/A filed with the SEC on April 19, 2023.

 

NOTE 4 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expense consists of the following amounts:

 

   September 30, 2023   December 31, 2022 
         
Accounts payable  $1,667,621   $1,735,764 
Accrued expense   772,191    775,100 
Accounts payable and accrued liabilities  $2,439,812   $2,510,864 

 

    September 30, 2023       December 31, 2022  
                 
Accounts payable – related party   $ 343,673     $ 332,432  

 

 21 

 

NOTE 5 – CONVERTIBLE DEBENTURES, NOTES AND OTHER DEBT

 

As of September 30, 2023 and December 31, 2022, special purchase agreements (SPAs) with convertible debentures and notes, net of debt discount and including accrued interest, if any, consist of the following amounts:

 

   September 30,   December 31, 
   2023   2022 
Convertible debentures          
10% Convertible note payable, due April 23, 2022 – Bridge Investor  $35,556   $35,556 
10% Convertible note payable, due April 23, 2022 – Related Party   164,444    164,444 
10% Convertible note payable, due August 6, 2022 – Bridge Investor   200,000    200,000 
Convertible note payable   400,000    400,000 
Fall 2019 Notes          
5% Convertible note payable – Stephen Boesch   127,708    123,958 
5% Convertible note payable – Related Party   298,108    288,733 
5% Convertible note payable – Dr. Sanjay Jha (Through his family trust)   297,628    288,253 
5% Convertible note payable – CEO, CTO* & CFO – Related Parties   97,534    94,457 
5% Convertible note payable – Bridge Investors   199,822    193,522 
Convertible note payable   1,020,800    988,923 
August 2021 Convertible Notes          
5% Convertible note – Autotelic Inc– Related Party   276,927    267,553 
5% Convertible note – Bridge investors   413,730    399,722 
5% Convertible note – CFO – Related Party   83,080    80,266 
Convertible note payable   773,737    747,541 
JH Darbie PPM Debt          
16% Convertible Notes - Non-related parties   1,305,046    2,441,471 
16% Convertible Notes – CEO – Related Party   125,000    124,547 
Convertible note payable   1,430,046    2,566,018 
JH Darbie PPM 2 Debt          
16% Convertible Notes - Non-related parties   899,099    - 
          
November/December 2021 & March 2022 Notes          
16% Convertible Notes – Accredited Investors   303,393    619,345 
           
Debt for Clinical Trials – GMP          
2% Convertible Notes – GMP   4,727,316    4,659,782 
           
May and June 2022 Note          
16% Convertible Notes – Accredited Investors   1,363,683    885,312 
           
Other Debt          
Short term debt – Bridge investors   210,000    245,000 
Short term debt from CFO   35,050    25,050 
Short term debt – Autotelic Inc– Related Party   1,220,000    120,000 
    1,465,050    390,050 
Total of convertible debentures & notes and other debt  $12,383,124    11,256,971 

 

 22 

 

Bridge Financing

 

Notes with Officer and Bridge Investor

 

In April 2019, the Company entered into a Securities Purchase Agreement (the “Bridge SPA”) with our CEO (the “Trieu Note”) and a Bridge Investor with a commitment to purchase convertible notes in the aggregate of $400,000. For more information on the Bridge SPA, refer to our 2022 Annual Report on Form 10-K/A filed with the SEC on April 19, 2023.

 

The issuance of the Trieu Note resulted in a discount from the beneficial conversion feature totaling $131,555 related to the conversion feature. Total amortization of the OID and the discount totaled $0 and approximately $19,000 for the nine months ended September 30, 2023, and 2022. Total unamortized discount on this note was approximately $0 as of September 30, 2023, and December 31, 2022, respectively.

 

In April 2019, pursuant to the Bridge SPA the Company entered into Convertible Note Tranche #1 (“Tranche #1”) with the Bridge Investor. For more information on Tranche #1, refer to our Annual Report on Form 10-K/A filed with the SEC on April 19, 2023.

 

The issuance of the note resulted in a discount from the beneficial conversion feature totaling $28,445. Total amortization of the OID and discount totaled approximately $0 and approximately $4,400 for the nine months ended September 30, 2023, and 2022, respectively. Total unamortized discount on this note was approximately $0 as of September 30, 2023, and December 31, 2022.

 

On August 6, 2019, pursuant to the Bridge SPA the Company entered into Convertible Note Tranche #2 (“Tranche #2”) with the Bridge Investor. For more information on Tranche #2, refer to our Annual Report on Form 10-K/A filed with the SEC on April 19, 2023.

 

The issuance of the note resulted in a discount from the beneficial conversion feature totaling $175,000. Total amortization of the OID and discount totaled approximately $0 and 11,700 for the nine months ended September 30, 2023, and 2022, respectively. Total unamortized discount on this note was $0 as of September 30, 2023, and December 31, 2022.

 

Fall 2019 Debt Financing

 

In December 2019, the Company closed its Fall 2019 Debt Financing, raising an additional $500,000 bringing the gross proceeds of all debt financings under the Fall 2019 Debt Financing to $1,000,000. The Company entered into those certain Note Purchase Agreements (the “Fall 2019 Note Purchase Agreements”) with certain accredited investors and the officers of the Company for the sale of convertible promissory notes (the “Fall 2019 Notes”). The Company completed the initial closing under the Fall 2019 Note Purchase Agreements in November 2019. The Company issued Fall 2019 Notes in the principal amount of $250,000 to each of Dr. Vuong Trieu, the Company’s Chief Executive Officer, and Stephen Boesch, in exchange for gross proceeds of $500,000. In connection with the second and final closing of the Fall 2019 Debt Financing, the Company issued Fall 2019 Notes to additional investors including $250,000 to Dr. Sanjay Jha, through his family trust, the former CEO of Motorola and COO/President of Qualcomm. The Company also offset certain amounts due to Dr. Vuong Trieu, the Company’s Chief Executive Officer, Chulho Park, then Company’s Chief Technology Officer, and Amit Shah, the Company’s Chief Financial Officer, all related parties as Officers of the Company, and converted such amounts due into the Fall 2019 Notes. $35,000 due to Dr. Vuong Trieu, $27,000 due to Chulho Park and $20,000 due to Amit Shah were converted into debt. The Company also issued the Fall 2019 Notes of $168,000 to two accredited investors.

 

There was no activity during the three and nine months ended September 30, 2023 and 2022. The total unamortized principal amount of the Fall 2019 Notes was $850,000 as of September 30, 2023, and December 31, 2022.

 

 23 

 

All the Fall 2019 Notes provided for interest at the rate of 5% per annum and are unsecured. All amounts outstanding under the Fall 2019 Notes became due and payable upon the approval of the holders of a majority of the principal amount of outstanding Fall 2019 Notes (the “Majority Holders”) on or after (a) September 30, 2023, or (b) the occurrence of an event of default (either, the “Maturity Date”). The Company had the option to prepay the Fall 2019 Notes at any time. Events of default under the Fall 2019 Notes included failure to make payments under the Fall 2019 Notes within thirty (30) days of the date due, failure to observe of the Fall 2019 Note Purchase Agreement or Fall 2019 Notes which is not cured within thirty (30) days of notice of the breach, bankruptcy, or a change in control of the Company (as defined in the Fall 2019 Note Purchase Agreement).

 

The Majority Holders had the right, at any time not more than five (5) days following the Maturity Date, to elect to convert all, and not less than all, of the outstanding accrued and unpaid interest and principal on the Fall 2019 Notes. The Fall 2019 Notes may be converted, at the election of the Majority Holders, either (a) into shares of the Company’s Common Stock at a conversion price of $0.18 per share, or (b) into shares of common stock of the Edgepoint, at a conversion price of $5.00 (based on a $5.0 million pre-money valuation) of Edgepoint and 1,000,000 shares outstanding.

 

Further, the Company recorded a total amount of approximately $10,600 and approximately $32,000 of interest expense on these Fall 2019 Notes for the three and nine months ended September, 30, 2023 and 2022. The total amount outstanding under the Fall 2019 Notes, net of discounts and including accrued interest thereon, as of September 30, 2023, and December 31, 2022, was approximately $1,020,800 and approximately $989,000, respectively.

 

GMP Notes

 

In June 2020, the Company secured $2 million in debt financing, evidenced by a one-year convertible note (the “GMP Note”) from GMP, to conduct a clinical trial evaluating OT-101 against COVID-19 bearing 2% annual interest, and is personally guaranteed by Dr. Vuong Trieu, the Chief Executive Officer of the Company. The GMP Note is convertible into the Company’s Common Stock upon the GMP Note’s maturity of the GMP Note, at the Company’s Common Stock price on the date of conversion with no discount. GMP has waived the default in the maturity of the GMP Note and as such there is no event of default and also agreed to extend the date of maturity of the GMP Note to December 31, 2023. GMP does not have the option to convert prior to the GMP Note’s maturity. Such financing will be utilized solely to fund the clinical trial. The Company’s liability under GMP Note commenced to accrue when GMP first began to pay for services related to the clinical trial to our third-party clinical research organization, up to a maximum of $2 million. GMP has been invoiced by the clinical research organization for the full $2 million as of March 31, 2022, and as such the Company has recognized the liability as a convertible debt.

 

In September 2021, the Company secured a further $1.5 million in debt financing, evidenced by a one-year convertible note (the “GMP Note 2”) from GMP, to fund the same clinical trial evaluating OT-101 against COVID-19 bearing 2% annual interest. The GMP Note is convertible into the Company’s Common Stock upon the GMP Note 2’s maturity one year from the date of the GMP Note 2, at the Company’s Common Stock price on the date of conversion with no discount. GMP has waived the default in the maturity of the GMP Note and as such there is no event of default and also agreed to extend the date of maturity of the GMP Note to December 31, 2023. GMP does not have the option to convert prior to the GMP Note 2’s maturity at the end of one year. Such financing was to be utilized solely to fund the clinical trial. As of September 30, 2023, GMP was invoiced by the clinical research organization for $1.5 million. Till date, GMP has paid the clinical trial organization the $1.0 million.

 

In October 2021, the Company entered into an Unsecured Convertible Note Purchase Agreement (the “October Purchase Agreement”) with GMP, pursuant to which the Company issued a convertible promissory note in the aggregate principal amount of $0.5 million (the “October 2021 Note”), which October 2021 Note is convertible into shares of the Company’s Common Stock. GMP has waived the default in the maturity of the GMP Note and as such there is no event of default and also agreed to extend the date of maturity of the GMP Note to December 31, 2023.

 

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In January 2022, the Company entered into an Unsecured Convertible Note Purchase Agreement (the “January Purchase Agreement”) with GMP, pursuant to which the Company issued a convertible promissory note in the aggregate principal amount of $0.5 million (the “January 2022 Note”), which January 2022 Note is convertible into shares of the Company’s Common Stock. GMP agreed to extend the date of maturity of the January 2022 Note to December 31, 2023.

 

Cumulatively, the GMP Note, GMP Note 2, October 2021 Note and the January 2022 Notes are referred to as the “GMP Notes”.

 

The GMP Notes carry an interest rate of 2% per annum and mature on the earlier of (a) the one-year anniversary of the date of the Purchase Agreement, or (b) the acceleration of the maturity by GMP upon occurrence of an Event of Default (as defined below). All Notes contain a voluntary conversion mechanism whereby GMP may convert the outstanding principal and accrued interest under the terms of all the GMP Notes into shares of Common Stock (the “Conversion Shares”), at the consolidated closing bid price of the Company’s Common Stock on the applicable OTC Market as of the date the Company receives a Notice of Conversion from GMP. Prepayment of the GMP Notes may be made at any time by payment of the outstanding principal amount plus accrued and unpaid interest. The October Note contains customary events of default (each an “Event of Default”). If an Event of Default occurs, at GMP’s election, the outstanding principal amount of the GMP Notes, plus accrued but unpaid interest, will become immediately due and payable in cash. The October Purchase Agreement requires the Company to use of the proceeds received under the October 2021 Note to support the clinical development of OT-101, including payroll and has been made in continuation of the relationship between the Company and GMP.

 

The total principal outstanding on all the GMP notes, inclusive of accrued interest, was approximately $4.7 million as of September 30, 2023, and December 31, 2022, respectively.

 

During the three and nine months ended September 30, 2023, the Company incurred approximately $22,700 and approximately $67,300 of interest expense, respectively. During the three and nine months ended September 30, 2022, the Company incurred approximately $22,700 and approximately $66,500 of interest expense, respectively.

 

August 2021 Notes

 

In August 2021, the Company entered into Note Purchase Agreements with Autotelic - a related party, our CFO - a related party, and certain accredited investors (the “August 2021 investors”), whereby the Company issued four convertible notes in the aggregate principal amount of $698,500 convertible into shares of common stock of the Company for net proceeds of approximately $691,000. The convertible notes carry a five (5%) percent coupon and mature one year from issuance. The majority of the August 2021 investors have the right, but not the obligation, not more than five days following the maturity date, to convert all, but not less than all, the outstanding and unpaid principal plus accrued interest into the Company’s common stock, at a conversion price of $0.18. The August 2021 Note Holders has waived the default in the maturity of the August 2021 Notes and as such there is no event of default and also agreed to extend the date of maturity of the August 2021 Notes to December 31, 2023. The Company determined that the economic characteristics and risks of the embedded conversion option are not clearly and closely related to the economic characteristics and risks of the debt host instrument. Further, the Company determined that the embedded conversion feature meets the definition of a derivative but met the scope exception to the derivative accounting required under ASC 815 for certain contracts involving a reporting entity’s own equity.

 

As of September 30, 2023, and December 31, 2022, the August 2021 convertible notes, inclusive of accrued interest, consist of the following amounts:

 

   September 30,   December 31, 
   2023   2022 
         
Autotelic Related party convertible note, 5% coupon December 2023  $276,927   $267,553 
CFO Related party convertible note, 5% coupon December 2023   83,080    80,266 
Accredited investors convertible note, 5% coupon December 2023   413,730    399,722 
Convertible notes  $773,737   $747,541 

 

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During the three and nine months ended September 30, 2023, the Company recognized approximately $8,700 and approximately $26,000 of interest, respectively.

 

At September 30, 2023, and December 31, 2022, accrued interests on these convertible notes totaled approximately $75,000 and approximately $49,000, respectively.

 

November – December 2021 and March 2022 Financing

 

In November and December 2021, the Company entered into securities purchase agreement with five institutional investors, whereby the Company issued five convertible notes in the aggregate principal amount of $1,250,000 convertible into shares of common stock of the Company. The convertible notes carry a twelve (12%) percent coupon and a default coupon of 16% and mature at the earliest of one year from issuance or upon event of default. Investors has the right at any time following issuance date to convert all or any part of the outstanding and unpaid amount of the note into the Company’s common stock at a conversion price established at a fixed rate of $0.07. The Company granted a total number of 9,615,385 warrants convertible into an equivalent number of the Company common shares at a strike price of $0.13 up to five years after issuance. The Placement agent was also granted a total amount of 961,540 as part of a finder’s fee agreement.

 

Further, in March 2022, the Company entered into a Securities Purchase Agreement with Fourth Man, pursuant to which the Company issued convertible promissory note in the aggregate principal amount of $0.25 million, convertible into shares of common stock of the Company. The convertible notes carry a twelve (12%) percent coupon and a default coupon of 16% and mature at the earliest of one year from issuance or upon event of default. Investors has the right at any time following issuance date to convert all or any part of the outstanding and unpaid amount of the note into the Company’s common stock at a conversion price established at a fixed rate of $0.10. The Company granted a total number of 1,250,000 warrants convertible into an equivalent number of the Company common shares at a strike price of $0.20 up to five years after issuance. The Placement agent was also granted a total amount of 125,000 as part of a finder’s fee agreement.

 

During the nine months ended September 30, 2023, the Company converted the balance of approximately $243,000 of Blue Lake convertible note, inclusive of accrued interest, into 3,466,583 shares of the Company’s Common Stock, and which fully retired the convertible note as of September 30, 2023. Further, during the nine months ended September 30, 2023, the Company fully converted the balance of Fourth Man convertible note of approximately $127,000 into 1,820,395 shares of the Company’s common stock, which fully retired the convertible note as of September 30, 2023.

 

As of September 30, 2023, and December 31, 2022, convertible notes under the November-December 2021 Financing, net of debt discount, consist of the following amounts:

 

   September 30,   December 31, 
   2023   2022 
Blue Lake Partners LLC Convertible note, 16% coupon, December 2021 (In default and inclusive of accrued interest)   -    227,817 
Fourth Man LLC Convertible note, 16% coupon December 2022 (In default and inclusive of accrued interest)   -    112,500 
Convertible notes, gross  $-   $339,687 
Less: Debt discount recorded   -    (500,000)
Amortization debt discount   -    500,000 
Convertible notes, net  $-   $339,687 

 

The Company recognized approximately $0 and approximately $18,300 of interest during the three and nine months ended September 30, 2023, respectively. The Company recognized approximately $150,000 and $0 of interest during the three and nine months ended September 30, 2022, respectively. The balance of accrued interest was $0 and approximately $30,000 as of September 30, 2023, and December 31, 2022, respectively. The Company recognized approximately $0 and approximately $0.7 million of interest expense attributable to the amortization of the debt discount from the original debt discount, deferred financing costs, fair value allocated to the warrants and the beneficial conversion feature as of September 30, 2023, and 2022, respectively.

 

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The Company recorded an initial debt discount of approximately $0.4 million representing the intrinsic value of the conversion option embedded in the convertible debt instrument based upon the difference between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. The Company recognized amortization expense related to the debt discount and debt issuance costs of approximately $0 and $0.5 million for the nine months ended September 30, 2023, and 2022, which is included in interest expense in the consolidated statements of operations.

 

The note included a default amount calculated at 125% of the unpaid principal and accrued interest. As the Company failed to repay the two notes at maturity date, the Company accrued an additional approximately $68,000 resulting from this default feature, which is included in the consolidated balance sheets as of September 30, 2023 and December 31, 2022. The balance of the default feature was approximately $22,500 at September 30, 2023.

 

As of September 30, 2023 and December 31, 2022, Fourth Man convertible note, net of debt discount, consist of the following amounts;

 

   September 30,   December 31, 
   2023   2022 
Fourth Man Convertible note, 12% coupon March 2022 (Inclusive of interest and default provision)  $303,393   $340,959 
Unamortized debt Discount   -    (61,301)
           
Convertible notes, net  $303,393   $279,658 

 

The March 2022 Fourth Man Financing balance was approximately $300,000 and $280,000 as of September 30, 2023 and December 31, 2022. As of September 30, 2023, the balance includes the remaining principal of $210,000, accrued interest of approximately $16,800 and approximately $70,000 of accrued default penalty pursuant to the terms of the underlying agreement. Accrued interest was approximately $17,000 and approximately $23,000 at September 30, 2023 and December 31, 2022, respectively. The Company recognized approximately $17,000 and approximately $25,000 of interest during the three and nine months ended September 30, 2023, respectively. The Company recognized approximately $7,500 and approximately $15,000 of interest during the three and nine months ended September 30, 2022, respectively.

 

The Company recognized approximately $36,000 and approximately $63,700 of interest expense attributable to the amortization of the debt discount from the original deferred financing costs, fair value allocated to the warrants and the beneficial conversion feature (prior to the adoption of ASU 2020-06) during the nine months ended September 30, 2023 and 2022, respectively.

 

As of September 30, 2023, and December 31, 2022, the balance of the unamortized debt discount was $0 and $61,301, respectively. The Company adopted ASU 2020-06 on January 1, 2023, which resulted in the reversal of the original BCF amount to additional paid in capital for $109,349, reversal of the unamortized debt discount related to the BCF for $25,489 with the balance being recorded through retained earnings for $78,460.

 

During the nine months ended September 30, 2023, the Company converted $40,000 in principal and $30,000 in accrued interest into 1,025,000 shares of common stock. The note includes a default amount calculated at 125% of the unpaid principal and accrued interest. As the Company failed to repay the note at maturity date, the Company accrued an additional $70,000 resulting from this default feature. Further, in October 2023, Fourth Man converted a portion of the March 2022 debt, including interest, default penalty and conversion fee, of approximately $71,000 for 1,025,000 shares of the Company’s Common Stock.

 

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May 2022 Mast Financing

 

In May 2022, the Company entered into a securities purchase agreement with one institutional investor, whereby the Company issued one convertible note in the aggregate principal amount of $605,000 convertible into shares of common stock of the Company (“May 2022 Mast Note”). The convertible notes carry a twelve (12%) percent coupon and a default coupon of 16% and mature at the earliest of one year from issuance or upon event of default. Investor has the right at any time following issuance date to convert all or any part of the outstanding and unpaid amount of the note into the Company’s common stock at a conversion price established at a fixed rate of $0.10. The Company granted a total number of 3,025,000 warrants convertible into an equivalent number of the Company common shares at a strike price of $0.20 up to five years after issuance. The Placement agent was also granted a total amount of 302,500 as part of a finder’s fee agreement. Portion of the proceeds will be used to retire some of the November/December 2021 notes. The extinguishment of existing notes resulted in the recognition of approximately $258,100 in loss on extinguishment of debt in the consolidated statement of operations in nine months ended September 30, 2022.

 

As of September 30, 2023 and December 31, 2022, the May 2022 Mast Financing, net of debt discount, consisted of the following amounts:

 

   September 30,   December 31, 
   2023   2022 
         
Mast Hill Convertible note, 16% coupon May 2023, inclusive of accrued interest and penalty  $881,284   $847,000 
Convertible notes, gross  $881,284   $847,000 
Less: Debt discount recorded   (605,000)   (605,000)
Amortization debt discount, net of reversal of original and unamortized BCF   605,000    333,119 
Convertible notes, net  $881,284   $575,119 

 

The Company recognized approximately $104,000 and $72,600 of accrued interest as of September 30, 2023, and December 31, 2022, respectively, which is the guaranteed twelve-month coupon and earned in full at issuance date and additional coupon at the default rate since the May 2022 Mast financing is past maturity and in default as of September 30, 2023. The Company recognized approximately $0 and approximately $146,000 of interest expense attributable to the amortization of the debt discount from the original debt discount, deferred financing costs, fair value allocated to the warrants during the three and nine months ended September 30, 2023, respectively. The Company recognized approximately $196,200 of interest expense attributable to the amortization of the debt discount from the original debt discount, deferred financing costs, fair value allocated to the warrants and the beneficial conversion feature during the nine months ended September 30, 2022.

 

Effective January 1, 2023, the Company adopted ASU 2020-06, which resulted in the reversal of the original BCF amount to additional paid in capital for approximately $0.2 million, a reversal of the unamortized debt discount related to the BCF for approximately $0.1 million, with the balance of approximately $0.1 million being recorded through retained earnings

 

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June 2022 Financing

 

In June 2022, the Company entered into a securities purchase agreement with one institutional investor, whereby the Company issued one convertible note in the aggregate principal amount of $335,000 convertible into shares of common stock of the Company (“June 2022 Blue Lake Note”). The convertible notes carry a twelve (12%) percent coupon and a default coupon of 16% and mature at the earliest of one year from issuance or upon event of default. Investor has the right at any time following issuance date to convert all or any part of the outstanding and unpaid amount of the note into the Company’s common stock at a conversion price established at a fixed rate of $0.10. The Company granted a total number of 837,500 warrants convertible into an equivalent number of the Company common shares at a strike price of $0.20 up to five years after issuance. The Placement agent was also granted a total amount of 83,750 warrants as part of a finder’s fee agreement. Portion of the proceeds will be used to retire some of the November/December 2021 notes.

 

As of September 30, 2023 and December 31, 2022, the June 2022 Blue Lake Note, net of debt discount, consisted of the following amount. No similar amount was outstanding as at December 31, 2022:

 

   September 30,   December 31, 
   2023   2022 
         
Blue Lake Convertible note, 16% coupon June 2023, inclusive of accrued interest  $482,400   $469,000 
Convertible notes, gross  $482,400   $469,000 
Less Debt discount recorded   (332,748)   (332,748)
Amortization debt discount, net of reversal of original and unamortized BCF   332,748    173,941 
Convertible notes, net  $482,400   $310,193 

 

The Company recognized approximately $0 and approximately $62,000 of interest expense attributable to the amortization of the debt discount from the original debt discount, deferred financing costs, fair value allocated to the warrants during the three and nine months ended September 30, 2023, respectively. The Company recognized approximately $90,600 of interest expense attributable to the amortization of the debt discount from the original debt discount, deferred financing costs, fair value allocated to the warrants and BCF (prior to adoption of ASU 2020-06) during the nine months ended September 30, 2022. The Company adopted ASU 2020-06 effective January 1, 2023, which resulted in the reversal of the original BCF amount to additional paid in capital of approximately $0.2 million, reversal of the unamortized debt discount of approximately $0.1 million related to the BCF and the balance of $0.1 million being recorded through retained earnings. As of September 30, 2023, these notes are in default. However, the Company has not received notification of default from the lender. The Company has recorded an estimated default penalty of approximately $94,000.

 

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Other short-term advances

 

As of September 30, 2023 compared to December 31, 2022, other short-term advances consist of the following amounts obtained from various employees and related parties:

 

Other Advances  September 30, 2023   December 31, 2022 
Short term advance from CFO – Related Party  $35,050   $25,050 
Short term advances – bridge investors & others   210,000    245,000 
Short term advances – Autotelic Inc. – Related Party   1,220,000    120,000 
Short term advance  $1,465,050   $390,050 

 

During the year ended December 31, 2021, the Company’s CFO provided short term advances of approximately $45,000. Of that amount, $20,000 was repaid to the CFO in January 2022. In the nine months ended September 30, 2023, the company’s CFO provided additional short-term advance of $10,000. As such approximately $35,000 was outstanding at September 30, 2023.

 

During the year ended December 31, 2021, the CFO provided a total of approximately $120,000, of which $75,000 was converted into the August 2021 Notes and $20,000 was repaid. During the nine months ended September 2023, the CFO provided an additional advance of $10,000. During the year ended December 31, 2021, the Company received approximately $630,000 primarily from two bridge investors, of which $373,500 was converted into the August 2021 Notes, and $20,000 was repaid. During the nine months ended September 2023, an additional $35,000 was repaid to one of the bridge investors. Approximately $210,000 was outstanding as short-term advances from bridge investors as of September 30, 2023.

 

In May 2021, Autotelic provided an additional short-term funding of $250,000 to the Company, which was converted into the August 2021 Notes. Autotelic provided an additional $120,000 short term loan to the company during the year ended December 31, 2022. During the nine months ended September 30, 2023 Autotelic provided $1.1 million in various short-term loans to the Company. As such, $1.2 million was outstanding and payable to Autotelic at September 30, 2023.

 

NOTE 6 - JOINT VENTURE WITH GMP BIO AND AFFILIATES, EQUITY METHOD INVESTMENT

 

On March 31, 2022, the Company entered into (i) a joint venture (the “JV”) agreement with Dragon and GMP Bio, both affiliates of GMP, (and the Company, Dragon and GMP Bio are collectively called the “Parties”) (the “JVA”), (ii) a license agreement for rights to OT-101 (the “US License Agreement”) for the territory within the United States of America (the “US”) with Sapu Holdings, LLC, a subsidiary of GMP Bio and (iii) a license agreement for rights to OT-101 for the rest of the world with GMP Bio (the “Ex-US Rights Agreement”, and the US License Agreement and the Ex-US License Agreement are collectively called the “Agreements”). For more information on the JV, JVA, and Agreements, refer to our 2022 Annual Report on Form 10-K/A filed with the SEC on April 19, 2023.

 

As of the effective date of the formation of the JV, the combined enterprise value of GMP Bio was approximately $50.4 million, comprising of the fair value of the Company’s investment in GMP Bio of approximately $22.7 million and the total original capital contributions by Dragon Overseas of approximately $27.7 million. As of September 30, 2023, the JV had approximately $22.8 million in assets, not including GMP Bio’s capital subscriptions of approximately $19.4 million; recorded approximately $2.2 million in liabilities and incurred approximately $4.5 million in operational expenses for the nine months ended September 30, 2023. While GMP’s fiscal year commences on April 1 and ends on March 31, the Company has reported the operational expenses for the same fiscal period as the Company. The Company elected the fair value option under subsection of Section 825-10-15 to account for its equity-method investment as the Company believes that it the most appropriate method to properly value the Company and record a change in value when and upon conducting a fair value assessment. As of September 30, 2023, the Company does not believe the fair value of the JV has changed and hence has not recorded a change in value.

 

For information on the various notes from GMP, refer to Note 5 – GMP Notes of the Notes to the Consolidated Financial Statements above.

 

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NOTE 7 - PRIVATE PLACEMENT (PPM-1) AND JH DARBIE FINANCING

 

During the period from July 2020 to March 31, 2021, the Company entered into various subscription agreements with certain accredited investors, including the CEO, pursuant to the JH Darbie Financing, whereby the Company issued and sold a total of 100 Units, for total gross proceeds of approximately $5 million, pursuant to the JH Darbie Placement Agreement, with each Unit consisting of:

 

  25,000 shares of Edge Point Common stock for a price of $1.00 per share of Edge Point Common stock.
  One convertible promissory note, convertible up to 25,000 shares of Edge Point Common stock, at a conversion price of $1.00 per share or up to 138,889 shares of the Company’s common stock, at a conversion price of $0.18 per share.
  50,000 warrants to purchase an equivalent number of shares of Edge Point Common stock at $1.00 per share and an equivalent number of shares of the Company’s common stock at $0.20 per share with a three-year expiration date. Either the Edgepoint or the Company’s warrants would be exercised.

 

In July 2023, The Company converted the debt of fifteen (15) accredited investors from the JH Darbie Financing (now referred to as “PPM-1”) into the new subscription agreements under the new financing (“PPM-2”- See Note 8 below), which resulted in conversion of $1.0 million of old debt into new debt to the Company.

 

As of September 30, 2023 and December 31, 2022 funds received under the JH Darbie Financing, net of debt discount, consist of the following amounts: