SILO 10-Q
Silo Pharma, Inc. (SILO)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
or
For the transition period from ________________ to ________________
Commission File Number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
(Address of principal executive offices)
(Registrant’s telephone number, including area code)
| Not applicable | ||
| (Former name, former address and former fiscal year, if changed since last report) |
Securities registered pursuant to Section 12(b) of the Exchange Act: None.
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.
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 registration was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | 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 ☐
As of November 10, 2021,
SILO PHARMA, INC.
FORM 10-Q
SEPTEMBER 30, 2021
TABLE OF CONTENTS
i
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
This Quarterly Report on Form 10-Q contains forward-looking statements which are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements may be identified by such forward-looking terminology as “may,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. Our forward-looking statements are based on a series of expectations, assumptions, estimates and projections about our company, are not guarantees of future results or performance and involve substantial risks and uncertainty. We may not actually achieve the plans, intentions or expectations disclosed in these forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in these forward-looking statements. Our business and our forward-looking statements involve substantial known and unknown risks and uncertainties, including the risks and uncertainties inherent in our statements regarding:
| ● | our ability to obtain additional funds for our operations; |
| ● | our financial performance; |
| ● | risks relating to the timing and costs of clinical trials and the timing and costs of other expenses; |
| ● | risks related to market acceptance of products; |
| ● | intellectual property risks; |
| ● | the impact of government regulation and developments relating to our competitors or our industry; |
| ● | our competitive position; |
| ● | our industry environment; |
| ● | our anticipated financial and operating results, including anticipated sources of revenues; |
| ● | assumptions regarding the size of the available market, benefits of our products, product pricing and timing of product launches; |
| ● | our estimates of our expenses, losses, future revenue and capital requirements, including our needs for additional financing; |
| ● | our ability to attract and retain qualified key management and technical personnel; |
| ● | statements regarding our goals, intensions, plans and expectations, including the introduction of new products and markets; and |
| ● | our cash needs and financing plans. |
All of our forward-looking statements are as of the date of this Quarterly Report on Form 10-Q only. In each case, actual results may differ materially from such forward-looking information. We can give no assurance that such expectations or forward-looking statements will prove to be correct. An occurrence of, or any material adverse change in, one or more of the risk factors or risks and uncertainties referred to in this Quarterly Report on Form 10-Q or included in our other public disclosures or our other periodic reports or other documents or filings filed with or furnished to the U.S. Securities and Exchange Commission (the “SEC”) could materially and adversely affect our business, prospects, financial condition and results of operations. Except as required by law, we do not undertake or plan to update or revise any such forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections or other circumstances affecting such forward-looking statements occurring after the date of this Quarterly Report on Form 10-Q, even if such results, changes or circumstances make it clear that any forward-looking information will not be realized. Any public statements or disclosures by us following this Quarterly Report on Form 10-Q that modify or impact any of the forward-looking statements contained in this Quarterly Report on Form 10-Q will be deemed to modify or supersede such statements in this Quarterly Report on Form 10-Q.
This Quarterly Report on Form 10-Q may include market data and certain industry data and forecasts, which we may obtain from internal company surveys, market research, consultant surveys, publicly available information, reports of governmental agencies and industry publications, articles and surveys. Industry surveys, publications, consultant surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but the accuracy and completeness of such information is not guaranteed. While we believe that such studies and publications are reliable, we have not independently verified market and industry data from third-party sources.
ii
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
SILO PHARMA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Equity investments | ||||||||
| Notes receivable, net | ||||||||
| Prepaid expenses and other current assets - current | ||||||||
| Assets of discontinued operations | - | |||||||
| Total Current Assets | ||||||||
| Note receivable - non-current | - | |||||||
| Prepaid expenses - non-current | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Note payable - current portion | ||||||||
| Deferred revenue - current portion | ||||||||
| Total Current Liabilities | ||||||||
| LONG TERM LIABILITIES: | ||||||||
| Deferred revenue - long-term portion | ||||||||
| Note payable - long-term portion | ||||||||
| Total Long Term Liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitment and Contingencies (see Note 9) | ||||||||
| STOCKHOLDERS’ EQUITY: | ||||||||
| Preferred stock, $ | ||||||||
| Series B convertible preferred stock, $ | ||||||||
| Series C convertible preferred stock, $ | ||||||||
| Common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
See accompanying condensed notes to unaudited consolidated financial statements.
1
SILO PHARMA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| LICENSE FEE REVENUES: | $ | $ | $ | $ | ||||||||||||
| COST OF REVENUES | ||||||||||||||||
| GROSS PROFIT | ||||||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Compensation expense | ||||||||||||||||
| Professional fees | ||||||||||||||||
| Research and development | ||||||||||||||||
| Insurance expense | ||||||||||||||||
| Bad debt expense (recovery) | ( | ) | ( | ) | ||||||||||||
| Selling, general and administrative expenses | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| OPERATING LOSS FROM CONTINUING OPERATIONS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OTHER INCOME (EXPENSE): | ||||||||||||||||
| Interest income | ||||||||||||||||
| Other income | ||||||||||||||||
| Gain on forgiveness of PPP note payable | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest expense - related party | ( | ) | ||||||||||||||
| Loss on debt extinguishment | ( | ) | ||||||||||||||
| Net realized gain on equity investments | ||||||||||||||||
| Net unrealized gain on equity investments | ||||||||||||||||
| Total other income (expense) | ( | ) | ||||||||||||||
| INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES | ( | ) | ( | ) | ||||||||||||
| Provision for income taxes | ( | ) | ( | ) | ||||||||||||
| INCOME (LOSS) FROM CONTINUING OPERATIONS | ( | ) | ( | ) | ||||||||||||
| DISCONTINUED OPERATIONS: | ||||||||||||||||
| Gain from sale of assets of discontinued operations, net of tax | ||||||||||||||||
| Loss from discontinued operations, net of tax | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| LOSS FROM DISCONTINUED OPERATIONS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| NET INCOME (LOSS) | ( | ) | ( | ) | ||||||||||||
| Deemed dividend | ( | ) | ( | ) | ||||||||||||
| NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| NET INCOME (LOSS) PER COMMON SHARE: | ||||||||||||||||
| Basic | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Diluted | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
See accompanying condensed notes to unaudited consolidated financial statements.
2
SILO PHARMA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
For the Nine Months Ended September 30, 2021 and 2020
(Unaudited)
| Series
B Preferred Stock | Series
C Preferred Stock | Common Stock | Additional Paid In | Accumulated | Total Stockholders’ | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Equity (Deficit) | ||||||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||
| Series C preferred stock issued for cash, net of offering cost | ||||||||||||||||||||||||||||||||||||
| Deemed dividend upon issuance of preferred stock | - | - | - | ( | ) | |||||||||||||||||||||||||||||||
| Common stock warrants granted for services | - | - | - | |||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||
| Balance, March 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||
| Issuance of common stock for conversion of preferred stock | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||
| Balance, June 30, 2021 | - | ( | ) | |||||||||||||||||||||||||||||||||
| Net income | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||
| Balance, September 30, 2021 | - | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||
| Series
B Preferred Stock | Series
C Preferred Stock | Common Stock | Additional Paid In | Accumulated | Total Stockholders’ | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Equity (Deficit) | ||||||||||||||||||||||||||||
| Balance, December 31, 2019 | $ | - | - | $ | - | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||
| Balance, March 31, 2020 | $ | - | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||
| Common Stock issued for cash, net of offering cost | - | - | ||||||||||||||||||||||||||||||||||
| Common Stock issued for future services | - | - | - | - | - | |||||||||||||||||||||||||||||||
| Preferred Shares Exchanged for Common Stock | ( | ) | - | - | - | ( | ) | - | - | |||||||||||||||||||||||||||
| Common Stock issued in connection with employment agreement | - | - | - | - | - | |||||||||||||||||||||||||||||||
| Common Stock issued for Exchange of Notes | - | - | - | - | - | |||||||||||||||||||||||||||||||
| Deemed dividend on Preferred Stock Exchange | - | - | - | - | - | - | ( | ) | - | |||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||
| Balance, June 30, 2020 | - | - | - | - | ( | ) | ||||||||||||||||||||||||||||||
| Common Stock issued for conversion of Redeemable Series A Preferred stock | - | - | ||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balance, September 30, 2020 | - | $ | - | - | $ | - | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||
See accompanying condensed notes to unaudited consolidated financial statements.
3
SILO PHARMA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2021 | 2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
| Bad debt (recovery) expense | ( | ) | ||||||
| Stock-based compensation | ||||||||
| Amortization of debt discount to interest expense | ||||||||
| Amortization of prepaid stock-based expense | ||||||||
| Inventory write-down | - | |||||||
| Net realized gain on equity investments | ( | ) | - | |||||
| Net unrealized gain on equity investments | ( | ) | ||||||
| Gain on forgiveness of PPP note payable and accrued interest | ( | ) | - | |||||
| Loss from disposal of assets from discontinued operations | ( | ) | - | |||||
| Loss from debt extinguishment | ||||||||
| Change in operating assets and liabilities: | ||||||||
| Increase in prepaid expenses and other current assets - current | ( | ) | ( | ) | ||||
| Increase in prepaid expenses - non-current | ( | ) | ( | ) | ||||
| (Increase) decrease in assets of discontinued operations | ( | ) | ||||||
| Increase in accounts payable and accrued expenses | ||||||||
| Increase in deferred revenue | ||||||||
| NET CASH USED IN OPERATING ACTIVITIES | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Proceeds from sale of equity investments | - | |||||||
| Collection on note receivable written off prior to 2019 | - | |||||||
| Collection on note receivable | ||||||||
| NET CASH PROVIDED BY INVESTING ACTIVITIES | ||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from note payable - related party | ||||||||
| Proceeds from note payable | ||||||||
| Repayment of note payable - related party | ( | ) | ||||||
| Net proceeds from sale of common stock | ||||||||
| Net proceeds from sale of preferred stock | ||||||||
| Repayment of advance from a related party | ( | ) | ||||||
| Advance from a related party | ||||||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | ||||||||
| NET INCREASE IN CASH AND CASH EQUIVALENTS: | ||||||||
| CASH AND CASH EQUIVALENTS - beginning of period | ||||||||
| CASH AND CASH EQUIVALENTS - end of period | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | $ | $ | ||||||
| Non-cash investing and financing activities: | ||||||||
| Common stock issued for prepaid services | $ | $ | ||||||
| Common stock issued for Exchange of Notes | $ | $ | ||||||
| Common stock issued for conversion of Redeemable Series A Preferred Stock | $ | - | $ | |||||
| Increase in equity investments recorded as deferred revenue pursuant to a patent license agreement | $ | $ | ||||||
| Note receivable issued in connection with asset purchase agreement | $ | $ | - | |||||
See accompanying condensed notes to unaudited consolidated financial statements.
4
SILO PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021 (UNAUDITED)
NOTE 1 – ORGANIZATION AND BUSINESS
Silo Pharma, Inc. (formerly Uppercut Brands, Inc.) (the “Company”) was incorporated in the State of New York on July 13, 2010 under the name Gold Swap, Inc. On January 24, 2013, the Company changed its state of incorporation from New York to Delaware.
The Company is a developmental stage biopharmaceutical company focused on merging traditional therapeutics with psychedelic research. The Company seeks to acquire and/or develop intellectual property or technology rights from leading universities and researchers to treat rare diseases, including the use of psychedelic drugs, such as psilocybin, and the potential benefits they may have in certain cases involving depression, mental health issues and neurological disorders. The Company is focused on merging traditional therapeutics with psychedelic research for people suffering from indications such as depression, post-traumatic stress disorder (“PTSD”), Alzheimer’s, Parkinson’s, and other rare neurological disorders. The Company’s mission is to identify assets to license and fund the research which the Company’s believes will be transformative to the well-being of patients and the health care industry. The Company was engaged in the development of a streetwear apparel brand, NFID (see below).
On October 4, 2013, the Company filed a Form N-54A and elected to become a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, the Company previously elected to be treated for federal income tax purpose as a regulated investment company, (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended, (the “Code”). Through September 29, 2018, the Company met the definition of RIC in accordance with the guidance under Accounting Standards Codification (“ASC”) Topic 946 “Financial Services – Investment Companies”. On September 29, 2018, the Company filed Form N-54C, Notification of Withdrawal of Election to be Subject to Section 55 through 65 of the 1940 Act, as the Company changed the nature of its business so as to cease to be a business development company (See Note 2 – Basis of Presentation). Additionally, since 2017, the Company has been subject to income taxes at corporate tax rates.
On May 21, 2019, the Company filed an amendment to its Certificate of Incorporation with the State of Delaware to change its name from Point Capital, Inc. to Uppercut Brands, Inc. Thereafter, on September 24, 2020, the Company filed an amendment to its Certificate of Incorporation with the State of Delaware to change its name from Uppercut Brands, Inc. to Silo Pharma, Inc.
On April 8, 2020, the Company incorporated a new wholly-owned subsidiary, Silo Pharma Inc., in the State of Florida. The Company has also secured the domain name www.silopharma.com. The Company has been exploring opportunities to expand the Company’s business by seeking to acquire and/or develop intellectual property or technology rights from leading universities and researchers to treat rare diseases, including the use of psychedelic drugs, such as psilocybin, and the potential benefits they may have in certain cases involving depression, mental health issues and neurological disorders. In July 2020, through the Company’s newly formed subsidiary, the Company entered into a commercial evaluation license and option agreement with University of Maryland, Baltimore (“UMB”) (see Note 9) pursuant to which, among other things, UMB granted the Company an exclusive, option to negotiate and obtain an exclusive, sublicensable, royalty-bearing license to with respect to certain technology. The option was extended and exercised on January 13, 2021. On February 12, 2021, the Company entered into a Master License Agreement with UMB (see Note 9). The Company plans to actively pursue the acquisition and/or development of intellectual property or technology rights to treat rare diseases, and to ultimately expand the Company’s business to focus on this new line of business.
On September 30, 2021,
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
Management acknowledges its responsibility for the preparation of the accompanying unaudited condensed consolidated financial statements which reflect all adjustments, consisting of normal recurring and non-recurring adjustments, considered necessary in its opinion for a fair statement of its financial position and the results of its operations for the periods presented. The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (the “U.S. GAAP”) for interim financial information and with the instructions Article 8-03 of Regulation S-X. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. Certain information and note disclosure normally included in financial statements prepared in accordance with U.S. GAAP has been condensed or omitted from these statements pursuant to such accounting principles and, accordingly, they do not include all the information and notes necessary for comprehensive financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the summary of significant accounting policies and notes to the financial statements for the year ended December 31, 2020 included in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 29, 2021.
5
SILO PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021 (UNAUDITED)
In accordance with, ASC 205-20 “Discontinued Operations” establishes that the disposal or abandonment of a component of an entity or a group of components of an entity should be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. As a result, the component’s results of operations have been classified as discontinued operations on a retrospective basis for all periods presented. Accordingly, the results of operations of this component, for all periods, are separately reported as “discontinued operations” on the condensed consolidated statements of operations.
Going Concern
These unaudited condensed consolidated financial
statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities
and commitments in the normal course of business. As reflected in the accompanying unaudited condensed consolidated financial statements,
the Company had a cash used in operations of $
Use of Estimates
The preparation of unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate could change in the near term due to one or more future events. Accordingly, the actual results could differ significantly from estimates. Significant estimates during the nine months ended September 30, 2021 and 2020 include the collectability of notes receivable, the valuation of the Company’s equity investments, estimates for obsolete and slow-moving inventory, estimates of the deemed dividend, valuation allowances for deferred tax assets, the fair value of warrants issued with debt and for services, and the fair value of shares issued for services and in settlements.
Cash and Cash Equivalents
The Company considers all highly liquid investments
with a maturity of three months or less when acquired to be cash equivalents. The Company places its cash with high credit quality financial
institutions. The Company’s accounts at these institutions are insured by the Federal Deposit Insurance Corporation (“FDIC”)
up to $
Notes Receivable
The Company recognizes an allowance for losses on notes receivable in an amount equal to the estimated probable losses net of recoveries. The allowance is based on an analysis of historical bad debt experience, current note receivable aging, and expected future write-offs, as well as an assessment of specific identifiable accounts considered at risk or uncollectible. The expense associated with the allowance for doubtful accounts is recognized as general and administrative expense.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets - current
of $
6
SILO PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021 (UNAUDITED)
Equity Investments, at Fair Value
Realized gain or loss is recognized when an investment is disposed of and is computed as the difference between the Company’s carrying value and the net proceeds received from such disposition. Realized gains and losses on investment transactions are determined by specific identification. Net unrealized appreciation or depreciation is computed as the difference between the fair value of the investment and the cost basis of such investment. Net unrealized gains or losses for equity investments are recognized in operations as the difference between the carrying value at the beginning of the period and the fair value at the end of the period.
Equity Investments, at Cost
Equity investments, at cost are comprised mainly of non-marketable capital stock and stock warrants, are recorded at cost, as adjusted for other than temporary impairment write-downs and are evaluated for impairment periodically.
Revenue Recognition
The Company applies ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). ASC 606 establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance. This standard requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also requires certain additional disclosures.
The Company records interest and dividend income on an accrual basis to the extent that the Company expects to collect such amounts.
For the license and royalty income, revenue is recognized when the Company satisfies the performance obligation based on the related license agreement. Payments received from the licensee that are related to future periods are recorded as deferred revenue to be recognized as revenues over the term of the related license agreement (see Note 9).
Product sales were recognized when the NFID products were shipped to the customer and title was transferred and were recorded net of any discounts or allowances which are separately reported as “discontinued operations” on the condensed consolidated statements of operations.
Cost of Revenues
The primary components of cost of revenues on license fees included the cost of the license fees. Payments made to the licensor that are related to future periods are recorded as prepaid expense to be amortized over the term of the related license agreement (see Note 9).
The primary components of cost of revenues on NFID apparel include the cost of the product, production costs, warehouse storage costs and shipping fees which are separately reported as “discontinued operations” on the condensed consolidated statements of operations.
Stock-based Compensation
Stock-based compensation is accounted for based on the requirements of ASC 718 – “Compensation – Stock Compensation”, which requires recognition in the financial statements of the cost of employee, director, and non-employee services received in exchange for an award of equity instruments over the period the employee, director, or non-employee is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee, director, and non-employee services received in exchange for an award based on the grant-date fair value of the award. The Company has elected to recognize forfeitures as they occur as permitted under Accounting Standards Update (“ASU”) 2016-09 Improvements to Employee Share-Based Payment.
Income Taxes
Deferred income tax assets and liabilities arise from temporary differences between the financial statements and tax basis of assets and liabilities, as measured by the enacted tax rates, which are expected to be in effect when these differences reverse. Deferred tax assets and liabilities are classified as current or non-current, depending upon the classification of the asset or liabilities to which they relate. Deferred tax assets and liabilities not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
The Company follows the provisions of Financial Accounting Standards Board (“FASB”) ASC 740-10, “Uncertainty in Income Taxes”. Certain recognition thresholds must be met before a tax position is recognized in the financial statements. An entity may only recognize or continue to recognize tax positions that meet a “more-likely-than-not” threshold. The Company does not believe it has any uncertain tax positions as of September 30, 2021 and December 31, 2020 that would require either recognition or disclosure in the accompanying unaudited condensed consolidated financial statements.
The Company recognized income tax expense of
$
7
SILO PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021 (UNAUDITED)
Research and development
In accordance with ASC 730-10, “Research
and Development-Overall,” research and development costs are expensed when incurred. During the nine months ended September 30,
2021 and 2020, research and development costs were $
Net Income (Loss) per Common Share
Basic loss per share is computed by dividing net loss allocable to common shareholders by the weighted average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing net income available to common shareholders by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period using the as-if converted method. Potentially dilutive securities which included convertible preferred shares and stock options are excluded from the computation of diluted shares outstanding if they would have an anti-dilutive impact on the Company’s net losses. The following are the potentially dilutive shares for the nine months ended September 30, 2021 and 2020:
| September 30, 2021 | September 30, 2020 | |||||||
| Series A convertible preferred stock | ||||||||
| Series B convertible preferred stock | ||||||||
| Series C convertible preferred stock | ||||||||
| Stock options | ||||||||
| Warrants | ||||||||
The following is a reconciliation of the numerator and denominator used in the basic and diluted earnings per share (“EPS”) calculations.
| Three months ended September 30, 2021 | Three months ended September 30, 2020 | Nine months ended September 30, 2021 | Nine months ended September 30, 2020 | |||||||||||||
| Numerator: | ||||||||||||||||
| Net income (loss) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Denominator: | ||||||||||||||||
| Weighted-average shares of common stock | ||||||||||||||||
| Dilutive effect of convertible instruments | - | - | ||||||||||||||
| Diluted weighted-average of common stock | ||||||||||||||||
| Net income (loss) per common share from: | ||||||||||||||||
| Basic | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Diluted | ( | ) | ( | ) | ||||||||||||
Leases
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. ASU 2016-02 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to recognize a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification.
Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The pronouncement requires a modified retrospective method of adoption and was effective on January 1, 2019, with early adoption permitted. For the Company’s administrative office lease, the Company analyzed if it would be required to record a lease liability and a right-of-use asset on its condensed consolidated balance sheets at fair value upon adoption of ASU 2016-02. The Company has elected not to recognize right-of-use assets and lease liabilities for short-term leases that have a term of 12 months or less.
New Accounting Pronouncements
Accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the Company’s financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.
8
SILO PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021 (UNAUDITED)
NOTE 3 – FAIR VALUE OF FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
The Company follows ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), for assets and liabilities measured at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to existing generally accepted accounting principles that requires the use of fair value measurements, establishes a framework for measuring fair value and expands disclosure about such fair value measurements.
ASC 820 defines fair value as 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. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:
Level 1- Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.
Level 2- Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.
Level 3- Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.
The Company analyzes all financial instruments with features of both liabilities and equity under the FASB’s accounting standard for such instruments. Under this standard, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The carrying amounts reported in the unaudited condensed consolidated balance sheets for cash, prepaid expenses and other current assets, accounts payable and accrued expenses approximate their fair market value based on the short-term maturity of these instruments.
Equity investments, at fair value
The Company accounted for certain equity investments at fair value using level 1, level 2 and level 3 valuations. Assets and liabilities measured at fair value on a recurring basis are as follows at September 30, 2021 and December 31, 2020:
At September 30, 2021 (Unaudited) | At December 31, 2020 | |||||||||||||||||||||||
| Description | Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||
| Equity investments, at fair value | $ | $ | — | $ | $ | $ | ||||||||||||||||||
ASC 825-10 “Financial Instruments”, allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.
At September 30, 2021, equity investments, at fair value consisted of common equity securities of two entities, including AIkido Pharma, Inc. (see Note 9).
Equity investments are carried at fair value
with unrealized gains or losses included in income (expense). Realized gains and losses are determined on a specific identification
basis and are included in other income (expense). The Company reviews equity investments, at fair value for impairment whenever circumstances
and situations change such that there is an indication that the carrying amounts may not be recovered. For the nine months ended
September 30, 2021, we recorded a net realized gain on equity investments of $
The following are the Company’s equity investments, at fair value owned by levels within the fair value hierarchy at September 30, 2021:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Common Stock | $ | $ | — | $ | $ | |||||||||||
| Total Investments | $ | $ | — | $ | $ | |||||||||||
9
SILO PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021 (UNAUDITED)
The following table summarizes activity in the Company’s equity investments, at fair value for the periods presented:
| September
30, 2021 | December
31, 2020 | |||||||
| Balance, beginning of period | $ | $ | ||||||
Additions | ||||||||
| Sales | ( | ) | ||||||
| Unrealized gain | ||||||||
| Balance, end of period | $ | $ | ||||||
At September 30, 2021and December 31, 2020, equity investments, at fair value consisted of the following components:
September
30, | December 31, | |||||||
| Equity investments, at original cost | $ | $ | ||||||
| Gross unrealized appreciation | ||||||||
| Equity investments, at fair market value | $ | $ | ||||||
Equity Investments, at Cost
At September 30, 2021
and December 31, 2020, equity investments, at cost of $
NOTE 4 – DISPOSAL OF THE DISCONTINUED OPERATIONS OF THE NFID BUSINESS
On September 30, 2021, the Company entered into and closed on an Asset
Purchase Agreement (see Note 1) with NFID, LLC, an unrelated party, a Florida limited liability company, whereby the Company sold certain
assets, properties, and rights in connection with its NFID trademark name, logos, domain, and apparel clothing and accessories for a purchase
price of $
ASC 205-20 “Discontinued Operations” establishes that the disposal or abandonment of a component of an entity or a group of components of an entity should be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. As a result, the component’s results of operations have been classified as discontinued operations on a retrospective basis for all periods presented. Accordingly, the results of operations of this component, for all periods, are separately reported as “discontinued operations” on the condensed consolidated statements of operations.
As of September 30, 2021 and December 31, 2020,
assets of discontinued operations amounted $
The following table set forth the selected financial data of the Company’s gain from sale of the NFID business for the three and nine months ended September 30, 2021.
| September 30, 2021 |
||||
| Assets: | ||||
| Current assets: | ||||
| Inventory, net | $ | |||
| Total assets | $ | |||
| Liabilities: | ||||
| Current liabilities: | ||||
| Total liabilities | $ | |||
| Carrying value of NFID business on date of sale | $ | |||
| Total consideration | ( |
|||
| Net gain from sale of NFID business | $ | |||
10
SILO PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021 (UNAUDITED)
The summarized operating result of discontinued operations of the NFID Business included in the Company’s unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2021 and 2020 is as follows:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Product sales, net | $ | $ | $ | $ | ||||||||||||
| Cost of sales | ||||||||||||||||
| Gross profit (loss) | ( |
) | ( |
) | ||||||||||||
| Total operating and other non-operating expenses | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Gain from sale of NFID business | ||||||||||||||||
| Loss from discontinued operations | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
NOTE 5 – NOTES RECEIVABLE
On September 28, 2018, the Company and Blind
Faith Concepts Holdings, Inc. (the “Seller”) executed a two-year promissory note receivable agreement with a principal balance
of $
On November 2, 2018, the Company and Seller entered
into a promissory note agreement (“Promissory Note Agreement”) with a principal balance of $
In December 2019, pursuant to claim purchase
agreements (“Claim Purchase Agreements”), the Company sold its notes receivable and related interest receivable balances
in the aggregate amount of $
During the nine months ended September 30, 2021
and the year ended December 31, 2020, the Company recorded $
On September 30, 2021, the Company executed a
note receivable agreement with NFID, LLC in connection with an Asset Purchase Agreement (see Note 4). The promissory note bears
11
SILO PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021 (UNAUDITED)
As of September 30, 2021 and December 31, 2020, notes receivable, net, consisted of the following:
| September 30, 2021 | December 31, 2020 | |||||||
| Principal amounts of notes receivable | $ | $ | ||||||
| Collections on notes receivables | ( | ) | ( | ) | ||||
| Less: allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Less: notes receivable, net – current portion | ( | ) | ||||||
| Notes receivable – non-current | $ | $ | ||||||
NOTE 6 - NOTE PAYABLE
Paycheck Protection Program Funding
On April 30, 2020, the Company received federal
funding in the amount of $
During the nine months ended September 30,
2021, the Company recognized $
| As of September 30, 2021 | As of December 31, 2020 | |||||||
| Principal amount | $ | $ | ||||||
| Less: current portion | ( | ) | ||||||
| Note payable - long term portion | $ | $ | ||||||
NOTE 7 – STOCKHOLDERS’ EQUITY
Preferred stock
The Company has authorized the issuance of
Certificate of Designation of Series C Convertible Preferred Stock
On February 9, 2021, the Company filed a Certificate
of Designation of Preferences, Rights and Limitations of Series C Convertible Preferred Stock (the “Certificate of Designations”)
with the Delaware Secretary of State, designating
Designation. The Company has designated
Dividends. Holders of Series C Convertible Preferred Stock shall be entitled to receive dividends (on an as-if-converted-to-common-stock basis) in the same form as dividends actually paid on shares of the common stock when, as and if such dividends are paid on shares of the common stock. No other dividends shall be paid on shares of the Series C Convertible Preferred Stock.
12
SILO PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021 (UNAUDITED)
Liquidation. Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, the holders of Series C Convertible Preferred Stock shall be entitled to receive the same amount that a holder of common stock would receive if the Series C Convertible Preferred Stock were fully converted (disregarding any conversion limitations) which amounts shall be paid pari passu with all holders of common stock.
Voting Rights. Except as otherwise provided in the Certificate of Designations or as otherwise required by law, the Series C Convertible Preferred Stock shall have no voting rights. However, as long as any shares of Series C Convertible Preferred Stock are outstanding, the Company shall not, without the affirmative vote of the holders of a majority of the then outstanding shares of the Series C Convertible Preferred Stock, (a) alter or change adversely the powers, preferences or rights given to the Series C Convertible Preferred Stock or alter or amend the Certificate of Designations, (b) amend its Certificate of Incorporation or other charter documents in any manner that adversely affects any rights of the holders of the Series C Convertible Preferred Stock, (c) increase the number of authorized shares of Series C Convertible Preferred Stock, or (d) enter into any agreement with respect to any of the foregoing.
Conversion. Each share of Series C Convertible
Preferred Stock is convertible, at any time and from time to time after the issuance date, at the option of the holder, into such number
of shares of common stock determined by dividing the Series C Stated Value by the Series C Conversion Price. “Series C Conversion
Price” means $
Forced Conversion. Notwithstanding anything herein to the contrary, after the date that the Company’s stockholder approval is obtained and deemed effective, the Company may deliver a written notice to all holders (the “Forced Conversion Notice Date”) to cause each holder to convert all or part of such holder’s Sereis C Convertible Preferred Stock pursuant to Section 6 (“Forced Conversion”), it being agreed that the “Conversion Date” shall be deemed to occur no later than the earlier of (i) two (2) trading days and (ii) the number of trading days comprising the standard settlement period following the Forced Conversion Notice Date; provided, however, a holder shall only be required to convert pursuant to a Forced Conversion to the extent that such conversion would not cause a holder to exceed its beneficial ownership limitation. On March 10, 2021, the Company obtained the stockholders’ approval forcing the conversion of all the Series C Convertible Preferred Stock. On April 12, 2021, the Company notified holders of its Series C Convertible Preferred Stock of its election to force the conversion to its Series C Convertible Preferred Stock into shares of the Company’s common stock (see below).
Exercisability.
Series C Convertible Preferred Stock Financing
On February 9, 2021 (the “Effectiveness
Date”),
The February Warrants are exercisable for a period
of
The Series C Convertible Preferred Stock and the February Warrants each contain a beneficial ownership limitation that restricts each of the investor’s ability to exercise the February Warrants and convert the Series C Convertible Preferred Stock such that the number of shares of the Company common stock held by each of them and their affiliates after such conversion or exercise does not exceed 4.99% (or, at the election of the Investor, 9.99%) of the Company’s then issued and outstanding shares of common stock.
The Series C Purchase Agreement also provides
that until the 18 month anniversary of the Effectiveness Date, in the event of a subsequent financing (except for certain exempt issuances
as provided in the Series C Purchase Agreement) by the Company, each investor will have the right to participate in such subsequent financing
up to an amount equal to the investor’s proportionate share of the subsequent financing based on such investor’s participation
in the offering on the same terms, conditions and price provided for in the subsequent financing up to an amount equal to
13
SILO PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021 (UNAUDITED)
In connection with the offering, the Company
entered into separate registration rights agreements (“Registration Rights Agreements”) with the investors pursuant to which
the Company agreed to undertake to file a registration statement (the “Registration Statement”) to register the resale of
the Registrable Securities (as defined in the Registration Rights Agreement) within ten calendar days following the Effectiveness Date.
The Company agreed to use its best efforts to cause the Registration Statement covering the Registrable Securities to be declared effective
no later than the 60th calendar day following the Effectiveness Date, or in the event of a full review by the Securities
and Exchange Commission, the 90th calendar day following the Effectiveness Date, and to maintain the effectiveness of
the Registration Statement until all of the Registrable Securities have been sold or are otherwise able to be sold pursuant to Rule 144
under the Securities Act of 1933, as amended. If the Company fails to file the Registration Statement or have it declared effective by
the dates set forth above, amongst other things, the Company will be obligated to pay the investors damages in the amount of
In addition,
The net proceeds of the offering are expected to be used for working capital purposes and to further execute on the Company’s existing business.
Conversion of Series C Convertible Preferred Stock
On April 12, 2021, the Company notified holders
of its Series C Convertible Preferred Stock of its election to force the conversion to its Series C Convertible Preferred Stock into
shares of the Company’s common stock pursuant to the Certificate of Designations unless such conversion would cause the holder
to exceed its beneficial ownership limitation pursuant to the Certificate of Designations. On April 14, 2021, the Company converted
Common stock
Increase in Authorized Shares
On March 10, 2021, the Company filed an amendment
to its Certificate of Incorporation with the Secretary of State of Delaware to increase the authorized number of shares of common stock
of the Company from
Stock options
On January 18, 2021, the board of directors (“Board
of Directors” or “Board”) of the Company approved the Silo Pharma, Inc. 2020 Omnibus Equity Incentive Plan (the “Plan”)
to incentivize employees, officers, directors and consultants of the Company and its affiliates.
Stock option activities for the nine months ended September 30, 2021 are summarized as follows:
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
| Balance Outstanding, December 31, 2020 | $ | |||||||||||||||
| Granted/issued | ||||||||||||||||
| Forfeited | ||||||||||||||||
| Balance Outstanding, September 30, 2021 | $ | $ | ||||||||||||||
| Exercisable, September 30, 2021 | $ | $ | ||||||||||||||
14
SILO PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021 (UNAUDITED)
Warrants
Warrant activities for the nine months ended September 30, 2021 are summarized as follows:
| Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
| Balance Outstanding, December 31, 2020 | ||||||||||||||||
| Granted | ||||||||||||||||
| Forfeited | ||||||||||||||||
| Balance Outstanding, September 30, 2021 | $ | $ | ||||||||||||||
| Exercisable, September 30, 2021 | $ | $ | ||||||||||||||
On January 18, 2021, the Company granted warrants
to purchase up to
On February 9, 2021,
NOTE 8 – CONCENTRATIONS
Customer concentration
For the nine months ended September 30, 2021,
one licensee accounted for
Vendor concentrations
For the nine months ended September 30, 2021,
one licensor accounted for
15
SILO PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021 (UNAUDITED)
NOTE 9 – COMMITMENTS AND CONTINGENCIES
Employment Agreement
On April 17, 2020, the Company entered into an
employment agreement (“Employment Agreement”) with the Company’s Chief Executive Officer (“CEO”) pursuant
to which CEO will serve as Chief Executive Officer and Chief Financial Officer of the Company. The term of the Employment Agreement will
continue for a period of one year from the date of execution date thereof and automatically renews for successive one-year periods at
the end of each term until either party delivers written notice of their intent not to review at least six months prior to the expiration
of the then effective term. Pursuant to the terms of the Employment Agreement,
The Employment Agreement may be terminated by either the Company or CEO at any time and for any reason upon 60 days prior written notice. Upon termination of the Employment Agreement, the CEO shall be entitled to (i) any equity award that has vested prior to the termination date, (ii) reimbursement of expenses incurred on or prior to such termination date and (iii) such employee benefits to which the CEO may be entitled as of the termination date (collectively, the “Accrued Amounts”). The Employment Agreement shall also terminate upon CEO’s death or the Company may terminate the CEO’s employment upon his disability (as defined in the Employment Agreement). Upon the termination of the CEO’s employment for death or disability, the CEO shall be entitled to receive the Accrued Amounts. The Employment Agreement also contains covenants prohibiting the CEO from disclosing confidential information with respect to the Company.
Vendor License Agreements
Commercial Evaluation License and Option Agreement with the University of Baltimore, Maryland
Effective as of July 15, 2020, through the Company’s
wholly-owned subsidiary, Silo Pharma, Inc. (see Note 1), the Company entered into a commercial evaluation license and option agreement
with UMB pursuant to which UMB has granted the Company an exclusive, non-sublicensable, non-transferable license to with respect to the
exploration of the potential use of central nervous system-homing peptides in vivo and their use for the investigation and treatment
of multiple sclerosis and other neuroinflammatory pathology. In addition, UMB granted the Company an exclusive, option to negotiate
and obtain an exclusive, sublicensable, royalty-bearing license to with respect to the subject technology. This agreement originally
was set to expire six months from July 15, 2020 but was extended and exercised on January 13, 2021. Both parties may terminate this agreement
within thirty days by giving a written notice. In July 2020, the Company paid the license fee of $
On February 26, 2021, through the Company’s
wholly-subsidiary, Silo Pharma, Inc., the Company entered into a commercial evaluation license and option agreement with UMB pursuant
to which UMB has granted the Company an exclusive, non-sublicensable, non-transferable license to with respect to the exploration of
the potential use of joint-homing peptides for use in the investigation and treatment of arthritogenic processes. In addition, UMB
granted the Company an exclusive, option to negotiate and obtain an exclusive, sublicensable, royalty-bearing license to with respect
to the subject technology. This agreement was to expire six months from February 26, 2021, unless sooner terminated. Both parties may
terminate this agreement within thirty days by giving a written notice. On July 6, 2021, the Company entered into a First Amendment Agreement
with UMB pursuant to which the term of the agreement was extended by 6 months such that the agreement shall terminate on February 25,
2022 unless earlier terminated pursuant to the terms thereof; however, if the Company exercises the option, the agreement will expire
at the end of the negotiation period (as defined in the agreement) or upon execution of a master license agreement, whichever occurs
first. Pursuant to the agreement, the Company paid the license fee of $
16
SILO PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021 (UNAUDITED)
Master License Agreement with the University of Baltimore, Maryland
On February 12, 2021 (the “Master License Agreement Effective Date”), the Company entered into the Master License Agreement (the “Master License Agreement”) with UMB pursuant to which UMB granted the Company an exclusive, worldwide, sublicensable, royalty-bearing license to certain intellectual property (i) to make, have made, use, sell, offer to sell, and import certain licensed products and (ii) to use the invention titled, “Central nervous system-homing peptides in vivo and their use for the investigation and treatment of multiple sclerosis and other neuroinflammatory pathology” and UMB’s confidential information to develop and perform certain licensed processes for the therapeutic treatment of neuroinflammatory disease.
Pursuant to the Master License Agreement,
Additionally,
| (i) | 3% on sales of Licensed Products (as defined in the Master License Agreement) during the applicable calendar year for sales less than $50,000,000; and |
Furthermore, the Company agreed to pay UMB minimum royalty payments, as follows:
| Payment | Year | |||
| $ | ||||
| $ | ||||
| $ | ||||
| $ | ||||
| $ | ||||
Furthermore, the Company agrees to pay milestone payments, as follows:
| Payment | Milestone | |||
| $ | ||||
| $ | ||||
| $ | ||||
| $ | ||||
| $ | ||||
The Company shall pay to UMB a percentage of all sublicense income which is receivable by Company or Company affiliates as follows: (a) 25% of sublicense income which is receivable with respect to any sublicense that is executed before the filing of an NDA (or foreign equivalent) for the first licensed product; and (b) 15% of sublicense income which is receivable with respect to any sublicense that is executed after the filing of an NDA (or foreign equivalent) for the first licensed product.
The Master License Agreement will remain in effect
on a Licensed Product-by-Licensed Product basis and country-by-country basis until the later of: (a) the last patent covered under the
Master License Agreement expires, (b) the expiration of data protection, new chemical entity, orphan drug exclusivity, regulatory exclusivity,
or other legally enforceable market exclusivity, if applicable, or (c)
In connection with the Sublicense Agreement with
Aikido (see below), in April 2021, the Company paid $
17
SILO PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021 (UNAUDITED)
Customer License Agreements
Patent License Agreement with AIkido Pharma Inc.
On January 5, 2021, the Company entered into a patent license agreement (the “Agreement”) with Silo Pharma, Inc., a Florida corporation and wholly-owned subsidiary of the Company (collectively, the “Licensor”) and AIkido Pharma Inc. (“AIkido”), as amended on April 12, 2021, pursuant to which the Licensor granted AIkido an exclusive, worldwide (the “Territory”), sublicensable, royalty-bearing license to certain intellectual property (i) to make, have made, use, provide, import, export, lease, distribute, sell, offer for sale, develop and advertise certain licensed products and (ii) to develop and perform certain licensed processes for the treatment of cancer and symptoms caused by cancer (the “Field of Use”).
In addition, the Agreement also provided that,
if the Licensor exercised the option granted to it pursuant to its commercial evaluation license and option agreement with UMB, effective
as of July 15, 2020, it would grant AIkido a non-exclusive sublicense (the “Right”) to certain UMB patent rights in the field
of neuroinflammatory diseases occurring in patients diagnosed with cancer (the “Field”). Pursuant to the Agreement, AIkido
agreed to pay the Licensor, among other things, (i) a one-time non-refundable cash payment of $
Pursuant to the Agreement, the Company is required
to prepare file, prosecute, and maintain the licensed patents. Unless earlier terminated, the term of the license to the licensed patents
will continue until the expiration or abandonment of all issued patents and filed patent applications within the licensed patents. The
Company may terminate the Agreement upon 30 day written notice if AIkido fails to pay any amounts due and payable to the Company or if
AIkido or any of its affiliates brings a patent challenge against the Company, assists others in bringing a legal or administrative challenge
to the validity, scope, or enforceability of or opposes any of the licensed patents (“Patent Challenge”) against the Company
(except as required under a court order or subpoena). AIkido may terminate the Agreement at any time without cause, and without incurring
any additional penalty, (i) by providing at least 30 days’ prior written notice and paying the Company all amounts due to it through
such termination effective date. Either party may terminate the Agreement for material breaches that have failed to be cured within 60
days after receiving written notice. The Company collected the non-refundable cash payment of $
With respect to a vote of AIkido’s stockholders
to approve a reverse split of its common stock no later than December 31, 2021 only
The Right shall be to the full extent permitted
by and on terms and conditions required by UMB for a term consistent with the term of patent and technology licenses that UMB normally
grants. In the event that the Company exercises its option and executes a license with UMB to the UMB patent rights within 40 days after
the execution of such UMB license, for consideration to be agreed upon and paid by AIkido, which consideration shall in no event exceed
18
SILO PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021 (UNAUDITED)
Sublicense Agreement with AIkido Pharma Inc.
On April 6, 2021 (the “Sublicense Agreement Effective Date”), the Company entered into the Sublicense Agreement with AIkido pursuant to which the Company granted AIkido an exclusive worldwide sublicense to (i) make, have made, use, sell, offer to sell and import the Licensed Products (as defined below) and (ii) in connection therewith to (A) use an invention known as “Central nervous system-homing peptides in vivo and their use for the investigation and treatment of multiple sclerosis and other neuroinflammatory pathology” which was sublicensed to the Company pursuant to the Master License Agreement and (B) practice certain patent rights (“Patent Rights”) for the therapeutic treatment of neuroinflammatory disease in cancer patients. “Licensed Products” means any product, service, or process, the development, making, use, offer for sale, sale, importation, or providing of which: (i) is covered by one or more claims of the Patent Rights; or (ii) contains, comprises, utilizes, incorporates, or is derived from the Invention or any technology disclosed in the Patent Rights.
Pursuant to the Sublicense Agreement, AIkido
agreed to pay us (i) an upfront license fee of $
Sponsored Study and Research Agreements
Investigator-Sponsored Study Agreement with Maastricht University of the Netherlands
On November 1, 2020, the Company entered into
an investigator-sponsored study agreement (the “Study Agreement”) with Maastricht University of the Netherlands. The research
project is a clinical study to examine the effects of repeated low doses of psilocybin and lysergic acid diethylamide on cognitive and
emotional dysfunctions in Parkinson’s disease and to understand its mechanism of action. The Study Agreement shall terminate on
October 31, 2024, unless earlier terminated pursuant to the terms thereof. The Company shall pay a total fee of
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In December 2020,
19
SILO PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021 (UNAUDITED)
Investigator-Sponsored Study Agreement with UMB
On January 5, 2021, the Company entered into
an investigator-sponsored study agreement (the “Sponsored Study Agreement”) with the University of Maryland, Baltimore. The
research project is a clinical study to examine a novel peptide-guided drug delivery approach for the treatment of multiple sclerosis
(“MS”). More specifically, the study is designed to evaluate (1) whether MS-1-displaying liposomes can effectively deliver
dexamethasone to the CNS and (2) whether MS-1-displaying liposomes are superior to plain liposomes, also known as free drug, in inhibiting
the relapses and progression of experimental autoimmune encephalomyelitis. Pursuant to the Sponsored Study Agreement, the research shall
commence on March 1, 2021 and will continue until substantial completion, subject to renewal upon mutual written consent of the parties.
Sponsored Research Agreement with The Regents of the University of California
On June 1, 2021 (the “Effective Date”),
the Company entered into a sponsored research agreement (the “Sponsored Research Agreement”) with The Regents of the University
of California, on behalf of its San Francisco Campus (“UCSF”) pursuant to which UCSF shall conduct a study to examine psilocybin’s
effect on inflammatory activity in humans to accelerate its implementation as a potential treatment for Parkinson’s Disease, chronic
pain, and bipolar disorder. Pursuant to the Agreement, the Company shall pay UCSF a total fee of $
Sponsored Research Agreement with University of Maryland, Baltimore
On July 6, 2021, the Company entered into a sponsored research agreement (the “July 2021 Sponsored Research Agreement”) with UMB pursuant to which UMB shall evaluate the pharmacokinetics of dexamethasone delivered to arthritic rats via liposome. The research pursuant to the July 2021 Sponsored Research Agreement shall commence on September 1, 2021 and will continue until the substantial completion thereof, subject to renewal upon written consent of the parties. The July 2021 Sponsored Research Agreement may be terminated by either party upon 30 days’ prior written notice to the other party. In addition, if either party commits any material breach of or defaults with respect to any terms or conditions of the July 2021 Sponsored Research Agreement and fails to remedy such default or breach within 10 business days after written notice from the other party, the party giving notice may terminate the July 2021 Sponsored Research Agreement as of the date of receipt of such notice by the other party. If the Company terminates the July 2021 Sponsored Research Agreement for any reason other than an uncured material breach by UMB, the Company shall relinquish any and all rights it may have in the Results (as defined in the July 2021 Sponsored Research Agreement) to UMB. In addition, if the July 2021 Sponsored Research Agreement is terminated early, the Company, among other things, will pay all costs incurred and accrued by UMB as of the date of termination.
Pursuant to the terms of the July 2021 Sponsored Research Agreement, UMB granted the Company an option (the “Option”) to negotiate and obtain an exclusive license to any UMB Arising IP (as defined in the July 2021 Sponsored Research Agreement) and UMB’s rights in any Joint Arising IP (as defined in the July 2021 Sponsored Research Agreement) (collectively, the “UMB IP”). The Company may exercise the Option by giving UMB written notice within 60 days after it receives notice from UMB of the UMB IP. Pursuant to the July 2021 Sponsored Research Agreement, the Company shall pay UMB the fees below:
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The Company paid the first payment
of $
20
SILO PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021 (UNAUDITED)
Joint Venture Agreement with Zylö Therapeutics, Inc.
On April 22, 2021 (the “JV Effective Date”), the Company entered into a Joint Venture Agreement (the “JV Agreement”) with Zylö Therapeutics, Inc. (“ZTI”) pursuant to which the parties agreed to form a joint venture entity, to be named Ketamine Joint Venture, LLC (the “Joint Venture”), to, among other things, focus on the clinical development of ketamine using ZTI’s Z-pod™ technology (the “Venture”). Pursuant to the JV Agreement, the Company shall act as the manager (the “Manager”) of the Joint Venture. The Venture shall terminate if the development program does not meet certain specifications and milestones as set forth in the JV Agreement within 30 days of the date set forth in the JV Agreement. Notwithstanding the foregoing, the Manager may, in its sole discretion, terminate the Venture at any time.
Pursuant to the terms of the JV Agreement,
Furthermore, pursuant to the terms of the JV Agreement, ZTI shall grant the Joint Venture a sublicense pursuant to its license agreement (the “License Agreement”) with Albert Einstein College of Medicine dated November 27, 2017, in the event that the Company or a third party makes a request indicating that the patented technology (the “Patented Technology”) licensed to ZTI pursuant to the License Agreement is needed to advance the development of the Joint Venture or it is contemplated or determined that the Patented Technology will be sold. Furthermore, pursuant to the JV Agreement, ZTI granted the Company an exclusive option to enter into a separate joint venture for the clinical development of psilocybin using ZTI’s Z-pod™ technology on the same terms and conditions set forth in the JV Agreement, which option shall expire 24 months after the JV Effective Date.
Amended Service Agreement
On September 10, 2021 (the “Effective Date”),
the Company entered into an Amendment Agreement (the “Amended Service Agreement”) to a certain service agreement dated on
September 8, 2020 with the University of Texas (the “University”) at Austin whereby the University will provide advisory
service and assist the Company on identifying license and sponsored research opportunities for the Company. The Company shall pay the
University $
NOTE 10 – SUBSEQUENT EVENTS
Sponsored Research Agreement with Columbia University
On October 1, 2021,
21
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read together with the unaudited financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and related notes for the year ended December 31, 2020 included in the form 10-K filed with the SEC. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors. We discuss factors that we believe could cause or contribute to these differences below and elsewhere in this Quarterly Report on Form 10-Q, including those factors set forth in the section entitled “Cautionary Note Regarding Forward-Looking Statements and Industry Data” and in the section entitled “Risk Factors” in Part II, Item 1A.
Overview
We are a developmental stage biopharmaceutical company focused on merging traditional therapeutics with psychedelic research. We are committed to developing innovative solutions to address a variety of underserved conditions. In these uncertain times, the mental health of the nation and beyond is being put to the test. More than ever, creative new therapies are needed to address the health challenges of today. Combining our resources with world-class medical research partners, we hope to make significant advances in the medical and psychedelic space.
Rare Disease Therapeutics
We seek to acquire and/or develop intellectual property or technology rights from leading universities and researchers to treat rare diseases, including the use of psychedelic drugs, such as psilocybin, and the potential benefits they may have in certain cases involving depression, mental health issues and neurological disorders. We are focused on merging traditional therapeutics with psychedelic research for people suffering from indications such as depression, post-traumatic stress disorder (“PTSD”), Parkinson’s, and other rare neurological disorders. Our mission is to identify assets to license and fund the research which we believe will be transformative to the well-being of patients and the health care industry.
Psilocybin is considered a serotonergic hallucinogen and is an active ingredient in some species of mushrooms. Recent industry studies using psychedelics, such as psilocybin, have been promising, and we believe there is a large unmet need with many people suffering from depression, mental health issues and neurological disorders. While classified as a Schedule I substance under the Controlled Substances Act (“CSA”), there is an accumulating body of evidence that psilocybin may have beneficial effects on depression and other mental health conditions. Therefore, the U.S. Food and Drug Administration (“FDA”) and U.S. Drug Enforcement Agency (“DEA”) have permitted the use of psilocybin in clinical studies for the treatment of a range of psychiatric conditions.
The potential of psilocybin therapy in mental health conditions has been demonstrated in a number of academic-sponsored studies over the last decade. In these early studies, it was observed that psilocybin therapy provided rapid reductions in depression symptoms after a single high dose, with antidepressant effects lasting for up to at least six months for a number of patients. These studies assessed symptoms related to depression and anxiety through a number of widely used and validated scales. The data generated by these studies suggest that psilocybin is generally well-tolerated and has the potential to treat depression when administered with psychological support.
We have engaged in discussions with a number of world-renowned educational institutions and advisors regarding potential opportunities and have formed a scientific advisory board that is intended to help advise management regarding potential acquisition and development of products.
In addition, as more fully described below, we have entered into a license agreement with the University of Baltimore, Maryland, and have entered into a joint venture with Zylo Therapeutics, Inc., with respect to certain intellectual property and technology that may be used for targeted delivery of potential novel treatments. In addition, we have recently entered into a sponsored research agreement with Columbia University pursuant to which we have been granted an option to license certain patents and inventions relating to the treatment of Alzheimer’s disease and stress-induced affective disorders using Ketamine in combination with certain other compounds.
We plan to actively pursue the acquisition and/or development of intellectual property or technology rights to treat rare diseases, and to ultimately expand our business to focus on this new line of business.
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License Agreements
Vendor License Agreement with the University of Baltimore, Maryland for CNS Homing Peptide
On February 12, 2021, we entered into a Master License Agreement (the “UMB License Agreement”) with the University of Maryland, Baltimore (“UMB”) pursuant to which UMB granted us an exclusive, worldwide, sublicensable, royalty-bearing license to certain intellectual property (i) to make, have made, use, sell, offer to sell, and import certain licensed products and (ii) to use the invention titled, “Central nervous system-homing peptides in vivo and their use for the investigation and treatment of multiple sclerosis and other neuroinflammatory pathology” (the “Invention”) and UMB’s confidential information to develop and perform certain licensed processes for the therapeutic treatment of neuroinflammatory disease. The term of the License Agreement shall commence on the UMB Effective Date and shall continue until the latest of (i) ten years from the date of First Commercial Sale (as defined in the Sublicense Agreement) of the Licensed Product in such country and (ii) the date of expiration of the last to expire claim of the Patent Rights (as defined in the UMB License Agreement) covering such Licensed Product in such country, or (iii) the expiration of data protection, new chemical entity, orphan drug exclusivity, regulatory exclusivity, or other legally enforceable market exclusivity, if applicable, unless terminated earlier pursuant to the terms of the agreement. Pursuant to the UMB License Agreement, we agreed to pay UMB (i) a license fee of $75,000, (ii) certain event-based milestone payments, (iii) royalty payments, depending on net revenues, (iv) minimum royalty payments, and (v) a tiered percentage of sublicense income. The UMB License Agreement will remain in effect until the later of: (a) the last patent covered under the UMB License Agreement expires, (b) the expiration of data protection, new chemical entity, orphan drug exclusivity, regulatory exclusivity, or other legally enforceable market exclusivity, if applicable, or (c) ten years after the first commercial sale of a licensed product in that country, unless earlier terminated in accordance with the provisions of the UMB License Agreement. The term of the UMB License Agreement shall expire 15 year after the effective date in which (a) there were never any patent rights, (b) there was never any data protection, new chemical entity, orphan drug exclusivity, regulatory exclusivity, or other legally enforceable market exclusivity or (c) there was never a first commercial sale of a licensed product.
As described below, the Company has entered into an investigator sponsored research agreement with UMB related to a clinical study to examine a novel peptide-guided drug delivery approach for the treatment of Multiple Sclerosis.
Commercial Evaluation License and Option Agreement with UMB for Joint Homing Peptide
On February 26, 2021, through the Company’s wholly-subsidiary, Silo Pharma, Inc., the Company entered into a commercial evaluation license and option agreement with UMB related to joint-homing peptides for use in the investigation and treatment of arthritogenic processes. Pursuant to which UMB has granted the Company an exclusive, non-sublicensable, non-transferable license to with respect to the exploration of the potential use of joint-homing peptides for use in the investigation and treatment of arthritogenic processes. In addition, UMB granted the Company an exclusive, option to negotiate and obtain an exclusive, sublicensable, royalty-bearing license to with respect to the subject technology. This option under this agreement expires February 25,2022, unless sooner terminated. Both parties may terminate this agreement within thirty days by giving a written notice. Pursuant to the agreement, the Company paid the license fee in the low five-digit figures.
Joint Venture Agreement with Zylö Therapeutics, Inc. for Z-pod™ Technology
On April 22, 2021, the Company entered into a Joint Venture Agreement with Zylö Therapeutics, Inc. (“ZTI”) pursuant to which the parties agreed to form a joint venture entity, to be named Ketamine Joint Venture, LLC, to, among other things, focus on the clinical development of ketamine using ZTI’s Z-pod™ technology. Pursuant to the Joint Venture Agreement, the Company shall act as the manager of the Joint Venture. The Venture shall terminate if the development program does not meet certain specifications and milestones as set forth in the Joint Venture Agreement within 30 days of the date set forth in the Joint Venture Agreement. Notwithstanding the foregoing, the Manager may, in its sole discretion, terminate the Venture at any time. As of June 30, 2021 and as of the current date of this report, the joint venture entity has not been formed yet.
Pursuant to the terms of the Joint Venture Agreement, (A) the Company shall contribute (1) $225,000 and (2) its expertise and the expertise of its science advisory board and (B) ZTI shall contribute (1) certain rights to certain of its patented technology as set forth in the JV Agreement, (2) a license to the know-how and trade secrets with respect to its Z-pod™ technology for the loading and release of ketamine, (3) ketamine to be used for clinical purposes, (4) reasonable use of its facilities and permits and (5) its expertise and know-how. Pursuant to the Joint Venture Agreement, 51% of the interest in the Joint Venture shall initially be owned by the Company and 49% of the interest in the Joint Venture shall initially be owned by ZTI, subject to adjustment in the event of additional contributions by either party. Notwithstanding the foregoing, in no event shall either party own more than 60% of the interest in the Joint Venture.
Furthermore, pursuant to the terms of the JV Agreement, ZTI shall grant the Joint Venture a sublicense pursuant to its license agreement (the “License Agreement”) with Albert Einstein College of Medicine dated November 27, 2017, in the event that the Company or a third party makes a request indicating that the patented technology (the “Patented Technology”) licensed to ZTI pursuant to the License Agreement is needed to advance the development of the Joint Venture or it is contemplated or determined that the Patented Technology will be sold. Furthermore, pursuant to the JV Agreement, ZTI granted the Company an exclusive option to enter into a separate joint venture for the clinical development of psilocybin using ZTI’s Z-pod™ technology on the same terms and conditions set forth in the JV Agreement, which option shall expire 24 months after the JV Effective Date. As of September 30, 2021 and as of the current date of this report, the joint venture entity has not yet been formed.
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Investigator-Sponsored Study Agreements
Sponsored Research Agreement with Columbia University for the Study of Ketamine in Combination with Other Drugs for Treatment of Alzheimer’s and Depression Disorders
Effective as of October 1, 2021, the Company entered into a sponsored research agreement with The Trustees of Columbia University in the City of New York (“Columbia”) pursuant to which Columbia shall conduct two different studies related to all uses of Ketamine or its metabolites in combination with Prucalopride, one of which is related to Alzheimer’s and the other of which is related to Depression, PTSD and Stress Projects. Pursuant to the Columbia Agreement, the Company has agreed to pay a total of approximately $1.4 million to Columbia for the support of the research. Pursuant to the Columbia Agreement, Columbia has granted the Company (i) an exclusive option to obtain and exclusive, compensation bearing worldwide license to the Background Patents and Inventions (as defined) in thew Field, and (ii) a non-exclusive, worldwide license to the Research Information in the Field. The option under this agreement expires the earlier of (i) ninety (90) days after the date of the Company’s receipt of final research report for each specific research proposal or (ii) termination of the research, unless sooner terminated. Both parties may terminate this agreement within thirty days by giving a written notice. Pursuant to the agreement, the Company paid the license fee in the low five-digit figures. The terms of the proposed license include (i) a one-time license fee in the mid five-digit figures, (ii) annual license maintenance fees, (iii) certain event-based milestone payments, (iv) royalty payments, depending on net revenues, (v) minimum royalty payments, and (vi) a percentage of sublicense income.
Sponsored Research Agreement with University of Maryland, Baltimore for the Study of Targeted liposomal drug delivery for rheumatoid arthritis
On July 6, 2021, we entered into a sponsored research agreement (the “July 2021 Sponsored Research Agreement”) with UMB pursuant to which UMB shall evaluate the pharmacokinetics of dexamethasone delivered to arthritic rats via liposome. The research pursuant to the July 2021 Sponsored Research Agreement commenced on September 1, 2021 and will continue until the substantial completion thereof, subject to renewal upon written consent of the parties with a project timeline of twelve months. The July 2021 Sponsored Research Agreement may be terminated by either party upon 30 days’ prior written notice to the other party. In addition, if either party commits any material breach of or defaults with respect to any terms or conditions of the July 2021 Sponsored Research Agreement and fails to remedy such default or breach within 10 business days after written notice from the other party, the party giving notice may terminate the July 2021 Sponsored Research Agreement as of the date of receipt of such notice by the other party. If the Company terminates the July 2021 Sponsored Research Agreement for any reason other than an uncured material breach by UMB, we shall relinquish any and all rights it may have in the Results (as defined in the July 2021 Sponsored Research Agreement) to UMB. In addition, if the July 2021 Sponsored Research Agreement is terminated early, we, among other things, will pay all costs incurred and accrued by UMB as of the date of termination. Pursuant to the terms of the July 2021 Sponsored Research Agreement, UMB granted us an option (the “Option”) to negotiate and obtain an exclusive license to any UMB Arising IP (as defined in the July 2021 Sponsored Research Agreement) and UMB’s rights in any Joint Arising IP (as defined in the July 2021 Sponsored Research Agreement) (collectively, the “UMB IP”). We may exercise the Option by giving UMB written notice within 60 days after it receives notice from UMB of the UMB IP. We shall pay total fees of $276,285 as set forth in the July 2021 Sponsored Research Agreement.
Sponsored Research Agreement with The Regents of the University of California for the Effect of Psilocybin on Inflammation in the Blood
On June 1, 2021, the Company entered into a sponsored research agreement with The Regents of the University of California, on behalf of its San Francisco Campus (“UCSF”) pursuant to which UCSF shall conduct a study to examine psilocybin’s effect on inflammatory activity in humans to accelerate its implementation as a potential treatment for Parkinson’s Disease, chronic pain, and bipolar disorder. The purpose of this is to show what effect psilocybin has on inflammation in the blood. The Company believe that this study will help support the UMB homing peptide study. Pursuant to the Agreement, we shall pay UCSF a total fee of $342,850 to conduct the research over the two-year period. The Agreement shall be effective for a period of two years from the effective date, subject to renewal or earlier termination as set forth in the Sponsored Research Agreement.
Investigator-Sponsored Study Agreement with UMB for CNS Homing Peptide
On January 5, 2021, we entered into an investigator-sponsored study agreement with UMB. The research project is a clinical study to examine a novel peptide-guided drug delivery approach for the treatment of Multiple Sclerosis (“MS”). More specifically, the study is designed to evaluate (1) whether MS-1-displaying liposomes can effectively deliver dexamethasone to the central nervous system and (2) whether MS-1-displaying liposomes are superior to plain liposomes, also known as free drug, in inhibiting the relapses and progression of Experimental Autoimmune Encephalomyelitis. Pursuant to the agreement, the research commenced on March 1, 2021 and will continue until substantial completion, subject to renewal upon mutual written consent of the parties. The total cost under the S investigator-sponsored study agreement shall not exceed $81,474.
Investigator-Sponsored Study Agreement with Maastricht University of the Netherlands
On November 1, 2020, we entered into an investigator-sponsored study agreement with Maastricht University of the Netherlands. The research project is a clinical study to examine the effects of repeated low doses of psilocybin and lysergic acid diethylamide on cognitive and emotional dysfunctions in Parkinson’s disease and to understand its mechanism of action. The agreement shall terminate on October 31, 2024, unless earlier terminated pursuant to the terms thereof. We shall pay a total fee of 433,885 Euros ($507,602 USD) exclusive of value added tax based on a payment schedule set forth in the agreement. In September 2021, we notified Maastricht University of Netherlands for an early termination of this agreement. Maastricht University of Netherlands has not reached the second phase which is to obtain approval from ethical committee. We have no further obligation after the termination.
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Other License Agreements
Customer Patent License Agreement with AIkido Pharma Inc.
On January 5, 2021, we entered into a Patent License Agreement (the “AIkido License Agreement”) with our wholly-owned subsidiary, Silo Pharma, Inc., and AIkido Pharma Inc. (“AIkido”) pursuant to which we granted AIkido an exclusive, worldwide, sublicensable, royalty-bearing license to certain intellectual property (i) to make, have made, use, provide, import, export, lease, distribute, sell, offer for sale, develop and advertise certain licensed products and (ii) to develop and perform certain licensed processes for the treatment of cancer and symptoms caused by cancer. The AIkido License Agreement relates to the rights which we had obtained under the UMB Option Agreement. Pursuant to the AIkido License Agreement, we agreed that if we exercised the UMB Option, we would grant AIkido a non-exclusive sublicense to certain UMB patent rights in the field of neuroinflammatory diseases occurring in patients diagnosed with cancer. The UMB Option was exercised on January 13, 2021. Accordingly, on April 6, 2021, we entered into a sublicense agreement with AIkido pursuant to which we granted AIkido a worldwide exclusive sublicense to our licensed patents under the UMB License Agreement. (See “Sublicense with AIkido Pharma Inc.”).
Customer Sublicense Agreement with AIkido Pharma Inc.
On April 6, 2021 (“Effective Date”), we entered into a sublicense agreement (the “Sublicense Agreement”) with AIkido pursuant to which we granted AIkido an exclusive worldwide sublicense to (i) make, have made, use, sell, offer to sell and import the Licensed Products (as defined below) and (ii) in connection therewith to (A) use the Invention that was sublicensed to us pursuant to the UMB License Agreement and (B) practice certain patent rights as set forth in the Sublicense Agreement (the “Patent Rights”) for the therapeutic treatment of neuroinflammatory disease in cancer patients. “Licensed Products” means any product, service, or process, the development, making, use, offer for sale, sale, importation, or providing of which: (i) is covered by one or more claims of the Patent Rights; or (ii) contains, comprises, utilizes, incorporates, or is derived from the Invention or any technology disclosed in the Patent Rights. Pursuant to the Sublicense Agreement, AIkido shall agree to pay the Company (i) an upfront license fee of $50,000, (ii) the same sales-based royalty payments that we are subject to under the UMB License Agreement and (iii) total milestone payments of up to $1.9 million. The Sublicense Agreement shall continue on a Licensed Product-by-Licensed Product and country-by-country basis until the later of (i) the date of expiration of the last to expire claim of the Patent Rights covering such Licensed Product in such country, (ii) the expiration of data protection, new chemical entity, orphan drug exclusivity, regulatory exclusivity or other legally enforceable market exclusivity, if applicable and (iii) 10 years after the first commercial sale of a Licensed Product in that country, unless terminated earlier pursuant to the terms of the Sublicense Agreement. Furthermore, the Sublicense Agreement shall expire 15 years after the Effective Date with respect to any country in which (i) there were never any Patent Rights, (ii) there was never any data protection, new chemical entity, orphan drug exclusivity, regulatory exclusivity or other legally enforceable market exclusivity with respect to a Licensed Product and (ii) there was never a commercial sale of a Licensed Product, unless such agreement is earlier terminated pursuant to its terms.
Recent Developments
On September 30, 2021, we entered into and closed on an Asset Purchase Agreement with NFID, LLC, a Florida limited liability company, whereby we sold certain assets, properties, and rights related to our NFID brand, consisting of trademarks related to the NFID brand, logos, domain, apparel and accessories for a purchase price of $60,000 in the form of a promissory note. The promissory note bears 8% interest per annum and matures on October 1, 2023. Accordingly, the results of operations of this component, for all periods presented, are separately reported as “discontinued operations” on the condensed consolidated statements of operations.
In September 2021, we received proceeds of $6,736,070 from the sale of our equity investments in DatChat, Inc. and Aikido Pharma, Inc.
Going Concern
Our unaudited financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying unaudited condensed consolidated financial statements, we had cash used in operations of $1,504,145 for the nine months ended September 30, 2021, respectively. Additionally, we had an accumulated deficit of $2,173,891 at September 30, 2021 and have generated minimal revenues under our new business plan. These factors raise substantial doubt about our ability to continue as a going concern for a period of twelve months from the issuance date of this report. Management cannot provide assurance that we will ultimately achieve profitable operations or become cash flow positive or raise additional capital through debt and/or equity financings. We may seek to raise capital through additional debt and/or equity financings to fund our operations in the future. If we are unable to raise additional capital or secure additional lending in the near future to fund our business plan, we may need curtail or cease our operations. Our unaudited condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
COVID-19
The outbreak of the novel Coronavirus (COVID-19) evolved into a global pandemic. The Coronavirus has spread to many regions of the world. The extent to which the Coronavirus impacts the Company’s business and operating results will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning the Coronavirus and the actions to contain the Coronavirus or treat its impact, among others.
As a result of the continuing spread of the Coronavirus, certain aspects of the Company’s business operations may be delayed or subject to interruptions. Specifically, as a result of the shelter-in-place orders and other mandated local travel restrictions, among other things, the research and development activities of certain of the Company’s partners may be affected, which may result in delays to the Company’s clinical trials, and the Company can provide no assurance as to when such trials, if delayed, will resume at this time or the revised timeline to complete trials once resumed.
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Furthermore, site initiation, participant recruitment and enrollment, participant dosing, distribution of clinical trial materials, study monitoring and data analysis may be delayed due to changes in hospital or university policies, federal, state or local regulations, prioritization of hospital resources toward pandemic efforts, or other reasons related to the pandemic. If the Coronavirus continues to spread, some participants and clinical investigators may not be able to comply with clinical trial protocols. For example, quarantines or other travel limitations (whether voluntary or required) may impede participant movement, affect sponsor access to study sites, or interrupt healthcare services, and the Company may be unable to conduct its clinical trials.
Infections and deaths related to the pandemic may disrupt the United States’ healthcare and healthcare regulatory systems. Such disruptions could divert healthcare resources away from, or materially delay U.S. Food and Drug Administration review and/or approval with respect to the Company’s clinical trials. It is unknown how long these disruptions could continue, were they to occur. Any elongation or de-prioritization of the Company’s clinical trials or delay in regulatory review resulting from such disruptions could materially affect the development and study of the Company’s product candidates.
The spread of the Coronavirus, which has caused a broad impact globally, including restrictions on travel and quarantine policies put into place by businesses and governments, may have a material economic effect on the Company’s business. While the potential economic impact brought by and the duration of the pandemic may be difficult to assess or predict, it has already caused, and is likely to result in further, significant disruption of global financial markets, which may negatively impact the Company’s ability to access capital on favorable terms, if at all. In addition, a recession, depression or other sustained adverse market event resulting from the spread of the Coronavirus could materially and adversely affect the Company’s business and the value of its common stock.
The ultimate impact of the current pandemic, or any other health epidemic, is highly uncertain and subject to change. The Company does not yet know the full extent of potential delays or impacts on its business, its clinical trials, its research programs, healthcare systems or the global economy as a whole. However, these effects could have a material impact on the Company’s operations, and the Company will continue to monitor the situation closely.
Equity Investments
At September 30, 2021, equity investments, at fair value consisted of common equity securities of two entities, including Aikido. Equity investments are carried at fair value with unrealized gains or losses included in income (expense). Realized gains and losses are determined on a specific identification basis and are included in other income (expense). We review equity investments, at fair value for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recovered.
At September 30, 2021and December 31, 2020, equity investments, at cost are comprised mainly of non-marketable capital stock and stock warrants, are recorded at cost, as adjusted for other than temporary impairment write-downs and are evaluated for impairment periodically.
Results of Operations
Comparison of Our Results of Operations for the Three and Nine months ended September 30, 2021 and 2020
Results of Operations
The following table summarizes the results of operations for the three months ending September 30, 2021 and 2020 based primarily on the comparative unaudited financial statements, footnotes and related information for the periods identified, and should be read in conjunction with our condensed consolidated financial statements and the notes to those statements that are included elsewhere in this report.
| For the Three Months | For the Nine months | |||||||||||||||
| Ended September 30, | Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenues | $ | 18,025 | $ | - | $ | 53,238 | $ | - | ||||||||
| Cost of sales | 1,459 | - | 3,544 | - | ||||||||||||
| Gross profit | 16,566 | - | 49,694 | - | ||||||||||||
| Operating expenses | 480,508 | 558,893 | 1,851,621 | 1,610,142 | ||||||||||||
| Loss from operations | (463,942 | ) | (558,893 | ) | (1,801,927 | ) | (1,610,142 | ) | ||||||||
| Other income (expense), net | 6,955,513 | 2,425 | 7,040,956 | (455,432 | ) | |||||||||||
| Provision for income taxes | (19,133 | ) | - | (19,133 | ) | - | ||||||||||
| Loss from discontinued operations, net of tax | (87,319 | ) | (77,327 | ) | (227,469 | ) | (182,129 | ) | ||||||||
| Net income (loss) | $ | 6,385,119 | $ | (633,795 | ) | $ | 4,992,427 | $ | (2,247,703 | ) | ||||||
Revenues:
During the nine months ended September 30, 2021, we generated minimal revenues from operations. For the three and nine months ended September 30, 2021, revenues consisted of revenues on licensing fees related to our biopharmaceutical operation of $18,025 and $53,238, respectively, as compared to $0 during the three and nine months ended September 30, 2020. Such revenues are primarily related to the AIkido License and Sublicense Agreement.
Cost of Revenues:
During the three and nine months ended September 30, 2021, cost of revenues on license fees related to our biopharmaceutical operation amounted to $1,459 and $3,544, respectively, as compared to $0 for the three and nine months ended September 30, 2020. The primary components of cost of revenues on license fees include the cost of the license fees primarily related to the UMB License and Sublicense Agreement.
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Operating Expenses:
For the three and nine months ended September 30, 2021 and 2020, total operating expenses consisted of the following:
| For the Three Months | For the Nine months | |||||||||||||||
| Ended September 30, | Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Compensation expense | $ | 54,943 | $ | 37,308 | $ | 222,177 | $ | 717,198 | ||||||||
| Professional fees | 331,419 | 415,409 | 1,273,894 | 757,620 | ||||||||||||
| Research and development | 70,514 | - | 217,962 | - | ||||||||||||
| Insurance expense | 29,014 | 13,578 | 79,735 | 17,560 | ||||||||||||
| Bad debt recovery | (30,000 | ) | 85,000 | (83,500 | ) | 84,000 | ||||||||||
| Selling, general and administrative expenses | 24,618 | 7,598 | 141,353 | 76,088 | ||||||||||||
| Total operating expenses | $ | 480,508 | $ | 558,893 | $ | 1,851,621 | $ | 1,610,142 | ||||||||
| ● | Compensation expense: |
For the three months ended September 30, 2021, compensation expense increased by $17,635, or 47%, as compared to the three months ended September 30, 2020. This increase was primarily attributable to the increase of our Chief Executive Officer’s compensation and related benefits expense of $16,135.
For the nine months ended September 30, 2021, compensation expense decreased by $495,021, or 69%, as compared to the nine months ended September 30, 2020. This decrease was primarily attributable to a decrease in stock-based compensation related to the issuance of stock to our chief executive officer for his employment agreement of $610,475 in 2020 offset by an increase of our Chief Executive Officer’s compensation and related benefits expense of $49,454, increase in compensation expense for directors of $4,500 and bonuses paid to our Chief Executive Officer and directors of an aggregate amount of $61,500.
| ● | Professional fees: |
For the three months ended September 30, 2021, professional fees decreased by $83,990 or 20%, as compared to the three months ended September 30, 2020. The decrease was primarily attributable to a decrease in stock-based consulting fees of $242,983 related to the issuance of shares to consultants for business advisory and strategic planning services and decrease legal fees of $42,187 offset by increase in other consulting fees of $139,678 for general business advisory and strategic planning services, increase in accounting fees of $6,002 and an increase in investor relation fees of $55,500.
For the nine months ended September 30, 2021, professional fees increased by $516,274 or 68%, as compared to the nine months ended September 30, 2020. The increase was primarily attributable to an increase in stock-based legal fees of $83,728, an increase legal fees of $75,311, an increase investor relation fees of $226,795, and an increase in other consulting fees of $467,012, increase in accounting fees of $15,746 offset by decrease in stock-based consulting fees of $352,318 related to the issuance of shares to consultants for business advisory and strategic planning services.
| ● | Research and development: |
For the three months ended September 30, 2021 and 2020, the Company incurred $70,514 and $0, respectively, in research and development costs in connection with the Investigator-sponsored Study Agreement with Maastricht University, UCSF, and UMB.
For the nine months ended September 30, 2021 and 2020, the Company incurred $217,962 and $0, respectively, in research and development costs in connection with the Investigator-sponsored Study Agreement with Maastricht University, UCSF, and UMB.
| ● | Insurance expense: |
For the three months ended September 30, 2021, insurance expense increased by $15,436, or an increase of 114%, as compared to $13,578 for the three months ended September 30, 2020. This increase was a result of increase in the cost of renewal of certain insurance policies.
For the nine months ended September 30, 2021, insurance expense increased by $62,175, or an increase of 354%, as compared to $17,560 for the nine months ended September 30, 2020. This increase was a result of increase in the cost of renewal of certain insurance policies.
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| ● | Bad debt recovery: |
For the three months ended September 30, 2021 and 2020, we recorded bad debt recovery (expense) of $30,000 and $(85,000), respectively. We recorded bad debt recovery from the collection of a previously written off note receivable deemed uncollectible.
For the nine months ended September 30, 2021 and 2020, we recorded bad debt recovery (expense) of $83,500 and ($84,000), respectively. We recorded bad debt recovery from the collection of a previously written off notes receivable deemed uncollectible.
| ● | Selling, general and administrative expenses: |
Selling, general and administrative expenses consist of advertising and promotion, patent related expenses, transfer agent fees, custodian fees, bank service charges, travel, and other fees and expenses. For the three months ended September 30, 2021, general and administrative expenses increased by $17,020, or 224%, as compared to the three months ended September 30, 2020. For the nine months ended September 30, 2021, general and administrative expenses increased by $107,589, or 319%, as compared to the nine months ended September 30, 2020. The increase in selling, general and administrative expenses was primarily attributed to an increase in patent related expenses, EDGAR filing fees, annual board meeting expenses, public company fees, and other expenses related to our new business operations.
Loss from Continuing Operations:
For the three months ended September 30, 2021 and 2020, loss from continuing operations amounted to $463,942 and $558,893, respectively, a decrease of $94,951, or 17%. The decrease was primarily a result of the changes in operating expenses discussed above. For the nine months ended September 30, 2021 and 2020, loss from continuing operations amounted to $1,801,927 and $1,610,142, respectively, an increase of $191,785, or 12%. The increase was primarily a result of the changes in operating expenses discussed above.
Other (Expenses) Income:
For the three months ended September 30, 2021, other income amounted to $6,955,513 as compared to other income of $2,425 for the three months ended September 30, 2020, an increase of $6,953,088. For the nine months ended September 30, 2021, other income amounted to $7,040,956 as compared to other expenses of $455,432 for the nine months ended September 30, 2020, an increase of $7,496,388.
| ● | Interest income: |
For the three and nine months ended September 30, 2020, we earned interest income of $2,818 and $8,788, respectively, primarily resulting from interest earned on notes receivable as compared to $0 for both periods in 2021. The decrease was attributable to the decrease in income-earning notes receivable as a result of an allowance established in 2020, ceasing accrual of interest and collections on some principal amounts of notes receivables.
| ● | Gain on forgiveness of PPP note payable: |
For the three and nine months ended September 30, 2021, we recorded gain on forgiveness of PPP note payable of $0 and $19,082, respectively. The increase was attributable to the forgiveness of the principal and accrued interest under the PPP loan by the Small Business Administration.
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| ● | Interest expense: |
During the three and nine months ended September 30, 2021, we incurred interest expense of $483 and $2,872, respectively, primarily related to our PPP loan. During the three and nine months ended September 30, 2020, we incurred interest expense of $393 and $268,996, respectively, primarily related to the increase in borrowings under convertible debt agreements which included amortization of debt discount to interest expense of $268,125.
| ● | Net change in unrealized gain on investments: |
During the three and nine months ended September 30, 2021, we recorded an unrealized gain on equity investments of $300,876 and $369,626, respectively, attributable to our analysis of the fair value of our investments in Aikido and Home Bistro, Inc. as compared to $0 for the three and nine months ended September 30, 2020.
| ● | Net change in realized gain on investments: |
During the three and nine months ended September 30, 2021, we recorded a realized gain on equity investments of $6,655,120, attributable to the sale of our investments in Aikido and DatChat, Inc. as compared to $0 for the three and nine months ended September 30, 2020.
| ● | Loss on debt extinguishment: |
During the three and nine months ended September 30, 2020, we recorded loss on debt extinguishment of $198,000 due to the exchange of the convertible notes into common stock pursuant to Exchange Agreements. We did not have such loss during the 2021 period.
Loss from Discontinued Operations:
On September 30, 2021, we entered into an Asset Purchase Agreement with NFID, LLC, a Florida limited liability company, whereby the Buyer purchased from the Company certain assets, properties, and rights in connection with the Company’s NFID trademark name, logos, domain, and apparel clothing and accessories for a purchase price of $60,000 in the form of a promissory note amounting to $60,000. The promissory note bears 8% interest per annum and matures on October 1, 2023. Accordingly, the results of operations of this component, for all periods, are separately reported as “discontinued operations” on the condensed consolidated statements of operations
The following table set forth the selected financial data of the Company’s gain from sale of the NFID business for the three and nine months ended September 30, 2021.
| September 30, 2021 | ||||
| Assets: | ||||
| Current assets: | ||||
| Inventory, net | $ | 58,447 | ||
| Total assets | $ | 58,447 | ||
| Liabilities: | ||||
| Current liabilities: | ||||
| Total liabilities | $ | - | ||
| Carrying value of NFID business on date of sale | $ | 58,447 | ||
| Total consideration | (60,000 | ) | ||
| Net gain from sale of NFID business | $ | 1,553 | ||
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The summarized operating result of discontinued operations of the NFID Business included in the Company’s unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2021 and 2020 is as follows:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Product sales, net | $ | 39,236 | $ | 16,285 | $ | 119,541 | $ | 18,795 | ||||||||
| Cost of sales | 30,637 | 29,450 | 98,998 | 30,866 | ||||||||||||
| Gross profit (loss) | 8,599 | (13,165 | ) | 20,543 | (12,071 | ) | ||||||||||
| Total operating and other non-operating expenses | (97,471 | ) | (64,162 | ) | (249,565 | ) | (170,058 | ) | ||||||||
| Gain from sale of NFID business | 1,553 | - | 1,553 | - | ||||||||||||
| Loss from discontinued operations | $ | (87,319 | ) | $ | (77,327 | ) | $ | (227,469 | ) | $ | (182,129 | ) | ||||
Net Income (Loss) Available to Common Stockholders:
For the three months ended September 30, 2021 and 2020, net income (loss) available to common stockholders amounted to $6,385,119 or $0.06 per common share (basic and diluted), and ($633,795), or $(0.01) per common share (basic and diluted), respectively, an increase of $7,018,914, or 1,107%. For the nine months ended September 30, 2021 and 2020, net income (loss) available to common stockholders amounted to $3,588,430 or $0.04 per common share (basic and diluted), and $2,316,703, or $(0.04) per common share (basic and diluted), respectively, an increase of $5,905,133, or 254%. The increase was primarily a result of the changes in operating expenses, and other income, discussed above.
Liquidity and Capital Resources
Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash requirements. We had a working capital of $11,018,743 and $10,261,416 in cash and cash equivalents as of September 30, 2021, and working capital of $1,284,941 and $1,128,389 in cash and cash equivalents as of December 31, 2020.
| September 30, 2021 | December 31, 2020 | Working Capital Change | Percentage Change | |||||||||||||
| Working capital: | ||||||||||||||||
| Total current assets | $ | 11,302,132 | $ | 1,426,664 | $ | 9,875,468 | 692 | % | ||||||||
| Total current liabilities | (283,389 | ) | (141,723 | ) | (141,666 | ) | 100 | % | ||||||||
| Working capital: | $ | 11,018,743 | $ | 1,284,941 | $ | 9,733,802 | 757 | % | ||||||||
The increase in working capital of $9,733,802 was primarily attributable to an increase in cash of $9,133,027, an increase in equity investments of $819,926, offset by decreases in notes receivable of $23,500, prepaid and other current assets - current of $20,501, decrease in inventory as reflected as assets of discontinued operations of $33,484 and an increase in current liabilities of $141,666 primarily from increases in accounts payable and deferred revenue.
On February 9, 2021, we entered into Securities Purchase Agreements with certain institutional and accredited investors for the sale of an aggregate of 4,276 shares of our Series C Convertible Preferred Stock and warrants to purchase up to 14,253,323 shares of our common stock in a private placement for gross proceeds of approximately $4,276,000, before deducting placement agent and other offering expenses of $484,898.
Cash Flows
A summary of cash flow activities is summarized as follows:
Nine months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash used in operating activities | $ | (1,504,145 | ) | $ | (620,673 | ) | ||
| Cash provided by investing activities | 6,843,070 | 20,000 | ||||||
| Cash provided by financing activities | 3,794,102 | 2,134,633 | ||||||
| Net increase in cash | $ | 9,133,027 | $ | 1,533,960 | ||||
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Net Cash Used in Operating Activities:
Net cash flow used in operating activities was $1,504,145 for the nine months ended September 30, 2021 as compared to $620,673 for the nine months ended September 30, 2020, an increase of $875,972.
Net cash flow used in operating activities for the nine months ended September 30, 2020 primarily reflected a net income of $4,992,427 adjusted for the add-back of non-cash items such as total stock-based compensation of $191,698, bad debt recovery of $83,500, changes in operating asset and liabilities primarily consisting of an increase in assets of discontinued operations of $24,963, increase in total prepaid expenses and other current assets (current and non-current) of $115,587, an increase in accounts payable and accrued expenses of $84,399, and an increase in total deferred revenue of $496,762 offset by net unrealized gain on equity investments of $369,626, net realized gain on equity investments of $6,655,120, loss from disposal of assets of discontinued operations of $1,553 and gain on forgiveness of note payable and accrued interest of $19,082.
Net cash flow used in operating activities for the nine months ended September 30, 2020 primarily reflected a net loss of $2,247,703 adjusted for the add-back of non-cash items such as amortization of debt discount of $268,125, bad debt of $90,000, total stock-based compensation of $1,070,765, loss from debt extinguishment of $198,000, inventory write-down of $19,879, and changes in operating asset and liabilities primarily consisting of an increase in prepaid expenses and other current assets current portion of $68,045 and non-current portion of $117,347, an increase in accounts payable and accrued expenses of $59,910 and a decrease in asset of discontinued operations of $105,743.
Net Cash Provided by Investing Activities
Net cash flow provided by investing activities was $6,843,070 for the nine months ended September 30, 2021 which primarily consisted of proceeds from sale of our equity investments in Aikido and DatChat, Inc. for $6,736,070 and collection on notes receivable of $7,500 and $99,500, as compared to $20,000 for the nine months ended September 30, 2020 which consisted of proceeds from collection on a note receivable.
Cash Provided by Financing Activities
Net cash provided by financing activities was $3,794,102 for the nine months ended September 30, 2021 as compared to $2,134,633 for the nine months ended September 30, 2020. During the nine months ended September 30, 2021, we received net proceeds from sale of our Series C Convertible Preferred Stock of $3,794,102 and advance from a related party of $2,366 offset by repayment of advance of $2,366. During the nine months ended September 30, 2020, we received net proceeds from sale of common stock of $2,115,733, related party loans of $35,000, issuance of note payable of $18,900 offset by repayment on notes payable- related party of $35,000.
Cash Requirements
We believe that our existing available cash will not be enough to enable us to meet the working capital requirements for at least 12 months from the date of this report. Our primary uses of cash have been for salaries, fees paid to third parties for professional services, and general and administrative expenses. The following trends are reasonably likely to result in changes in our liquidity over the near to long term:
| ● | An increase in working capital requirements to finance our current business; | |
| ● | An increase in research and development fees related to our biopharmaceutical operations; | |
| ● | Addition of administrative and other personnel as the business grows; and | |
| ● | The cost of being a public company. |
Since we believe that our existing available cash will not enable us to meet our working capital requirements for at least 12 months from the date of this report, we will need to raise additional funds. If we are unable to raise capital, we may be required to reduce the scope of our product development and marketing activities, which could harm our business plans, financial condition and operating results, or cease our operations entirely, in which case, you will lose all of your investment.
Management cannot provide assurance that we will ultimately achieve profitable operations or become cash flow positive or raise additional funds through debt and/or equity financings. We will seek to raise capital through additional debt and/or equity financings to fund operations, for product development and for marketing in the future. If we are unable to raise capital or secure lending in the near future, management expects that we may need to curtail or cease our operations.
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Until such time as we generate substantial product revenue to offset operational expenses, we expect to finance our cash needs through a combination of public and private equity offerings and debt financing. We may be unable to raise capital or enter into such other arrangements when needed, on favorable terms or at all. Our failure to raise capital or enter into such other arrangements as and when needed would have a negative impact on our financial condition. We have no agreements or arrangements to raise capital.
We currently have no material commitments for any capital expenditures.
Off-Balance Sheet Arrangements
As of September 30, 2021, we did not have any off-balance sheet arrangements (as defined in the rules and regulations of the SEC) or any commitments or contractual obligations.
Critical Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, (“U.S. GAAP”).
Cash and Cash Equivalents
We consider all highly liquid instruments purchased with an original maturity of three months or less and money market accounts to be cash equivalents.
Equity Investments, at fair value
Equity investments are carried at fair value with unrealized gains or losses included in income (expense). Realized gains and losses are determined on a specific identification basis and are included in other income (expense). We review equity investments, at fair value for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recovered.
Equity Investments, at Cost
Equity investments, at cost are comprised mainly of non-marketable capital stock and stock warrants, are recorded at cost, as adjusted for other than temporary impairment write-downs and are evaluated for impairment periodically.
Fair Value of Financial Instruments and Fair Value Measurements
We use the guidance of Accounting Standards Codification (“ASC”) Topic 820 for fair value measurements which clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:
Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.
Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.
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Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.
The carrying amounts reported in the balance sheets for cash, prepaid expenses and other current assets, and accounts payable and accrued expenses approximate their fair market value based on the short-term maturity of these instruments.
Revenue Recognition
We apply ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). ASC 606 establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance. This standard requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also requires certain additional disclosures.
We record interest and dividend income on an accrual basis to the extent that we expect to collect such amounts.
For license and royalty income, revenue is recognized when we satisfy the performance obligation based on the related license agreement. Payments received from licensee that are related to future periods are recorded as deferred revenue to be recognized as revenues over the term of the related license agreement.
Product sales were recognized when the NFID products were shipped to the customer and title was transferred and were recorded net of any discounts or allowances which are separately reported as “discontinued operations” on the condensed consolidated statements of operations.
Stock-based Compensation
Stock-based compensation is accounted for based on the requirements of ASC 718 – “Compensation –Stock Compensation”, which requires recognition in the financial statements of the cost of employee, director, and non-employee services received in exchange for an award of equity instruments over the period the employee, director, or non-employee is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee, director, and non-employee services received in exchange for an award based on the grant-date fair value of the award. We have elected to recognize forfeitures as they occur as permitted under Accounting Standards Update 2016-09 Improvements to Employee Share-Based Payment.
Income Taxes
Deferred income tax assets and liabilities arise from temporary differences between the financial statements and tax basis of assets and liabilities, as measured by the enacted tax rates, which are expected to be in effect when these differences reverse. Deferred tax assets and liabilities are classified as current or non-current, depending upon the classification of the asset or liabilities to which they relate. Deferred tax assets and liabilities not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
We follow the provisions of Financial Accounting Standards Board ASC 740-10, “Uncertainty in Income Taxes”. Certain recognition thresholds must be met before a tax position is recognized in the financial statements. An entity may only recognize or continue to recognize tax positions that meet a “more-likely-than-not” threshold. We do not believe we have any uncertain tax positions as of September 30, 2021 that would require either recognition or disclosure in the accompanying financial statements.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk.
As a smaller reporting company, we are not required to provide the information required by this Item.
Item 4. Controls and Procedures.
| (a) | Disclosure Controls and Procedures |
We are required to maintain “disclosure controls and procedures,” as that term is defined in Rule 13a-15(e) and 15d-15(e), promulgated by the SEC pursuant to the Exchange Act. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in the reports we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Our management, with the participation of our principal executive officer and principal financial officer, evaluated our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our principal executive officer and principal financial officer concluded that as of September 30, 2021, our disclosure controls and procedures were not effective because of a material weakness in our internal controls over financial reporting. The ineffectiveness of our disclosure controls and procedures were not effective because of the material weaknesses set forth below.
The ineffectiveness of our disclosure controls and procedures was due to the following material weaknesses:
| ● | We lack segregation of duties within accounting functions duties as a result of our limited financial resources to support hiring of personnel. | |
| ● | The lack of multiples levels of management review on complex business, accounting and financial reporting issues. | |
| ● | We have not implemented adequate system and manual controls. |
While we used the services of third-party accountant who is a certified public accountant to provide accounting and financial reporting services to us, we lack both an adequate number of personnel with requisite expertise in the key functional areas of finance and accounting and an adequate number of personnel to properly implement control procedures. In addition, while we have independent directors, we do not have an audit committee, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures. These factors represent material weaknesses in our internal controls over financial reporting. Although we believe the possibility of errors in our financial statements is remote and expect to continue to use a third-party accountant to address shortfalls in staffing and to assist us with accounting and financial reporting responsibilities in an effort to mitigate the lack of segregation of duties, until such time as we expand our staff with qualified personnel, we expect to continue to report material weaknesses in our internal control over financial reporting.
(b) Changes in Internal Control over Financial Reporting.
There were no changes in our internal control over financial reporting the quarter ended September 30, 2021 that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we may be subject to litigation and claims arising in the ordinary course of business. We are not currently a party to any material legal proceedings and we are not aware of any pending or threatened legal proceeding against us that we believe could have a material adverse effect on our business, operating results, cash flows or financial condition.
Item 1A. Risk Factors.
Risk factors that affect our business and financial results are discussed in Part I, Item 1A “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2020 as filed with the SEC on March 29, 2021 (“Annual Report”). There have been no material changes in our risk factors from those previously disclosed in our Annual Report. You should carefully consider the risks described in our Annual Report, which could materially affect our business, financial condition or future results. The risks described in our Annual Report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results. If any of the risks actually occur, our business, financial condition, and/or results of operations could be negatively affected.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
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Item 6. Exhibits.
| Exhibit No. | Description of Exhibits | |
| 31.1* | Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1* | Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
| * | Filed herewith. |
| + | Indicates a management contract or any compensatory plan, contract or arrangement. |
| # | Portions of this exhibit (indicated by asterisks) have been redacted in compliance with Regulation S-K Item 601(b)(10)(iv). |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| SILO PHARMA, INC. | ||
| Dated: November 10, 2021 | By: | /s/ Eric Weisblum |
| Name: | Eric Weisblum | |
| Title: | Chairman, Chief Executive
Officer and Chief Financial Officer (Principal Executive Officer and Principal Financial and Accounting Officer) | |
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