Quarterly Report (10-q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the Quarterly Period Ended September 30, 2022

 

or

 

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

 

For the Transition Period from _________ to _________

 

Commission file number: 000-21990

 

Oncotelic Therapeutics, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware		13-3679168
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

29397 Agoura Road Suite 107 Agoura Hills, CA		91301
(Address of principal executive offices)		(Zip Code)

 

[phone]

(Registrant’s telephone number, including area code)

 

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

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

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

 

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

 

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

 

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

 

As of November 14, 2022, there were 391,107,595 shares of the registrant’s common stock outstanding.

 

 

 

 

ONCOTELIC THERAPEUTICS, INC. AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2022

 

TABLE OF CONTENTS

 

		Page
PART I. FINANCIAL INFORMATION
ITEM 1.	Financial Statements (unaudited)	3
	Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021	3
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2022 and 2021	4
	Consolidated Statements of Changes in Stockholders’ Equity for the Three Months and Nine Months Ended September 30, 2022 and 2021	5
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021	7
	Notes to Consolidated Financial Statements	8
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	46
ITEM 4.	Controls and Procedures	47
PART II. OTHER INFORMATION
ITEM 1.	Legal Proceedings	48
ITEM 1A.	Risk Factors	48
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48
ITEM 3.	Defaults Upon Senior Securities	49
ITEM 4.	Mine Safety Disclosures	49
ITEM 5.	Other Information	49
ITEM 6.	Exhibits, Financial Statement Schedules	49
SIGNATURES		51

 

2

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ONCOTELIC THERAPEUTICS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

		September 30,				December 31,
		2022				2021
ASSETS
Current assets:
Cash		$	253,882			$	568,769
Restricted cash			20,000				20,000
Accounts receivable			19,748				19,748
Prepaid & other current assets			18,394				18,778
Total current assets			312,024				627,295
Intangibles, net of accumulated amortization of $201,180 and $188,339 as of September 30, 2022 and December 31, 2021			-				821,841
In process R&D			1,101,760				1,101,760
Goodwill			16,182,457				21,062,455
Investment in GMP Bio at fair value			22,640,521				-
Total assets		$	40,236,762			$	23,613,351
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities		$	2,852,159			$	3,092,723
Accounts payable - related party			349,462				403,423
Contingent consideration			2,625,000				2,625,000
Derivative liability on notes			302,550				340,290
Convertible and short-term debt, net of costs			9,250,021				8,166,622
Convertible debt and short-term debt - related party, net of costs			831,266				826,862
Total current liabilities			16,210,458				15,454,920
Commitments and contingencies (Note 12)
Stockholders’ equity:
Convertible preferred stock, $0.01 par value, 15,000,000 shares authorized; 0 shares issued and outstanding			-				-
Common stock, $.01 par value; 750,000,000 shares authorized; 390,195,433 and 375,288,146 issued and outstanding, respectively			3,901,954				3,752,881
Additional paid-in capital			40,921,704				35,223,842
Accumulated deficit			(20,636,647	)			(31,021,050	)
Total Oncotelic Therapeutics, Inc. stockholders’ equity			24,187,011				7,955,673
Non-controlling interests			(160,707	)			202,758
Total stockholders’ equity			24,026,304				8,158,431
Total liabilities and stockholders’ equity		$	40,236,762			$	23,613,351

 

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

 

3

 

ONCOTELIC THERAPEUTICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2022				2021				2022				2021
Operating expenses:
Research and development		$	1,700			$	621,927			$	690,705			$	3,135,413
General and administrative			593,739				1,187,035				4,505,256				4,475,642
Total operating expenses			595,439				1,808,962				5,195,961				7,611,055
Loss from operations			(595,439	)			(1,808,962	)			(5,195,961	)			(7,611,055	)
Other income (expense):
Interest expense, net			(606,824	)			(445,363	)			(1,999,164	)			(1,400,249	)
PPP loan forgiveness			-				253,347				-				253,347
Gain on derecognition of non-financial asset			-				-				16,951,477				-
Reimbursement for expenses - related party			237,165				-				484,657				-
Change in fair value of derivative on debt			105,662				145,449				37,740				239,278
Loss on debt conversion			-				-				(257,810	)			(27,504	)
Total other income (expense)			(263,997	)			(46,567	)			15,216,900				(935,128	)
Net income (loss) before non-controlling interests			(859,436	)			(1,855,529	)			10,020,939				(8,546,183	)
Net loss attributable to non-controlling interests			(81,501	)			(293,001	)			(363,465	)			(949,295	)
Net income (loss) attributable to Oncotelic Therapeutics, Inc.		$	(777,935	)		$	(1,562,528	)		$	10,384,404			$	(7,596,888	)
Basic net loss per share attributable to common stock		$	(0.00	)		$	(0.00	)		$	0.03			$	(0.03	)
Basic weighted average common stock outstanding			386,751,480				370,443,893				385,610,191				279,358,671
Diluted net loss per share attributable to common stock		$	(0.00	)		$	(0.00	)		$	0.02			$	(0.03	)
Diluted weighted average common stock outstanding			386,751,480				370,443,893				420,738,409				279,358,671

 

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

 

4

 

ONCOTELIC THERAPEUTICS, INC. AND SUBSIDIARIES

Consolidated STATEMENT of STOCKHOLDERS’ EQUITY

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022

(Unaudited)

 

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

 

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

 

5

 

ONCOTELIC THERAPEUTICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021

 

		Preferred Stock								Common Stock								Additional Paid-in				Accumulated				Non controlling				Stockholders’
		Shares				Amount				Shares				Amount				Capital				Deficit				Interests				Equity
Balance at January 1, 2021			278,188			$	2,782				90,601,912			$	906,019			$	32,493,086			$	(21,630,008	)		$	708,954			$	12,480,833
Common shares issued upon conversion of Preferred Stock			(278,188	)			(2,782	)			278,187,847				2,781,878				(2,779,096	)			-				-				-
Common shares issued upon conversion of debt			-				-				657,200				6,572				203,729				-				-				210,301
Beneficial Conversion Feature on convertible debt			-				-				-				-				605,719				-				-				605,719
Warrants issued in connection with private placement			-				-				-				-				166,575				-				-				166,575
Increase in non-controlling interest from issuance of additional Edgepoint stock			-				-				-				-				-				-				620,052				620,052
Net loss			-				-				-				-				-				(2,803,080	)			(319,557	)			(3,122,637	)
Balance at March 31, 2021			-				-				369,446,959				3,694,469				30,690,013				(24,433,088	)			1,009,449				10,960,843
Warrants issued in connection with private placement			-				-				-				-				2,023,552				-				-				2,023,552
Common shares issued in lieu of services			-				-				250,000				2,500				67,500				-				-				70,000
Common shares issued for cash			-				-				400,000				4,000				95,055				-				-				99,055
Net loss			-				-				-				-				-				(3,231,280	)			(336,737	)			(3,568,017	)
Balance as of June 30, 2021			-				-				370,096,959				3,700,969				32,876,120				(27,664,368	)			672,712				9,585,433
Common shares issued in lieu of services			-				-				310,000				3,100				20,541				-				-				23,641
Common shares issued for cash											900,000				9,000				100,688				-				-				109,688
Common shares issued in lieu of restricted stock units			-				-				1,257,952				12,580				213,852				-				-				226,432
Stock Compensation Expense			-				-				-				-				299,890				-				-				299,890
Net loss			-				-				-				-				-				(1,562,528	)			(293,001	)			(1,855,529	)
Balance as of September 30, 2021			-			$	-				372,564,911			$	3,725,649			$	33,511,091			$	(29,226,896	)		$	379,711			$	8,389,555

 

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

 

6

 

ONCOTELIC THERAPEUTICS, INC. AND SUBSIDIARIES

Consolidated STATEMENTS OF CASH FLOWS

(Unaudited)

 

		For the Nine Months Ended September 30,
		2022				2021
Cash flows from operating activities:
Net income (loss)		$	10,020,939			$	(8,546,183	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Gain on derecognition of non-financial asset			(16,951,477	)		$	-
Amortization of debt discount and deferred finance costs			1,560,173				1,059,525
Amortization of intangible assets			12,841				38,524
Warrants issued in connection with private placement			2,905,316				2,093,552
Common shares issued in lieu of restricted stock units			-				226,432
Stock compensation expense			626,243				299,890
Depreciation on development equipment			-				7,609
Change in fair value of derivative			(37,740	)			(239,278	)
Loss on debt conversion			257,810				27,504
Changes in operating assets and liabilities:
Prepaid expenses and other current assets			384				30,865
Accounts payable and accrued expenses			287,590				1,600,849
Accounts payable to related party			(53,961	)			34,109
Net cash used in operating activities			(1,371,882	)			(3,366,602	)
Cash flows from financing activities:
Proceeds from / (repayment to) private placement			(25,000	)			1,613,200
Proceeds from sales of common stock			158,820				118,594
Proceeds from convertible debt			983,175				300,000
Proceeds from convertible notes and short term loans, others			500,000				1,020,875
Repaid to note holders			(500,000	)			(100,000	)
Repaid to others			(60,000	)			(75,000	)
Proceeds from Payroll Protection Plan			-				92,995
Net cash provided by financing activities			1,056,995				2,970,664
Net decrease in cash			(314,887	)			(395,938	)
Cash and restricted cash - beginning of period			588,769				494,019
Cash and restricted cash - end of period		$	273,882			$	98,081
Supplemental cash flow information:
Cash paid for:
Interest paid		$	328,181			$	298,401
Income taxes paid		$	-			$	-
Non-cash investing and financing activities:
Warrants issued in connection with private placement		$	3,273,691			$	2,190,127
Common shares issued upon partial conversion of debt		$	573,001			$	210,301
Common shares issued in lieu of services		$	-			$	93,641
Common shares issued in lieu of restricted stock units		$	-			$	226,432
Non-cash cost upon sale of common stock		$	79,180			$	39,991
Beneficial Conversion Feature on convertible debt and restricted common shares		$	570,717			$	605,719

 

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

 

7

 

ONCOTELIC THERAPEUTICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

 

Description of Business

 

Oncotelic Therapeutics, Inc. (“Oncotelic”), was formed in the State of New York in 1988 as OXiGENE, Inc., was reincorporated in the State of Delaware in 1992, and changed its name to Mateon Therapeutics, Inc. in 2016, and Oncotelic Therapeutics, Inc. in November 2020. Oncotelic conducts business activities through Oncotelic and its wholly owned subsidiaries, Oncotelic, Inc., a Delaware corporation, PointR Data, Inc. (“PointR”), a Delaware corporation: and EdgePoint AI, Inc. (“Edgepoint”), a Delaware Corporation for which there are non-controlling interests, (Oncotelic, Oncotelic Inc., PointR and Edgepoint are collectively called the “Company” or “We”). The Company completed a reverse merger with Oncotelic Inc in April 2019, a merger with PointR in November 2019 and formed a subsidiary Edgepoint in February 2020. For more information on these mergers, refer to our 2020 Annual Report on Form 10-K filed with the SEC on April 15, 2021.

 

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

 

The Company is primarily a cancer immunotherapy company dedicated to the development of first in class self-immunization protocol (“SIP™”) candidates for difficult to treat cancers. The Company’s proprietary SIP™ candidates are expected to offer advantages over other immunotherapies because they do not require extraction of the tumor or isolation of the antigens, and they have the potential for broad-spectrum applicability for multiple cancer types. The Company’s proprietary product candidates have shown promising clinical activity in phase 2 trials for the treatment of gliomas and pancreatic cancers. The Company aims to translate its unique insights, which span more than three decades of original work using RNA therapeutics, into the deployment of antisense as a RNA therapeutic for diseases which are caused by TGF-β overexpression, starting with cancer and expanding to Duchenne Muscular Dystrophy (“DMD”) and others. OT-101, is being developed as a broad-spectrum anti-cancer drug that can also be used in combination with other standard cancer therapies to establish an effective multi-modality treatment strategy for difficult-to-treat cancers. The JV plans to initiate phase 3 clinical trials for OT-101 in both high-grade glioma and pancreatic cancer, and any other indications that may evolve, for human pharmaceutical needs. The Company is evaluating the further development of its product candidates OXi4503 as a treatment for acute myeloid leukemia and myelodysplastic syndromes and CA4P in combination with a checkpoint inhibitor for the treatment of advanced metastatic melanoma. The JV is also developing OT-101 for the various epidemics and pandemics, similar to the current corona virus (“COVID-19”) pandemic. In this connection, the Company entered into an agreement and supplemental agreement with GMP for a total of $1.2 million to render services and was paid for the development of OT-101. In 2020 and 2021, the Company was developing Artemisinin as a potential therapy for COVID-19. Artemisinin, purified from a plant Artemisia annua. For more information on GMP and Artemisinin, refer to our 2021 Annual report on Form 10-K filed with the SEC on April 15, 2022.

 

8

 

Fundraising

 

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

 

Between July 2020 and March 2021, the Company issued and sold a total of 100 units (“Units”). For more information on the JH Darbie Financing, refer to our Annual Report on Form 10-K filed with the SEC on April 15, 2022 and Note 7 to these Financial Statements.

 

In February 2022, the Company and 99 out of 100 of the Investors agreed to extend the maturity date of the notes connected to the Units from March 31, 2022, to March 31, 2023. In addition, the Company issued approximately 33 million warrants to purchase $50,000 of shares of common stock of the Company in connection with agreeing to extend the maturity date by one year. The issuance of the additional warrants resulted in the Company recording an expense of approximately $2.9 million in the Company’s statement of operations during the nine months ended September 30, 2022.

 

Equity Purchase Agreement

 

In May 2021, the Company entered into an Equity Purchase Agreement (the “EPL”) and Registration Rights Agreement (the “Registration Rights Agreement”) with Peak One Opportunity Fund, L.P. (“Peak One”), pursuant to which the Company shall have the right, but not the obligation, to direct Peak One to purchase up to $10.0 million (the “Maximum Commitment Amount”) in shares of the common stock, par value $0.01 per share (“Common Stock”) in multiple tranches. The Company filed a post-effective amendment to reregister the EPL on April 26, 2022 and the post-effective amendment was found effective by the SEC on May 6, 2022. Since the EPL was made effective in June 2021 till September 30, 2022, the Company has directed Peak One, on multiple occasions, for an aggregate of 4.7 million shares of Common Stock for aggregate net cash proceeds of approximately $0.6 million. For more information on the EPL, refer to our Annual Report on Form 10-K filed with the SEC on April 15, 2022.

 

August 2021 Notes

 

In August 2021, the Company issued Note Purchase Agreements with Autotelic Inc., a related party, the Company’s Chief Financial Officer (“CFO”), and certain other accredited investors. Under the terms of the Note Purchase Agreements, the Company issued an aggregate of $698,500 (the “Principal Amount”) in debt in the form of unsecured convertible promissory notes (collectively, the “August 2021 Notes”). For further information on the Agreement, refer to our 2021 Annual report on Form 10-K filed with the SEC on April 15, 2022 and Note 5 to these Notes to the Consolidated Financial Statements.

 

November/December 2021 and March 2022 Notes

 

In November and December 2021, the Company entered into various securities purchase agreements with Talos Victory Fund, LLC (the (“Talos”), Mast Hill Fund, LP (“Mast”), FirstFire Global Opportunities Fund, LLC (“FirstFire”), Blue Lake Partners, LLC (“Blue Lake”) and Fourth Man, LLC (“Fourth Man”), (collectively called the “Purchase Agreements”), pursuant to which the Company issued convertible promissory notes in the aggregate principal amount of $0.25 million each, aggregating gross $1.25 million (the “November/December Notes”), which November/December Notes are convertible into shares of the Company’s Common Stock.

 

The Purchase Agreements were entered into as part of a convertible note financing round with aggregate gross proceeds to the Company of up to $1.25 million (the “Financing”), undertaken by the Company pursuant to that certain Finder’s Fee Agreement between the Company and JH Darbie & Co., Inc. (“JH Darbie”), dated October 26, 2021 (the “Darbie Agreement”). All of the Purchase Agreements and the Note contain identical terms except with reference to the name of the holders, the use of proceeds, which include repayment of certain debt, general corporate expenses and payroll, as applicable and the jurisdictions.

 

In January 2022, three of the five note holders under the November and December 2021 Notes exercised their warrants to purchase shares of Common Stock of the Company on a cashless basis. As such, the Company issued the note holders 3,041,958 shares of Common Stock.

 

In March 2022, the Company entered into a Securities Purchase Agreement with Fourth Man, pursuant to which the pursuant to which the Company issued convertible promissory note in the aggregate principal amount of $0.25 million, which Note is convertible into shares of the Company’s Common Stock. This Note was undertaken by the Company pursuant to the Darbie Agreement.

 

9

 

In August 2022, the Company converted $140,000 of Fourth Man Note into 2,025,000 shares of common stock. Further in September 2022, the Company converted $68,250 of Blue Lake note into 1,428,571 shares of common stock.

 

For more information on the notes, refer to Note 6: November – December 2021 Financing of these Notes to the Unaudited Consolidated Financial Statements.

 

May 2022 Note

 

In May 2022, the Company entered into a Securities Purchase Agreement with Mast, pursuant to which the Company issued convertible promissory notes in the aggregate principal amount of $0.6 million, which note is convertible into shares of the Company’s Common Stock. This note was used to fully repay November 2021 Talos note and the December 2021 First Fire note. $35,000 of the First Fire Note was converted into 500,000 shares of Common Stock and the balance was repaid in cash

 

In June 2022, Mast fully converted their November 2021 Note, for which the company issued 4,025,000 shares of Common Stock.

 

June 2022 Note

 

In June 2022, the Company entered into a Securities Purchase Agreement with Blue Lake, pursuant to which the Company issued convertible promissory notes in the aggregate principal amount of $0.34 million, which note is convertible into shares of the Company’s Common Stock. This note was utilized for corporate expenses.

 

Joint Venture with GMP Bio

 

In March 2022, the Company formalized a joint venture (“JV”) with Dragon Overseas Capital Limited (“Dragon”) and GMP Biotechnology Limited (“GMP Bio”), both affiliates of GMP. Although no assurances can be given, the Company and GMP currently intend to conduct an initial public offering of the JV, at a future date, on either the Hong Kong Exchange or other stock exchange. For more information on the JV, refer to Note 6 of the Notes to these Financial Statements and our Current Report on Form 8-K filed with the SEC on April 6, 2022.

 

The Company also entered into certain note purchase agreements and notes with GMP in September 2021, October 2021 and January 2022. For information on the GMP notes, refer to our 2021 Annual Report on Form 10K filed with the SEC on April 15, 2022 and Note 6 to the Notes to these Financial Statements.

 

Principles of Consolidation

 

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

 

Basis of Presentation

 

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

 

10

 

Liquidity and Going Concern

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred net accumulated losses of approximately $20.6 million, negative working capital of over $15.9 million and negative cash flow from operations of approximately $1.4 million at September 30, 2022. These conditions raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year from the date of this filing. Management expects to incur significantly lower costs and losses in the foreseeable future, as a majority of the costs related with the development of OT-101 will be incurred by the JV, but the Company also recognizes the need to raise capital to remain viable. The accompanying consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. For more information on Liquidity and Going Concern, refer to our 2021 Annual Report on Form 10-K filed with the SEC on April 15, 2022.

 

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

 

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

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Use of Estimates

 

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

 

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

 

Cash

 

As of September 30, 2022, and December 31, 2021 the Company held all its cash in banks. The Company considers investments in highly liquid instruments with a maturity of three months or less to be cash equivalents. The Company did not have any cash equivalents as of September 30, 2022 and December 31, 2021, respectively. Restricted cash consists of certificates of deposits held at banks as collateral for various purposes.

 

Debt issuance Costs and Debt discount

 

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

 

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

 

11

 

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

 

Fair Value of Financial Instruments

 

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

 

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

 

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

 

Investment in equity securities

 

The following table summarizes the cumulative gross unrealized gains and losses and fair values for long-term investments accounted for at fair value under the fair value option, with the unrealized gains and losses reported within earnings on the Condensed Consolidated Statements of Operation as of September 30, 2022. No similar investments were held by the Company at December 31, 2021:

		Initial Book Value				Cumulative Gross Unrealized Gains				Cumulative Gross Unrealized Losses				Fair Value
September 30, 2022
Investment in GMP Bio (equity securities)		$	22,640,521			$	-			$	-			$	22,640,521
Total		$	22,640,521			$	-			$	-			$	22,640,521

 

12

 

The table below sets forth a summary of the recording of the initial value of the long-term value of investment in equity securities of GMP Bio, based on a third-party valuation report, and changes in the fair value of such equity securities, if such change occurs, as a Level 3 fair value as of September 30, 2022. The Company did not own similar long-term investments as of September 30, 2021:

 

		September 30, 2022 Fair Value
Balance at January 1, 2022		$	-
Contribution at cost basis			5,689,044
Gain on derecognition of non-financial asset			16,951,477
Change in fair value			-
Balance at September, 2022		$	22,640,521

 

Derivative Liability

 

The Company has certain derivative liabilities associated with its 2019 bridge financing Convertible Notes (see Note 5), consisted of conversion feature derivatives at September 30, 2022 and 2021, are Level 3 fair value measurements.

 

The table below sets forth a summary of the changes in the fair value of the Company’s derivative liabilities classified as Level 3 as of September 30, 2022 and 2021:

 

		September 30, 2022 Conversion Feature				September 30, 2021 Conversion Feature
Balance at January 1, 2022 and 2021		$	340,290			$	777,024
New derivative liability			-				-
Reclassification to additional paid in capital from conversion of debt to common stock			-				(144,585	)
Change in fair value			(37,740	)			(239,278	)
Balance at September, 2022 and 2021		$	302,550			$	393,161

 

As of September 30, 2022, and December 31, 2021, the Company estimated the fair value of the conversion feature derivatives embedded in the convertible debentures based on assumptions used in the Black-Scholes valuation model. The key valuation assumptions used consists, in part, of the price of the Company’s Common Stock, a risk-free interest rate based on the yield of a Treasury note and expected volatility of the Company’s Common Stock all as of the measurement dates. The Company used the following assumptions to estimate fair value of the derivatives as of September 30, 2022:

 

		September 30, 2022 Key Assumptions for fair value of conversions
Risk free interest			0.17% -2.69%
Market price of share		$	0.07- 0.23
Life of instrument in years			0.01-0.33
Volatility			99.80%-109.40%
Dividend yield			0	%

 

When the Company changes its valuation inputs for measuring financial liabilities at fair value, either due to changes in current market conditions or other factors, it may need to transfer those liabilities to another level in the hierarchy based on the new inputs used. The Company recognizes these transfers at the end of the reporting period that the transfers occur. For the periods ended September 30, 2022 and 2021, respectively, there were no transfers of financial assets or financial liabilities between the hierarchy levels.

 

13

 

The $2,625,000 of contingent consideration, of shares issuable to PointR shareholders which was recorded and associated with the PointR Merger, is also classified as Level 3 fair value measurements. For more information on the contingent consideration, refer to our 2021 Annual Report on Form 10-K filed with the SEC on April 15, 2022 and our Quarterly Report on Form 10-Q filed with the SEC on August 21, 2022.

 

Net Income (Loss) Per Share

 

Basic net income (loss) per common share is computed by dividing the net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share includes the effect of Common Stock equivalents (notes convertible into Common Stock, stock options and warrants) when, under either the treasury or if-converted method, such inclusion in the computation would be dilutive. The Company has excluded from diluted loss per share the dilutive shares, since such inclusion would be anti-dilutive.

 

Stock-Based Compensation

 

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

 

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

 

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

 

Impairment of Long-Lived Assets

 

The Company reviews long-lived assets, including definite-lived intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of these assets is determined by comparing the forecasted undiscounted net cash flows of the operation to which the assets relate to the carrying amount. If the operation is determined to be unable to recover the carrying amount of its assets, then these assets are written down first, followed by other long-lived assets of the operation to fair value. Fair value is determined based on discounted cash flows or appraised values, depending on the nature of the assets. For the three and nine months ended September 30, 2022 and the year ended December 31, 2021, there were no impairment losses recognized for long-lived assets.

 

14

 

Intangible Assets

 

The Company records its intangible assets at cost in accordance with ASC 350, Intangibles – Goodwill and Other. The Company reviews the intangible assets for impairment on an annual basis or if events or changes in circumstances indicate it is more likely than not that they are impaired. These events could include a significant change in the business climate, legal factors, a decline in operating performance, competition, sale or disposition of a significant portion of the business, or other factors. If the review indicates the impairment, an impairment loss would be recorded for the difference of the value recorded and the new value. For the three and nine months ended September 30, 2022 and the year ended December 31, 2021, there were no impairment losses recognized for intangible assets. When we sell or contribute properties to unconsolidated arrangements and retain a non-controlling ownership interest in such assets, we recognize the difference between the consideration received and the carrying amount of the asset sold or contributed. For the three and nine months ended September 30, 2022, we derecognized the intangibles of $0.8 million associated with OT-101 upon the transfer of our non-financial asset as a capital contribution for our 45% ownership in the JV.

 

Goodwill

 

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

 

The first step involves comparing the fair value of the reporting unit to its carrying amount. If the fair value of the reporting unit is determined to be greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount is determined to be greater than the fair value, the second step must be completed to measure the amount of impairment, if any. The second step involves calculating the implied fair value of goodwill by deducting the fair value of all tangible and intangible assets, excluding goodwill, of the reporting unit from the fair value of the reporting unit as determined in step one. The implied fair value of the goodwill in this step is compared to the carrying value of goodwill. If the implied fair value of the goodwill is less than the carrying value of the goodwill, an impairment loss equivalent to the difference is recorded. For the three and nine months ended September 30, 2022 and the year ended December 31, 2021 there were no impairment losses recognized for Goodwill. When we sell or contribute properties to unconsolidated arrangements and retain a non-controlling ownership interest in such assets, we recognize the difference between the consideration received and the carrying amount of the asset sold or contributed. For the three and nine months ended September 30, 2022, we derecognized the goodwill of $4.8 million associated with OT-101upon the transfer of our non-financial asset as a capital contribution for our 45% ownership in the JV.

 

Derivative Financial Instruments Indexed to the Company’s Common Stock

 

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

 

15

 

Convertible Instruments

 

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

 

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

 

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

 

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

 

Variable Interest Entity (VIE) Accounting

 

The Company evaluates its ownership, contractual relationships and other interests in entities to determine the nature and extent of the interests, whether such interests are variable interests and whether the entities are VIEs in accordance with ASC 810, Consolidations. These evaluations can be complex and involve Management judgment as well as the use of estimates and assumptions based on available historical information, among other factors. Based on these evaluations, if the Company determines that it is the primary beneficiary of a VIE, the entity is consolidated into the financial statements. At September 30, 2022 and December 31, 2021, the Company identified EdgePoint to be the Company’s sole VIE. At September 30, 2022 and December 31, 2021, the Company’s ownership percentage of EdgePoint was 29% and 29%, respectively. The VIE’s net assets were $14 thousand and $0.1 million at September 30, 2022 and December 31, 2021, respectively.

 

Investments - Equity Method

 

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

 

16

 

Joint Venture agreement

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Revenue Recognition

 

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

 

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

 

17

 

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

 

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

 

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

 

Research & Development Costs

 

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

 

Recent Accounting Pronouncements

 

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

 

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

 

Prior Period Reclassifications

 

Certain amounts in prior periods may have been reclassified to conform with current period presentation, if any.

 

NOTE 3 - INTANGIBLE ASSETS AND GOODWILL

 

Goodwill from 2019 Reverse Merger with Oncotelic and PointR

 

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

 

The Oncotelic merger gave rise to Goodwill of $4,879,999. Further, we added goodwill of $16,182,456 upon the completion of the Merger with PointR. In general, the goodwill is tested on an annual impairment date of December 31. As of September 30, 2022, the goodwill from the Oncotelic merger of $4.9 million was contributed towards the JV as Oncotelic’s investment in equity in GMP Bio. Since the PointR assets are currently being developed for therapies and manufacturing AI platforms, the Company does not believe the there are any factors or indications that the goodwill is impaired.

 

18

 

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

 

Assignment and Assumption Agreement with Autotelic, Inc.

 

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

 

Intangible Asset Summary

 

The following table summarizes the balances as of September 30, 2022 and December 31, 2021, of the intangible assets acquired, their useful life, and annual amortization:

		September 30, 2022				Remaining Estimated Useful Life (Years)
Intangible asset – Intellectual property		$	819,191				16.25
Intangible asset – Capitalization of license cost			190,989				16.25
			1,010,180
Less Accumulated Amortization			(201,180	)
Less: Derecognition of carrying value upon transfer of non-financial asset			(809,000	)
Total		$	-

 

		December 31, 2021				Remaining Estimated Useful Life (Years)
Intangible asset – Intellectual property		$	819,191				17.00
Intangible asset – Capitalization of license cost			190,989				17.00
			1,010,180
Less Accumulated Amortization			(188,339	)
Total		$	821,841

 

Amortization of identifiable intangible assets for the three months ended September 30, 2022 and 2021 was $0 and $12,841, respectively. Amortization of identifiable intangible assets for the nine months ended September 30, 2022 and 2021 was $12,841 and $38,524, respectively. Upon the non-financial sale of our asset as contribution to our equity method investment of approximately $0.8 million, we derecognized the balance of the carrying value of our intangibles in accordance with our policy and authoritative accounting guidance.

 

There will be no future yearly amortization expense related to our intangibles.

 

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

 

The IPR&D assets were acquired in the PointR Merger during the year ended December 31, 2019. Since January 2021, the Company has determined that the IPR&D should be reported as an indefinitely lived asset and therefore will evaluate, on an annual basis, for any impairment on the IPR&D and will record an impairment if identified. The balance of IPR&D as of September 30, 2022 and December 31, 2021 was $1,101,760. The following table summarizes the balances as of September 30, 2022 and December 31, 2021 of the IPR&D assets. The Company evaluates, on an annual basis, for any impairment and records an impairment if identified. The Company identified no impairment to IPR&D assets during its evaluation.

 

19

 

		September 30, 2022
Intangible asset – Intellectual property		$	1,377,200
			1,377,200
Less Accumulated amortization			(275,440	)
Total		$	1,101,760

 

		December 31, 2021
Intangible asset – Intellectual property		$	1,377,200
			1,377,200
Less Accumulated amortization			(275,440	)
Total		$	1,101,760

 

NOTE 4 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expense consists of the following amounts:

 

		September 30, 2022				December 31, 2021
Accounts payable		$	1,783,561			$	1,927,749
Accrued expense			1,068,598				1,164,974
		$	2,852,159			$	3,092,723

 

		September 30, 2022					December 31, 2021
Accounts payable – related party		$	349,462			$	403,423

 

NOTE 5 – CONVERTIBLE DEBENTURES, NOTES AND OTHER DEBT

 

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

 

		September 30, 2022
Convertible debentures
10% Convertible note payable, due April 23, 2022 – Bridge Investor		$	35,556
10% Convertible note payable, due April 23, 2022 – Related Party			164,444
10% Convertible note payable, due August 6, 2022 – Bridge Investor			200,000
			400,000
Fall 2019 Notes
5% Convertible note payable – Stephen Boesch			122,708
5% Convertible note payable – Related Party			285,608
5% Convertible note payable – Dr. Sanjay Jha (Through his family trust)			285,128
5% Convertible note payable – CEO, CTO* & CFO – Related Parties			93,432
5% Convertible note payable – Bridge Investors			191,422
			978,298
August 2021 Convertible Notes
5% Convertible note – Autotelic Inc– Related Party			264,426
5% Convertible note – Bridge investors			395,053
5% Convertible note – CFO – Related Party			79,328
			738,807
JH Darbie PPM Debt
16% Convertible Notes - Non-related parties			2,305,370
16% Convertible Notes – CEO – Related Party			141,928
			2,447,298
November/December 2021 & March 2022 Notes
12% Convertible Notes – Accredited Investors			304,683
Debt for Clinical Trials – GMP
2% Convertible Notes – GMP			4,637,096
May and June 2022 Note
12% Convertible Notes – Accredited Investors			288,540
Other Debt
Short term debt – Bridge investors			243,916
Short term debt from CFO – Related Party			25,050
Short term debt – Autotelic Inc– Related Party			20,000
			288,966
Accrued interest			-2,401
Total of convertible debentures & notes and other debt		$	10,081,287

 

20

 

For information on the special purchase agreements (SPAs) with convertible debentures and notes, net of debt discount and including accrued interest, if any, as of December 31, 2022, refer to our Annual Report on Form 10-K for the year ended December 31, 2021.

 

Convertible Debentures

 

As of September 30, 2022, the Company had a derivative liability of approximately $300,000 and a change in fair value of approximately $38,000 on the Convertible Debentures issued in 2019 to our CEO and a bridge investor.

 

Bridge Financing

 

Notes with Officer and Bridge Investor

 

In April 2019, the Company entered into a Securities Purchase Agreement (the “Bridge SPA”) with our CEO and the Bridge Investor with a commitment to purchase convertible notes in the aggregate of $400,000. For more information on the Bridge SPA, refer to our Annual Report on Form 10-K filed with the SEC on April 15, 2022.

 

The issuance of the Trieu Note resulted in a discount from the beneficial conversion feature totaling $131,555 related to the conversion feature. Total amortization of the OID and the discount totaled $19,500 and $2,743 for the nine months ended September 30, 2022, and 2021. Total unamortized discount on this note was approximately $0 and $19,000 as of September 30, 2022, and December 31, 2021, respectively.

 

In April 2019, pursuant to the Bridge SPA the Company entered into Convertible Note Tranche #1 (“Tranche #1”) with the Bridge Investor. For more information on Tranche #1, refer to our Annual Report on Form 10-K filed with the SEC on April 15, 2022.

 

The issuance of the note resulted in a discount from the beneficial conversion feature totaling $28,445. Total amortization of the OID and discount totaled approximately $4,400 and $1,400 for the nine months ended September 30, 2022, and 2021, respectively. Total unamortized discount on this note was approximately $0 and $4,400 as of September 30, 2022, and December 31, 2021.

 

On August 6, 2019, pursuant to the Bridge SPA the Company entered into Convertible Note Tranche #2 (“Tranche #2”) with the Bridge Investor. For more information on Tranche #2, refer to our Annual Report on Form 10-K filed with the SEC on April 15, 2022.

 

21

 

The issuance of the note resulted in a discount from the beneficial conversion feature totaling $175,000. Total amortization of the OID and discount totaled approximately $11,700 and approximately $6,300 for the nine months ended September 30, 2022, and 2021, respectively. Total unamortized discount on this note was $0 and $12,000 as of September 30, 2022, and December 31, 2021.

 

Fall 2019 Debt Financing

 

In December 2019, the Company closed its Fall 2019 Debt Financing, raising an additional $500,000 bringing the gross proceeds of all debt financings under the Fall 2019 Debt Financing to $1,000,000. . The Majority Holders have waived the default in the maturity of the Fall 2019 Notes and as such there is no event of default. The Majority Holders have also extended the terms of the notes till June 30, 2023. For more information on the Fall 2019 Debt Financing, refer to our Annual Report on Form 10-K filed with the SEC on April 15, 2022.

 

The Company recorded interest expense of $10,625 and $31,875 for the three and nine months ended September 30, 2022. The Company recorded interest expense of $10,625 and $32,787 for the three and nine months ended September 30, 2021. The total amount outstanding under the Fall 2019 note, including accrued interest was $978,299 and $946,424 as of September 30, 2022 and December 31, 2021, respectively. The Company repaid $0 of principal during the three and nine months ended September 30, 2022. The total gross principal amount was $850,000 as of September 30, 2022, and December 31, 2021.

 

GMP Notes

 

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

 

In September 2021, the Company secured a further $1.5 million in debt financing, evidenced by a one-year convertible note (the “GMP Note 2”) from GMP, to fund the same clinical trial evaluating OT-101 against COVID-19 bearing 2% annual interest. The GMP Note is convertible into the Company’s Common Stock upon the GMP Note 2’s maturity one year from the date of the GMP Note 2, at the Company’s Common Stock price on the date of conversion with no discount. GMP has waived the default in the maturity of the GMP Note and as such there is no event of default and also agreed to extend the date of maturity of the GMP Note to December 31, 2022. GMP does not have the option to convert prior to the GMP Note 2’s maturity at the end of one year. Such financing was to be utilized solely to fund the clinical trial. GMP was invoiced by the clinical research organization for $0.5 million and. GMP paid the clinical trial organization the first tranche of $0.5 million in October 2021.

 

In October 2021, the Company entered into an Unsecured Convertible Note Purchase Agreement (the “October Purchase Agreement”) with GMP, pursuant to which the Company issued a convertible promissory note in the aggregate principal amount of $0.5 million (the “October 2021 Note”), which October 2021 Note is convertible into shares of the Company’s Common Stock.

 

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

 

22

 

The GMP Note 2, the October 2021 Note and the January 2022 Note carries an interest rate of 2% per annum and matures on the earlier of (a) the one-year anniversary of the date of the Purchase Agreement, or (b) the acceleration of the maturity by GMP upon occurrence of an Event of Default (as defined below). The GMP Note 2, the October 2021 Note and the January 2022 Note contains a voluntary conversion mechanism whereby GMP may convert the outstanding principal and accrued interest under the terms of the GMP Note 2, the October 2021 Note and the January 2022 Note into shares of Common Stock (the “Conversion Shares”), at the consolidated closing bid price of the Company’s Common Stock on the applicable OTC Market as of the date the Company receives a Notice of Conversion from GMP. Prepayment of the GMP Note 2, the October 2021 Note and the January 2022 Note may be made at any time by payment of the outstanding principal amount plus accrued and unpaid interest. The October Note contains customary events of default (each an “Event of Default”). If an Event of Default occurs, at GMP’s election, the outstanding principal amount of the GMP Note 2, the October 2021 Note and the January 2022 Note, plus accrued but unpaid interest, will become immediately due and payable in cash. The October Purchase Agreement and the January Purchase Agreement requires the Company to use of the proceeds received under the October 2021 Note and January 2022 Note to support the clinical development of OT-101, including payroll and has been made in continuation of the relationship between the Company and GMP.

 

The total principal outstanding on all the GMP notes, inclusive of accrued interest, was $4,637,096 and $4,069,781 as of September 30, 2022, and December 31, 2021, respectively.

 

During the nine months ended September 31, 2022, and 2021, the Company incurred approximately $66,500 and approximately $10,600, of interest expense respectively.

 

August 2021 Notes

 

In August 2021, the Company entered into Note Purchase Agreements with Autotelic - a related party, our CFO - a related party, and certain accredited investors (the “August 2021 investors”), whereby the Company issued four convertible notes in the aggregate principal amount of $698,500 convertible into shares of common stock of the Company for net proceeds of $690,825. The convertible notes carry a five (5%) percent coupon and mature one year from issuance. The majority of the August 2021 investors have the right, but not the obligation, not more than five days following the maturity date, to convert all, but not less than all, the outstanding and unpaid principal plus accrued interest into the Company’s common stock, at a conversion price of $0.18. The August 2021 Note Holders has waived the default in the maturity of the August 2021 Notes and as such there is no event of default and also agreed to extend the date of maturity of the August 2021 Notes to June 30, 2023. The Company determined that the economic characteristics and risks of the embedded conversion option are not clearly and closely related to the economic characteristics and risks of the debt host instrument. Further, the Company determined that the embedded conversion feature meets the definition of a derivative but met the scope exception to the derivative accounting required under ASC 815 for certain contracts involving a reporting entity’s own equity.

 

During the three and nine months ended September 30, 2022, the Company recognized approximately $8,700 and $26,050 of interest, respectively.

 

During the three and nine months ended September 30, 2021, the Company recognized approximately $5,400 of interest.

 

At September 30, 2022, and December 31, 2021, accrued interests on these convertible notes totaled approximately $40,300 and $14,260, respectively.

 

November – December 2021 and March 2022 Financing

 

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

 

23

 

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

 

During the nine months ended September 30, 2022, the Company converted the Mast Hill convertible note into 4,025,000 shares of the Company’s common stock, which fully retired the convertible note as of June 30, 2022. Such conversion resulted in a loss from debt conversion of approximately $0.1 million, which was recorded in other expense in the Company’s consolidated statements of operations.

 

During the nine months ended September 30, 2022, the Company repaid the Talos Victory and First Fire convertible notes with the proceeds from the May 2022 Mast Hill convertible note. Such repayment resulted in a loss from debt extinguishment of approximately $258,100, which was recorded in other expense in the Company’s consolidated statements of operations.

 

During the nine months ended September 30, 2022, the Company converted $68,250 of Blue Lake note into 1,428,571 shares of common stock.

 

During the nine months ended September 30, 2022, the Company converted $140,000 of Fourth Man note into 2,025,000 shares of common stock.

 

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

 

		September 30, 2022				December 31, 2021
Mast Hill Convertible note, 12% coupon November 21		$	-			$	250,000
Talos Victory Convertible note, 12% coupon November 2021			-				250,000
First Fire Convertible note, 12% coupon, December 2021			-				250,000
Blue Lake Convertible note, 12% coupon, December 2021			181,750				250,000
Fourth Man Convertible note, 12% coupon December 2021			110,000				250,000
Convertible notes, gross		$	291,750			$	1,250,000
Less Debt discount recorded			(500,000	)			(1,250,000	)
Amortization debt discount			386,734				76,994
Convertible notes, net		$	178,484			$	76,994

 

The Company recognized approximately $150,000 and $0 of interest during the nine months ended September 30, 2022, and 2021, respectively. The balance of Accrued interest was approximately $30,000 and $10,300 as of September 30, 2022, and December 31, 2021, respectively.

 

The Company recognized approximately $774,600 and $0 of interest expense attributable to the amortization of the debt discount from the original debt discount, deferred financing costs, fair value allocated to the warrants and the beneficial conversion feature as of September 30, 2022, and 2021, respectively.

 

The Company recorded an initial debt discount of approximately $0.4 million representing the intrinsic value of the conversion option embedded in the convertible debt instrument based upon the difference between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. The Company recognized amortization expense related to the debt discount and debt issuance costs of approximately $0.8 million for the nine months ended September 30, 2022, which is included in interest expense in the consolidated statements of operations.

 

24

 

March 2022 Financing

 

In March 2022, the Company entered into a securities purchase agreement with an accredited investor, whereby the Company issued a promissory note in the aggregate principal amount of $250,000 convertible into shares of common stock of the Company. The convertible note carries a twelve (12%) percent coupon and a default coupon of 16% and mature one year from issuance. The investor has the right at any time following issuance date to convert all or any part of the outstanding and unpaid amount of the note into the Company’s common stock at a conversion price established at a fixed rate of $0.10. The Company also granted a total number of 1,250,000 warrants convertible into an equivalent number of the Company common shares at a strike price of $0.20 up to five years after issuance.

 

As of September 30, 2022, the March 2022 convertible note, net of debt discount, consisted of the following amount. There were no similar amounts due on the March 2022 Notes as of December 31, 2021:

 

		September 30, 2022
Fourth Man Convertible note, 12% coupon March 2023		$	250,000
Debt Discount			(123,801	)
Convertible notes, net		$	126,199

 

The Company recognized approximately $7,500 and $15,100 of accrued interest during the three and nine months ended September 30, 2022, respectively. The Company recognized approximately $63,000 and $126,000 of interest expense attributable to the amortization of the debt discount from the original deferred financing costs, fair value allocated to the warrants and the beneficial conversion feature during the three and nine months ended September 30, 2022, respectively.

 

May 2022 Mast Financing

 

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

 

As of September 30, 2022 the May 2022 Mast Note, net of debt discount, consisted of the following amount. No similar amount was outstanding as at December 31, 2021:

 

		September 30, 2022
Mast Hill Convertible note, 12% coupon May 2023		$	605,000
Convertible notes, gross		$	605,000
Less Debt discount recorded			(605,000	)
Amortization debt discount			196,188
Convertible notes, net		$	196,188

 

The Company recognized approximately $72,600 and $0 of accrued interest during the nine months ended September 30, 2022, and 2021, respectively, which is the guaranteed twelve-month coupon and earned in full at issuance date. The Company recognized approximately $196,200 and $0 of interest expense attributable to the amortization of the debt discount from the original debt discount, deferred financing costs, fair value allocated to the warrants and the beneficial conversion feature during the nine months ended September 30, 2022, and 2021, respectively.

 

25

 

June 2022 Financing

 

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

 

As of September 30, 2022 the June 2022 Blue Lake Note, net of debt discount, consisted of the following amount. No similar amount was outstanding as at December 31, 2021:

 

		September 30, 2022
Blue Lake Convertible note, 12% coupon June 2023		$	335,000
Convertible notes, gross		$	335,000
Less Debt discount recorded			(333,271	)
Amortization debt discount			90,623
Convertible notes, net		$	92,352

 

The Company recognized approximately $40,200 and $0 of accrued interest during the nine months ended September 30, 2022, and 2021, respectively, which is the guaranteed twelve-month coupon and earned in full at issuance date. The Company recognized approximately $90,620 and $0 of interest expense attributable to the amortization of the debt discount from the original debt discount, deferred financing costs, fair value allocated to the warrants and the beneficial conversion feature during the nine months ended September 30, 2022, and 2021, respectively.

 

Other short-term advances

 

During the year ended December 31, 2020, the Company’s CEO provided additional funding of $70,000 to the Company, of which $50,000 was repaid before December 31, 2020. Further, during the nine months ended September 30, 2022, $20,000 was repaid to the Company’s CEO. As such, $0 and $20,000 was outstanding at September 30, 2022 and December 31, 2021, respectively.

 

During the year ended December 31, 2021, Autotelic Inc. provided a short-term funding of $120,000 to the Company, which was repaid in 2021. In May 2021, Autotelic provided an additional short-term funding of $250,000 to the Company, which was converted into the August 2021 Notes. Autotelic provided an additional $20,000 short-term loan to the Company, and as such, $20,000 was outstanding and payable to Autotelic at September 30, 2022 and December 31, 2021, respectively.

 

During the year ended December 31, 2021, the Company’s CFO, a related Party, provided short term advances of approximately $45,000. During the year ended December 31, 2020, the Company’s CFO had provided a short-term advance of $25,000, which was repaid during the year ended December 31, 2021. $20,000 was repaid to the CFO in January 2022. As such approximately $25,000 and $45,000 was outstanding at September 30, 2022 and December 31, 2021, respectively.

 

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

 

On March 31, 2022, the Company entered into (i) a joint venture (the “JV”) agreement with Dragon and GMP Bio, both affiliates of GMP, (and the Company, Dragon and GMP Bio are collectively called the “Parties”) (the “JVA”), (ii) a license agreement for rights to OT-101 (the “US License Agreement”) for the territory within the United States of America (the “US”) with Sapu Holdings, LLC, a subsidiary of GMP Bio and (iii) a license agreement for rights to OT-101 for the rest of the world with GMP Bio (the “Ex-US Rights Agreement”, and the US License Agreement and the Ex-US License Agreement are collectively called the “Agreements”).

 

26

 

Dragon and the Company entered into the JVA to regulate their relationship and the operation and management of the JV. The JVA contains provisions for the licensed products and licensed technologies related to OT-101 (the “Licensed products and technologies”). Pursuant to the JVA the Company is required to transfer to GMP Bio all of the Company’s rights and obligations under the research and development agreement dated 3 February 2020 between the Company and Golden Mountain Partners, LLC (“GMP”), an affiliate of Dragon, as amended, varied and/or supplemented by a supplement to research and Services Agreement dated 23 March 2020 between the Company, Mateon Therapeutics, Inc. (subsequently renamed the Company) and GMP (the “R&D Agreement”). The JVA permits GMP to seek conversion of certain convertible promissory notes entered into between the Company and GMP (see reference to Purchase Agreements and Notes below) into shares of the Common Stock of the Company within 15 business days of the execution of the JVA at a price of $0.2242 per Common Share, the closing price of the Common Share as traded on the OTCQB the day prior to the execution of the JVA, or the closing price of the Common Stock prior to the date of conversion if not within 15 business days of the JVA. Upon the execution of the JVA, Dragon will pay for and hold 55 shares of GMP Bio and the Company will pay for and hold 45 shares of GMP Bio, both to be acquired at $1.00 per share of GMP Bio. Such shares of GMP Bio were issued shortly after the date of the JVA. The JVA required the entering into of the Agreements on or before the execution of the JVA. The JVA defines the valuation of the Agreements (taking into account the transfer of the Company’s rights and obligations under the R&D Agreement) each at approximately $11.3 million, for an aggregate of approximately $22.7 million. The Parties also agreed that if a Rare Pediatric Disease (“RPD”) Priority Review Voucher, upon clinical approval of OT-101 Technologies for treatment of diffuse intrinsic pontine glioma (the “DIPG Voucher”), is issued to GMP Bio and GMP Bio, or a subsidiary thereof, sells the DIPG Voucher to a non-GMP subsidiary, then the Company shall be eligible to receive up to 50% of the net sales proceeds or $50 million, whichever is less. Dragon shall fund the JVA, for a total of approximately $27.7 million, based on the conditions contained in the JVA, and the Company will input the licenses under the Agreements into the JV. The Company is obligated to (i) (A) rectify the chain of legal title such that the Company is the sole legal owner of such rights, (B) complete registration as the sole owner of all the Company’s Patent Rights and (C) provide evidence of such registration that is satisfactory to Dragon; (ii) provide Dragon with copies of official documents issued by the relevant patent offices in the relevant countries evidencing the Company’s legal ownership of all the Company’s Patents Rights; and (iii) reflect the Company’s legal ownership of all the Company’s Patent Rights in the relevant online registers of the relevant patent offices in the relevant countries. The JVA intends to raise funding for the JVA through a Series A round of financing of not less than $20 million. Dragon can suspend funding the JVA if the Series A round of financing is not successfully completed by August 31, 2022, in which case Dragon’s funding obligation would be restricted to $250,000 per month to GMP Bio. If Dragon decides to terminate the JVA, the licenses granted under the Agreements shall be terminated and the OT-101 assets licensed by the Company will revert back to the Company. The rest of the JVA deals with the conduct of the JV, the board of directors of GMP Bio and other administrative matters. Dragon shall nominate up to three directors of their choosing to the board of directors of GMP Bio, two of whom are already nominated as “A” Directors and the Company shall nominate up to two directors of their choosing to the board of directors of GMP Bio, one of whom is already nominated as a “B” Director. The JVA defines how the board of directors will operate as well as the general management and operations of the JV. Other standard terms on shareholder rights, indemnification etc. are also defined in the JVA. Also included are the other terms with relation to insurance, indemnification, jurisdiction and other customary terms and conditions.

 

The Agreements include terms of an exclusive, irrevocable, perpetual, royalty-free, sublicensable license under the Licensed Technology to manufacture, have manufactured, use, import, sell, offer for sale or otherwise exploit the Licensed Products, which is OT-101, in the Field, which is all therapeutic uses in humans, and in the Territories, which is the US and the rest of the world. In addition, the Company grants a non-exclusive, irrevocable, perpetual, royalty-free, non-sublicensable license for its sole use of the Company’s Vision Grid system for monitoring process, man flow, equipment flow, and material flow in contract development and manufacturing organization operations. These have been granted to GMP Bio and Sapu Holdings, LLC as the capital contribution by the Company to GMP Bio. The Agreements include the contributions by the key employees, as defined and included in the Agreements, standard representations and warranties, intellectual property protection, insurance, indemnification, jurisdiction and other customary terms and conditions.

 

27

 

The Company determined that the arrangement does not meet the accounting definition of a joint venture. Subsequently, we analyzed our investment and determined that such investment was not considered a VIE, which would require consolidation because the Company does not have the power to direct the activities that most significantly impact the economic performance of the JV. The Company does not control the JV through majority ownership interest or Board participation. As such, the Company followed the guidance in ASC 610-20 regarding the sale of nonfinancial assets to noncustomers when retaining a non-controlling ownership interest in such assets. The Company is deemed to have substantially transferred the actual intellectual property related to OT-101 as the investee can benefit from the risk and rewards of ownership of such intellectual property. This resulted in the derecognition of the carrying amount of our intangible assets for approximately $0.8 million and goodwill for $4.9 million for an aggregate amount of approximately $5.7 million, recorded its initial investment at its fair value for approximately $22.6 million and which resulted in a non-cash gain on non-financial asset disposal of approximately $17 million, which was reported in other income in the condensed consolidated statements of operations in the three and nine months ended September 30, 2022.

 

As of the effective date of the formation of the JV, the combined enterprise value of GMP Bio was approximately $50.4 million, comprising of the fair value of the Company’s investment in GMP Bio of approximately $22.7 million and the total original capital contributions by Dragon Overseas of approximately $27.7 million. As of September 30, 2022, the JV had approximately $22.8 million in assets, not including GMP Bio’s capital subscriptions of approximately $24 million; recorded approximately $0.5 million in liabilities and incurred approximately $4.1 million in operational expenses. The Company elected the fair value option under subsection of Section 825-10-15 to account for its equity-method investment as the Company believes that it the most appropriate method to properly value the Company and record a change in value when and upon conducting a fair value assessment. As of September 30, 2022, the Company does not believe the fair value of the JV has changed and hence has not recorded a change in value.

 

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

 

NOTE 7 - PRIVATE PLACEMENT AND JH DARBIE FINANCING

 

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

 

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

 

The Company incurred approximately $0.64 million of issuance costs, including legal costs of approximately $39,000, that are incremental costs directly related to the issuance of the various instruments bundled in the offering.

 

Concurrently with the sale of the Units, JH Darbie was granted a warrant, exercisable over a five-year period, to purchase 10% of the number of Units sold in the JH Darbie Financing. As such, the Company granted 10 Units to JH Darbie pursuant to the JH Darbie Placement Agreement.

 

The terms of convertible notes are summarized as follows:

 

	■	Term: Through March 31, 2022, extended further to March 31, 2023
	■	Coupon: 16%.
	■	Convertible at the option of the holder at any time in the Company’s Common Stock or Edgepoint Common Stock.
	■	The conversion price is initially set at $0.18 per share for the Company’s Common Stock or $1.00 for Edgepoint Common Stock, subject to adjustment.

 

The Company allocated the proceeds among the freestanding financial instruments that were issued in the single transaction using the relative fair value method, which affects the determination of each financial instrument initial carrying amount. The Company utilized the relative fair value method as none of the freestanding financial instruments issued as part of the single transaction are measured at fair value. Under the relative fair value method, the Company made separate estimates of the fair value of each freestanding financial instrument and then allocated the proceeds in proportion to those fair value amounts. The Company recorded non-controlling interests of approximately $1 million in Edgepoint. Non-controlling interests represent the portion of net assets in consolidated entities that are not owned by the Company and are reported as a component of equity in the consolidated balance sheets.

 

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As of the multiple closings of the Company during the six months ended June 30, 2021, under the private placement memorandum with JH Darbie, the estimated volume weighted grant date fair value of approximately $0.21 per share associated with the warrants to purchase up to 2,035,000 shares of common stock issued in this offering, or a total of approximately $ 0.7 million, was recorded to additional paid-in capital on a relative fair value basis. All warrants sold in this offering had an exercise price of $0.20 per share of the Company stock or $1.00 per share of Edge Point, subject to adjustment, are exercisable immediately and expire three years from the date of issuance. The fair value of the warrants was estimated using a Black Scholes valuation models using the following input values:

 

Expected Term			1.5 years
Expected volatility			152.3%-164.8	%
Risk-free interest rates			0.09%-0.11	%
Dividend yields			0.00	%

 

In February 2022, the Company and all except one of the Investors agreed to extend the maturity date of the Notes from March 31, 2022, to March 31, 2023. In consideration for the extension of the Notes, the Company issued to the Investors an aggregate of 33,000,066 Oncotelic Warrants at a price of $0.15 per share of Company’s Common Stock and are immediately exercisable and expire two years from the date of issuance or February 9, 2024. Each Investor will be entitled to receive 333,334 Oncotelic Warrants for each Unit purchased. Upon the amendment of the terms of the convertible notes under the private placement memorandum. As incentive to extend the maturity date, approximately 33 million warrants were issued to the Unit Holders who participated in the amendment, The Company repaid the 1-unit holder who did not participate in the amendment shortly after March 31, 2022.

 

The Company reviewed the guidance per ASC 470-60 Troubled debt restructurings and ASC 470-50 Debt-Modifications and Extinguishments and concluded that the terms of the agreements were substantially different as of June 30, 2022, and, accounted for the transaction as a debt extinguishment. The loss is recognized equal to the difference between the net carrying amount of the original debt and the fair value of the modified debt instrument.

 

At March 31, 2022, the Company estimated the fair value of the warrants issued in conjunction with the amendment of the private placement under the JH Darbie financing based on assumptions used in the Black-Scholes valuation model. The warrants resulted in an aggregate fair value of approximately $2.9 million. The key valuation assumptions used consists, in part, of the price of the Company’s Common Stock, a risk-free interest rate based on the yield of a Treasury note and expected volatility of the Company’s Common Stock all as of the measurement date. The Company used the following assumptions to estimate fair value of the warrants:

 

Strike price			$0.15
Expected Term			1 year
Expected volatility			115.1	%
Risk-free interest rates			1.36	%
Dividend yields			0.00	%

 

The Company recognized amortization expense related to the debt discount and debt issuance costs of approximately $71 thousand and approximately $0.9 million for the nine months ended September 30, 2022 and 2021 respectively, which is included in interest expense in the statements of operations.

 

NOTE 8 - RELATED PARTY TRANSACTIONS

 

Master Service Agreement with Autotelic Inc.

 

In October 2015, Oncotelic entered into a Master Service Agreement (the “MSA”) with Autotelic Inc., a related party that is partly-owned by the Company’s CEO Vuong Trieu, Ph.D. Dr. Trieu, a related party, is a control person in Autotelic Inc. Autotelic Inc. currently owns less than 10% of the Company. The MSA stated that Autotelic Inc. will provide business functions and services to the Company and allowed Autotelic Inc. to charge the Company for these expenses paid on its behalf. The MSA includes personnel costs allocated based on amount of time incurred and other services such as consultant fees, clinical studies, conferences and other operating expenses incurred on behalf of the Company. The MSA requires a 90-day written termination notice in the event either party requires to terminate such services.

 

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Expenses related to the MSA were approximately $10,000 for the three months ended September 30, 2022 as compared to approximately $61,000 for the same period of 2021. Expenses related to the MSA were approximately $77,000 for the nine months ended September 30, 2022 as compared to approximately $220,000 for the same period of 2021. During the nine months ended September 30, 2022, Autotelic, Inc. paid expenses and accrued liabilities in the aggregate amount of approximately $0.5 million on behalf of the Company. This payment, on the Company’s behalf, was recognized as a capital contribution from Autotelic, Inc.

 

In September 2021, the Company entered into an exclusive License Agreement (the “Agreement”) with Autotelic. For more information on this Agreement, refer to our 2021 Annual Report on Form 10-K filed with the SEC on April 15, 2022.

 

Note Payable and Short-Term Loan – Related Parties

 

In April 2019, the Company issued a convertible note to Dr. Trieu totaling $164,444, including OID of $16,444, receiving net proceeds of $148,000, which was used by the Company for working capital and general corporate purposes. The Company issued a Fall 2019 Note to Dr. Trieu in the principal amount of $250,000. Dr. Trieu also offset certain amounts due to him in the amount of $35,000 and was converted into the Fall 2019 debt. During the year ended December 31, 2020, Dr. Trieu provided additional short-term funding of $70,000 to the Company, of which the Company repaid $50,000 prior to December 31, 2020. During the year ended December 31, 2020, Dr. Trieu purchased a total of 5 Units under the private placement for a gross total of $250,000.

 

During the year ended December 2021, Autotelic Inc provided a short-term loan of $270,000, of which $250,000 was converted into the August 2021 loan and the balance of $20,000 continues to be a short-term loan. During the six months ended June 30, 2021, Autotelic Inc, provided a short-term loan of $120,000 to the Company. Such loan was repaid in April 2021. No loans or repayments were made to Autotelic Inc. during the same period in 2022.

 

Artius Consulting Agreement

 

On March 9, 2020, the Company and Artius Bioconsulting, LLC (“Artius”), for which Mr. King is the Managing Member, entered into an amendment to the Consulting Agreement dated December 1, 2018, under which Artius agreed to serve as a consultant to the Company for services related to the Company’s business from time to time, effective December 1, 2019 (the “Effective Date”) (the “Artius Agreement”). For more information on this Agreement, refer to our 2021 Annual Report on Form 10-K filed with the SEC on April 15, 2022.

 

No expense was recorded during the three and nine months ended September 30, 2022 or 2021, respectively, related to this Agreement.

 

Maida Consulting Agreement

 

Effective May 5, 2020, the Company and Dr. Maida entered into an independent consulting agreement, commencing April 1, 2020 (the “Maida Agreement”), under which Dr. Maida will assist the Company in providing medical expertise and advice from time to time in the design, conduct and oversight of the Company’s existing and future clinical trials. For more information on this Agreement, refer to our 2021 Annual Report on Form 10-K filed with the SEC on April 15, 2022.

 

The Company recorded an expense of $0 during the three months ended September 30, 2022 related to this Agreement as compared to $45,000 during the same period in 2021. The Company recorded an expense of $75,000 during the nine months ended September 30, 2022 related to this Agreement as compared to $135,000 during the same period in 2021. Effective April 1, 2022, Dr Maida’s compensation shall be borne by the JVA with GMP Bio.

 

NOTE 9 - EQUITY PURCHASE AGREEMENT AND REGISTRATION RIGHTS AGREEMENT

 

On May 3, 2021, the Company entered into an Equity Purchase Agreement (“EPL”) and Registration Rights Agreement with Peak One Opportunity Fund LP (“Peak One” or the “Investor”). For further information on EPL, refer to our 2021 Annual Report on Form 10-K filed with the SEC on April 15, 2022.

 

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The Company filed a post-effective amendment Registration Statement on Form S-1 with the Commission on April 26, 2022, and the Form S-1 was declared effective on May 6, 2022. The Company filed the prospectus in this connection on May 11, 2022.

 

During the nine months ended September 30, 2022, the Company sold a total of 1.3 million shares of Common Stock to Peak One, at prices ranging from $0.09 and $0.25, for total gross proceeds of approximately $0.2 million, net of issuance costs.

 

Similarly, during the nine months ended September 30, 2021, the Company sold a total of 1.3 million shares of Common Stock at prices ranging from $0.11 and $0.23 for total gross proceeds of approximately $0.2 million, net of issuance costs.

 

NOTE 10 - STOCKHOLDERS’ EQUITY

 

The following transactions affected the Company’s Stockholders’ Equity:

 

Issuance of Common Stock during the nine months ended September 30, 2022

 

In January 2022, three of the five investors from the November/December 2021 financing made a cashless exercise for their warrants. In connection with this exercise, the Company issued 3,041,958 shares of Common Stock in exchange of approximately 5,769,231 million warrants.

 

In March 2022, the Company sold 300,000 shares of its Common Stock to Peak One under the EPL for net proceeds of approximately $52 thousand.

 

In May 2022, Blue Lake made a cashless exercise for their warrants. In connection with this exercise, the Company issued 1,403,326 shares of Common Stock in exchange of 1,923,077 warrants.

 

In June 2022, the Company sold 300,000 shares of its Common Stock to Peak One under the EPL for net proceeds of approximately $47 thousand.

 

In June 2022, Mast Hill converted their debt of approximately $0.28 million. In connection with the Note conversion, the Company issued 4,025,000 shares of Common Stock to Mast Hill.

 

In June 2022, Company issued 500,000 shares of Common Stock to First Fire under partial repayment of convertible debt of $35,000.

 

In June 2022, First Fire made a cashless exercise for their warrants. In connection with this exercise, the Company issued 1,183,400 shares of Common Stock in exchange for 1,923,077 warrants.

 

In July 2022, the Company sold 400,000 shares of its Common Stock to Peak One under the EPL for net proceeds of approximately $38 thousand.

 

In August 2022, the Company sold 300,000 shares of its Common Stock to Peak One under the EPL for net proceeds of approximately $23 thousand.

 

In August 2022, Fourth Man converted $0.14 million of their debt of approximately $0.28 million. In connection with the Note conversion, the Company issued 2,025,000 shares of Common Stock to Fourth Man.

 

In September 2022, Blue Lake converted $0.1 million of their debt of approximately $0.1 million. In connection with the Note conversion, the Company issued 1,428,571 shares of Common Stock to Blue Lake.

 

For further information on Common Stock issuance, refer to our 2021 Annual Report on Form 10-K filed with the SEC on April 15, 2022.

 

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NOTE 11 – STOCK-BASED COMPENSATION

 

Options

 

Pursuant to the Merger, the Company’s Common Stock and corresponding outstanding options survived. The below information details the Company’s associated option activity.

 

As of June 30, 2022, options to purchase Common Stock were outstanding under three stock option plans – the 2017 Equity Incentive Plan (the “2017 Plan”), the 2015 Equity Incentive Plan (the “2015 Plan”) and the 2005 Stock Plan (the “2005 Plan”). Under the 2017 Plan, up to 2,000,000 shares of the Company’s Common Stock may be issued pursuant to awards granted in the form of nonqualified stock options, restricted and unrestricted stock awards, and other stock-based awards. Under the 2015 and 2005 Plans, taken together, up to 7,250,000 shares of the Company’s Common Stock may be issued pursuant to awards granted in the form of incentive stock options, nonqualified stock options, restricted and unrestricted stock awards, and other stock-based awards.

 

Employees, consultants, and directors are eligible for awards granted under the 2017 and 2015 Plans. The Company registered an additional total of 20,000,000 shares of its Common Stock, which may be issued pursuant to the Registrant’s Amended and Restated 2015 Equity Incentive Plan (the “Plan”). Such additional shares were approved by the shareholders of the Company on August 10, 2020 and as reported to the Securities and Exchange Commission (the “SEC”) vide a Current Report on Form 8-K on August 14, 2020. As such, the total number of shares of the Company’s Common Stock available for issuance under the 2015 plan is 27,250,000. Since the adoption of the 2015 Plan, no further awards may be granted under the 2005 Plan, although options previously granted remain outstanding in accordance with their terms.

 

Compensation based stock option activity for qualified and unqualified stock options are summarized as follows:

 

						Weighted
For the nine months ended September 30, 2022						Average
		Shares				Exercise Price
Outstanding at January 1, 2022			16,592,620			$	0.30
Expired or cancelled			(2,359	)			11.88
Issued			9,100,000				0.10
Outstanding at September 30, 2022			25,690,261			$	0.23

 

Information on compensation-based stock option activity for qualified and unqualified stock options for the year ended December 31, 2021 can be found in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on April 15, 2022.

 

The following table summarizes information about options to purchase shares of the Company’s Common Stock outstanding and exercisable at September 30, 2022:

 

								Weighted-				Weighted-
								Average				Average
				Outstanding				Remaining Life				Exercise				Number
Exercise prices				Options				In Years				Price				Exercisable
$	0.01 to 0.15				16,250,000				9.4			$	0.12				6,057,500
	0.16				5,502,761				8.8				0.16				5,502,761
	0.22				1,750,000				3.6				0.22				1,750,000
	0.38				900,000				2.9				0.38				900,000
	0.73				762,500				2.5				0.73				762,500
	1.37				150,000				0.7				1.37				150,000
	1.43				300,000				2.7				1.43				300,000
	15.00				75,000				2.7				15.00				75,000
					25,690,261				8.3			$	0.30				15,497,761

 

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The compensation expense attributed to the issuance of the options is recognized as they are vested.

 

The employee stock option plan stock options are generally exercisable for ten years from the grant date and vest over various terms from the grant date to three years.

 

The aggregate intrinsic value totaled approximately $0 and was based on the Company’s closing stock price of $0.07 as of September 30, 2022, which would have been received by the option holders had all option holders exercised their options as of that date. Information on the aggregate intrinsic value for the year ended December 31, 2021 can be found in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on April 15, 2022.

 

The Company granted 9.1 million stock options to its employees during the three months ended September 30, 2022. 20% of the options vested immediately and the balance will vest at December 31, 2022, based on achievement of certain corporate and individual milestones. At September 30, 2022, the Company estimated the fair value of the options issued based on assumptions used in the Black-Scholes valuation model. The options resulted in an aggregate fair value of approximately $0.5 million. The key valuation assumptions used of the price of the Company’s Common Stock, a risk-free interest rate based on the yield of a Treasury note and expected volatility of the Company’s Common Stock all as of the measurement date. The Company used the following assumptions to estimate fair value of the warrants:

 

Strike price		$	0.10
Expected Term			1 year
Expected volatility			95.5	%
Risk-free interest rates			3.12	%
Dividend yields			0.00	%

 

The Company amortized approximately $0.3 million and $0.6 million of stock compensation expense during the three and the nine months ended September 30, 2022 on the 2021 and 2022 grants. The Company recorded $0.3 million of similar expense during the same periods of 2021 respectively.

 

Warrants

 

Pursuant to the Merger, the Company’s Common Stock and corresponding outstanding warrants survived. The below information represents the Company’s associated warrant activity.

 

In February 2022, the Company and all except one of the Investors agreed to extend the maturity date of the Notes from March 31, 2022, to March 31, 2023. In consideration for the extension of the Notes, the Company issued to the Investors an aggregate of approximately 33 million Oncotelic Warrants at a price of $0.15 per share of Company’s Common Stock. At March 31, 2022, the Company estimated the fair value of the warrants issued in conjunction with the amendment of the private placement under the JH Darbie financing based on assumptions used in the Black-Scholes valuation model. The warrants resulted in an aggregate fair value of approximately $2.9 million. The key valuation assumptions used consists, in part, of the price of the Company’s Common Stock, a risk-free interest rate based on the yield of a Treasury note and expected volatility of the Company’s Common Stock all as of the measurement date. The Company used the following assumptions to estimate fair value of the warrants:

 

Strike price		$	0.15
Expected Term			1 year
Expected volatility			115.1	%
Risk-free interest rates			1.36	%
Dividend yields			0.00	%

 

The issuance of warrants to purchase shares of the Company’s Common Stock, including those attributed to debt issuances, as of September 30, 2022 are summarized as follows:

 

		Shares				Average Exercise Price
Outstanding at January 1, 2022			53,314,424			$	0.20
Issued during the nine months ended September 30, 2022			38,623,816				0.15-0.20
Exercised / cancelled during the nine months ended September 30, 2022			(9,615,385	)			0.13
Outstanding at September 30, 2022			82,322,855			$	0.18

 

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The following table summarizes information about warrants outstanding and exercisable at September 30, 2022:

 

				Outstanding and exercisable
								Weighted-				Weighted-
								Average				Average
				Number				Remaining Life				Exercise				Number
Exercise Price				Outstanding				in Years				Price				Exercisable
$	0.20				42,737,500				0.50			$	0.20				42,737,500
	0.13				961,539				4.21				0.13				961,539
	0.15				33,000,066				1.50				0.15				33,000,066
	0.20				5,623,750				4.50-4.73				0.20				5,623,750
					82,322,855				1.0			$	0.18				82,322,855

 

NOTE 12 – INCOME TAXES

 

The Company had gross deferred tax assets, which primarily relate to net operating loss carry forwards. As of December 31, 2021, the Company had gross federal and state net operating loss carry forwards of approximately $236.1 million and $76.3 million, respectively, which are available to offset future taxable income, if any. A portion of the gain on the sale of the non-financial asset may give rise to some taxable income, but such income is likely to be offset against the available net operating losses. The Company recorded a valuation allowance in the full amount of its net deferred tax assets since realization of such tax benefits has been determined by our management to be less likely than not. Information on our deferred tax assets and liabilities can be found in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on April 15, 2022.

 

Portions of these carry forwards will expire through 2038, if not otherwise utilized. The Company’s utilization of net operating loss carry forwards could be subject to an annual limitation. as a result of certain past or future events, such as stock sales or other equity events constituting a “change in ownership” under the provisions of Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitations could result in the expiration of net operating loss carry forwards and tax credits before they can be utilized. We have not performed a formal analysis, but we believe our ability to use such net operating losses and tax credit carry forwards will be subject to annual limitations, due to change of ownership control provisions under Section 382 and 383 of the Internal Revenue Code, which would significantly impact our ability to realize these deferred tax assets.

 

NOTE 13 – COMMITMENTS AND CONTINGENCIES

 

Leases

 

Currently, the Company is leasing the office located at 29397 Agoura Road, Suite 107, Agoura Hills, CA 91301 on a month-to-month basis until such time a new office is identified. The Company believes the office is sufficient for its current operations.

 

Legal Claims

 

From time to time, the Company may become involved in legal proceedings arising in the ordinary course of business. The Company is not presently a party to any legal proceedings that it currently believes, if determined adversely to the Company, would individually or taken together have a material adverse effect on the Company’s business, operating results, financial condition or cash flows.

 

PointR Merger Contingent Consideration

 

The total purchase price in the PointR Merger of $17,831,427 represented the consideration transferred from the Company and was calculated based on the number of shares of Common Stock plus the preferred shares outstanding but convertible into Common Stock outstanding at the date of the PointR Merger and included $2,625,000 of contingent consideration of shares issuable to PointR shareholders, which could increase to $15 million of contingent consideration, upon achievement of certain milestones. For more information on the PointR Merger Contingent Consideration, refer to our 2021 Annual Report on Form 10-K filed with the SEC on April 15, 2022.

 

Other claims

 

From time to time, the Company may become involved in certain claims arising in the ordinary course of business. One of the Company’s ex-employees has made a claim against the Company. The Company is evaluating the validity of the claim, as the Company believes that such claim has limited merits and is hopeful to attain a positive outcome for such claim. Since the Company is still evaluating the claim, we are unable to quantify the amount such claim would be settled at, if at all settled.

 

NOTE 14 – SUBSEQUENT EVENTS

 

In October 2022, the Company was awarded a contract with Biomedical Advanced Research and Development Authority (BARDA) for the development of OT-101 therapeutic against long term effects of respiratory distress post COVID-19.

 

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ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q (the “Quarterly Report” or “Report”) includes a number of forward-looking statements that reflect management’s current views with respect to future events and financial performance. Forward-looking statements are projections in respect of future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other comparable terminology. Those statements include statements regarding the intent, belief or current expectations of us and members of our management team, as well as the assumptions on which such statements are based.

 

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, or performance. These statements are only predictions and involve known and unknown risks, uncertainties and other factors. Some of these risks are included in the section entitled “Risk Factors” set forth in this Quarterly Report and in other reports that we file with the SEC. The occurrence of any of these risks, or others of which we are currently unaware, may cause our company’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These risks include, by way of example and without limitation:

 

●	our ability to successfully commercialize our products and services on a large enough scale to generate profitable operations;
●	our ability to maintain and develop relationships with customers and suppliers;
●	our ability to successfully integrate acquired businesses or new products, or to realize anticipated synergies in connection with acquisitions of businesses or products;
●	expectations concerning our ability to raise additional funding and to continue as a going concern;
●	our ability to successfully implement our business plan; and
●	our ability to avoid, or to adequately address any intellectual property claims brought by third parties; and
●	the anticipated impact of any changes in industry regulation.

 

Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the SEC, including our Form 8-K/A filed with the SEC on July 8, 2019, which includes the audited financial statements for our subsidiary, Oncotelic, as of and for the years ended December 31, 2018 and 2017. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time except as required by law. We believe that our assumptions are based upon reasonable data derived from and known about our business and operations. No assurances are made that actual results of operations or the results of our future activities will not differ materially from our assumptions.

 

Corporate History

 

Oncotelic Therapeutics, Inc. (“Oncotelic”), was formed in the State of New York in 1988 as OXiGENE, Inc., was reincorporated in the State of Delaware in 1992, and changed its name to Mateon Therapeutics, Inc. in 2016, and Oncotelic Therapeutics, Inc. in November 2020. Oncotelic conducts business activities through Oncotelic and its wholly owned subsidiaries, Oncotelic, Inc., a Delaware corporation, PointR Data, Inc. (“PointR”), a Delaware corporation: and EdgePoint AI, Inc. (“Edgepoint”), a Delaware Corporation for which there are non-controlling interests, (Oncotelic, Oncotelic Inc., PointR and Edgepoint are collectively called the “Company” or “We”). The Company completed a reverse merger with Oncotelic Inc in April 2019, a merger with PointR in November 2019 and formed a subsidiary Edgepoint in February 2020. For more information on these mergers, refer to our 2020 Annual Report on Form 10-K filed with the SEC on April 15, 2021.

 

Company Overview

 

We are a clinical stage biopharmaceutical company developing drugs for the treatment of cancer. Our goal is to advance our drug candidates into late-stage pivotal clinical trials and either sell marketing rights to a larger pharmaceutical company or seek FDA approval ourselves.

 

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

 

The Company had entered into an agreement and supplemental agreement with GMP for a total of $1.2 million to render services for the development of OT-101 for COVID-19. Such amount was recorded as revenue upon completion of all performance obligations under the agreement. Further, In June 2020, the Company secured $2 million in debt financing from GMP to conduct a clinical trial evaluating OT-101 against COVID-19. The Company discontinued enrollment in its OT-101 clinical trial in patients with COVID-19 in June 2021. In September 2021, the Company secured a further $1.5 million in debt from GMP to complete the study. The trial completed randomization of 32 out of 36 patients planned, on an intent to treat basis. The discontinuance of the trial was due to the continuing rise of more severe variants in Latin America, leading to exhaustion of medical care infrastructure in Latin America.

 

In 2020 and 2021, the Company was developing Artemisinin as a potential therapy for COVID-19. Artemisinin, purified from a plant Artemisia annua. It can inhibit TGF-β activity and is able to neutralize COVID-19. The Company initially conducted a study and the test results during an in vitro study at Utah State University showed Artemisinin having an EC50 of 0.45 ug/ml, and a Safety Index of 140. For more information on the development of Artemisinin, refer to our 2021 Annual Report on Form 10-K filed with the SEC on April 15, 2022.

 

Between October 2021 and January 2022, GMP provided $1.0 million to the Company to fund operations on the way to complete a JV. On March 31, 2022, the Company formalized a JV with Dragon and GMP Bio. For more information on the JV, refer to Note 6 of the Notes to the unaudited Consolidated Financial Statements for this Quarterly Report on Form 10Q.

 

Since April 2019, we have been operating under significant capital constraints, which has curtailed our ability to achieve meaningful progress in either of the Company’s two clinical programs – one of which is developing OXi4503 as a treatment for acute myeloid leukemia and myelodysplastic syndromes and the other of which is developing CA4P in combination with a checkpoint inhibitor for the treatment of advanced metastatic melanoma. We believe that the merger of Oncotelic and Oncotelic Inc. creates a combined company that has potential to generate shareholder value through a promising pipeline of next generation immunotherapies targeting several significant cancer markets where there is a lack of therapeutic options and lack of an effective immunotherapy protocol.

 

Joint Venture

 

On March 31, 2022, the Company entered into (i) a joint venture (the “JV”) agreement with Dragon and GMP Bio (and the Company, Dragon and GMP Bio are collectively called the “Parties”) (the “JVA”), (ii) a license agreement for rights to OT-101 (the “US License Agreement”) for the territory within the United States of America (the “US”) with Sapu Holdings, LLC, a subsidiary of GMP Bio and (iii) a license agreement for rights to OT-101 for the rest of the world with GMP Bio (the “Ex-US Rights Agreement”, and the US License Agreement and the Ex-US License Agreement are collectively called the “Agreements”).

 

The Company determined that the arrangement does not meet the accounting definition of a joint venture. Subsequently, we analyze our investment and determined that such investment was not considered a VIE, which would require consolidation. Besides, the Company does not have the power to direct the activities that most significantly impact the economic performance of the JV. The Company does not control the JV through majority ownership interest or Board participation. As such, the Company followed the guidance in ASC 610-20 regarding the sale of nonfinancial assets to noncustomers when retaining a non-controlling ownership interest in such assets. The Company is deemed to have substantially transferred the actual intellectual property related to OT-101 as the investee can benefit from the risk and rewards of ownership of such intellectual property. This resulted in the derecognition of the carrying amount of our intangible assets for approximately $0.8 million and goodwill for $4.9 million for an aggregate amount of approximately $5.7 million, recorded its initial investment at its fair value for approximately $22.6 million and which resulted in a non-cash gain on non-financial asset disposal of approximately $17 million, which was reported in other income in the condensed consolidated statements of operations in the three and nine months ended September 30, 2022. The Company elected the fair value option under subsection of Section 825-10-15 to account for its equity-method investment as the Company believes that the fair value option is most appropriate for a company in the biotechnology industry, The fair value option is more appropriate for companies that are involved in extensive and usually very expensive research and development efforts, which are not appropriately reflected in the market value or reflective of the true value of the development activities of the company

 

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This JV is a significant milestone in the history of the Company. It permits the Company to monetize and develop the assets it holds, by minimal to no shareholder dilution. This transaction allows us to unburden the Company of the high cost of drug development, which the JV will be responsible for, while the Company will participate in its upside through appreciation in the value of its shares in the JV and up to a potential of $50 million on the sale of the RPD voucher following marketing approval of OT-101 for DIPG. Dragon has agreed to invest cash and other assets with a value of approximately $27.6 million for 55% ownership of the JV; and Oncotelic has granted the License to the JV for 45% ownership in the JV for a fair value of about $22.6 million. The cash contributions by Dragon will allow the JV to commence the development of OT-101.

 

For information on the JV, refer to Note 6 – Joint Venture and GMP of the Notes to the Consolidated Financial Statements above.

 

November – December 2021 and March 2022 Financing

 

In November and December 2021, the Company entered into securities purchase agreement with five institutional investors, whereby the Company issued five convertible notes in the aggregate principal amount of $1,250,000 convertible into shares of common stock of the Company. The convertible notes carry a twelve (12%) percent coupon and a default coupon of 16% and mature at the earliest of one year from issuance or upon event of default. Investors has the right at any time following issuance date to convert all or any part of the outstanding and unpaid amount of the note into the Company’s common stock, par value of $0.01 (“Common Stock”) at a conversion price established at a fixed rate of $0.07. The Company granted a total number of 9,615,385 warrants convertible into an equivalent number of the Common Stock at a strike price of $0.13 up to five years after issuance. The Placement agent was also granted a total amount of 961,540 as part of a finder’s fee agreement. In March 2022, the Company entered into a Securities Purchase Agreement with Fourth Man, pursuant to which the pursuant to which the Company issued convertible promissory note in the aggregate principal amount of $0.25 million, which Note is convertible into shares of the Company’s Common Stock. This Note was undertaken by the Company pursuant to that certain Finder’s Fee Agreement between the Company and JH Darbie, dated October 26, 2021 (the “Agreement”).

 

In January 2022, three of the five investors made a cashless exercise for their warrants. In this connection, the Company issued 3,041,958 million shares of the Common Stock in exchange of approximately 5,761,231 million warrants. In May 2022, November 2021 Talos note and the December 2021 First Fire note were fully repaid, including repaying $35,000 of the First Fire note by issuance of 500,000 shares of our Common Stock. In June 2022, Mast converted their Note from November 2021 for which the company issued 4,025,000 shares of Common Stock. Further, in June 2022, First Fire exercised their warrant to purchase shares of Common Stock of the Company on a cashless basis. In August 2022, the Company converted $140,000 of Fourth Man Note into 2,025,000 shares of common stock. In September 2022, the Company converted $68,250 of Blue Lake note into 1,428,571 shares of common stock.

 

May 2022 Financing

 

In May 2022, the Company entered into a Securities Purchase Agreements with Mast, pursuant to which the Company issued convertible promissory notes in the aggregate principal amount of $0.6 million. This Note is convertible into shares of the Company’s common stock, par value $0.01 per share (“Common Stock”). This note was used to fully repay the November 2021 Talos note and partially repay the December 2021 First Fire note.

 

June 2022 Financing

 

In June 2022, the Company entered into a Securities Purchase Agreements with Blue Lake, pursuant to which the Company issued convertible promissory notes in the aggregate principal amount of $0.34 million. This Note is convertible into shares of the Company’s common stock, par value $0.01 per share (“Common Stock”). This note was utilized for corporate expenses.

 

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Equity Purchase Agreement

 

On May 3, 2021, the Company entered into an Equity Purchase Agreement (“EPL”) and Registration Rights Agreement with Peak One Opportunity Fund LP (“Peak One” or the “Investor”). For further information on EPL, refer to our 2021 Annual Report on Form 10-K filed with the SEC on April 15, 2022. The Company filed a post-effective amendment Registration Statement on Form S-1 with the Commission on April 26, 2022, and the Form S-1 was declared effective on May 6, 2022. The Company filed the prospectus in this connection on May 11, 2022. During the nine months ended September 30, 2022, the Company sold a total of 1.3 million shares of Common Stock to Peak One under the EPL, at price ranging from $0.09 and $0.25, for total gross proceeds of approximately $0.2 million, net of issuance costs.

 

Critical Accounting Policies and Significant Judgments and Estimates

 

The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expense during the reporting periods. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances at the time we make such estimates. Actual results and outcomes may differ materially from our estimates, judgments and assumptions. We periodically review our estimates in light of changes in circumstances, facts and experience. The effects of material revisions in estimates are reflected in the financial statements prospectively from the date of the change in estimate. Our significant accounting policies are more fully described in Note 2 to our Unaudited Consolidated Financial Statements included elsewhere in this Quarterly Report.

 

We define our critical accounting policies as those accounting principles that require us to make subjective estimates and judgments about matters that are uncertain and are likely to have a material impact on our financial condition and results of operations, as well as the specific manner in which we apply those principles. We believe the critical accounting policies used in the preparation of our financial statements that require significant estimates and judgments are the following:

 

Impairment of Long-Lived Assets

 

The Company reviews long-lived assets, including definite-lived intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of these assets is determined by comparing the forecasted undiscounted net cash flows of the operation to which the assets relate to the carrying amount. If the operation is determined to be unable to recover the carrying amount of its assets, then these assets are written down first, followed by other long-lived assets of the operation to fair value. Fair value is determined based on discounted cash flows or appraised values, depending on the nature of the assets. For the nine months ended September 30, 2022 and 2021, there were no impairment losses recognized for long-lived assets.

 

Intangible Assets

 

The Company records its intangible assets at cost in accordance with ASC 350, Intangibles – Goodwill and Other. The Company reviews the intangible assets for impairment on an annual basis or if events or changes in circumstances indicate it is more likely than not that they are impaired. These events could include a significant change in the business climate, legal factors, a decline in operating performance, competition, sale or disposition of a significant portion of the business, or other factors.

 

Goodwill

 

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

 

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The first step involves comparing the fair value of the reporting unit to its carrying amount. If the fair value of the reporting unit is determined to be greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount is determined to be greater than the fair value, the second step must be completed to measure the amount of impairment, if any. The second step involves calculating the implied fair value of goodwill by deducting the fair value of all tangible and intangible assets, excluding goodwill, of the reporting unit from the fair value of the reporting unit as determined in step one. The implied fair value of the goodwill in this step is compared to the carrying value of goodwill. If the implied fair value of the goodwill is less than the carrying value of the goodwill, an impairment loss equivalent to the difference is recorded.

 

Convertible Instruments

 

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

 

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

 

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

 

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

 

Derivative Financial Instruments Indexed to the Company’s Common Stock

 

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

 

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Variable Interest Entity (VIE) Accounting

 

We evaluate our ownership, contractual relationships and other interests in entities to determine the nature and extent of the interests, whether such interests are variable interests and whether the entities are VIEs in accordance with ASC 810, Consolidations. These evaluations can be complex and involve Management judgment as well as the use of estimates and assumptions based on available historical information, among other factors. Based on these evaluations, if the Company determines that it is the primary beneficiary of a VIE, the entity is consolidated into the financial statements.

 

Investments - Equity Method

 

The Company accounts for equity method investments at cost, adjusted for the Company’s share of the investee’s earnings or losses, which are reflected in the consolidated statements of operations. The Company periodically reviews the investments for other than temporary declines in fair value below cost and more frequently when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.

 

The Investment in GMP Bio represents the investment into equity securities for which the Company elected the fair value option pursuant to ASC 825-10-15 and subsequent fair value changes in the GMP Bio shares are included in the result from continuing operations. Refer to Note 6 to these Notes to the Consolidated Financial Statements.

 

Joint Venture agreement

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

The Company elected the fair value option under the fair value option Subsection of Section 825-10-15 to account for its equity-method investment.

 

Research and Development Expense

 

Research and development expense consist of costs we incur for the development of our investigational drugs and, to a lesser extent, for preclinical research activities. Research and development costs are expensed as incurred. Research and development expense include clinical trial costs, salaries and benefits of employees, including associated stock-based compensation, payments to clinical investigators, drug manufacturing costs, laboratory supplies and facility costs. Clinical trial costs are a significant component of our research and development expense, and these can be difficult to accurately estimate. Included in clinical trial costs are fees paid to other entities that conduct certain research and development activities on our behalf, such as clinical research organizations, or CROs. We estimate clinical trial expense based on the services performed pursuant to contracts with research institutions such as CROs and the actual clinical investigators. These estimates are based on actual time and expenses incurred by the CRO and the clinical investigators. Also included in clinical trial expense are costs based on the level of patient enrollment into the clinical trial and the actual services performed under the related clinical trial agreement. Changes in clinical trial assumptions, such as the length of time estimated to enroll all patients, rate of screening failures, patient drop-out rates, number and nature of adverse event reports and the total number of patients enrolled can impact the average and expected cost per patient and the overall cost of the clinical trial. Based on patient enrollment reports and services provided, we may periodically adjust estimates for the clinical trial costs. If we do not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed, the length of time for these services or the costs of these services, our actual expenses could differ from our estimates.

 

Share-Based Compensation

 

We record the estimated fair value of all share-based payments issued to employees and other service providers. Our share-based payments consist primarily of stock options. The valuation of stock options is an inherently subjective process, since market values are not available for any stock options in our equity securities. Market values are also not available on long-term, non-transferable stock options in other equity securities. With no market values on options to trade in our common stock and no comparable market values on any long-term non-transferable stock options, the process of valuing our stock options is even more uncertain and subjective. Accordingly, we use a Black-Scholes option pricing model to derive an estimated fair value of the stock options which we issue. The Black-Scholes option pricing model requires certain input assumptions, including the expected term of the options and the expected volatility of our common stock. Changes in these assumptions could have a material impact on the estimated fair value that we record for share-based payments that we issue. We determine the term of the options based on the simplified method, which averages the vesting period and the contractual life of the stock option. We determine the expected volatility based on the historical volatility of our common stock over a period commensurate with the option’s expected term. The Black-Scholes option pricing model also requires assumptions for risk-free interest rates and the expected dividend yield of our common stock, but we feel that these values are more objective and note that changes in these values do not have a significant impact on the estimated value of the options when compared to the volatility and term assumptions.

 

We are also required to estimate the level of award forfeitures expected to occur and record compensation expense only for those awards that are ultimately expected to vest. Accordingly, we perform a historical analysis of option awards that are forfeited prior to vesting, and record total stock option expense that reflects this estimated forfeiture rate.

 

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Results of Operations

 

Comparison of the Results of Operations for the three Months Ended September 30, 2022 to the three Months Ended September 30, 2021

 

A comparison of the Company’s operating results for the three months ended September 30, 2022 and 2021, respectively, is as follows.

 

		September 30, 2022				September 30, 2021				Variance
Operating expense:
Research and development			1,700				621,927				(620,227	)
General and administrative			593,739				1,187,035				(593,296	)
Total operating expense			595,439				1,808,962				(1,213,523	)
Loss from operations			(595,439	)			(1,808,962	)			1,213,523
Reimbursement for expenses – related party			237,165				-				237,165
Interest expense, net			(606,824	)			(445,363	)			(161,461	)
PPP loan forgiveness			-				253,347				(253,347	)
Change in the value of derivatives on debt			105,662				145,449				(39,787	)
Net income (loss) before controlling interests		$	(859,436	)		$	(1,855,529	)		$	996,093

 

Net Loss

 

We recorded a net loss of approximately $0.9 million for the three months ended September 30, 2022, compared to a net loss of approximately $1.9 million for the three months ended September 30, 2021. The lower loss of approximately $1.0 million for the three months ended September 30, 2022 as compared to the same period of 2021 was primarily due to reduced operating expenses of approximately $1.2 million, reimbursement of expenses by a related party of approximately $0.2 million; offset by higher interest expense by approximately $0.2 million, PPP loan forgiveness of approximately $0.3 million from the three months ended September 30, 2021 and change in the value of derivatives on debt of approximately $40 thousand.

 

Research and Development Expenses

 

Research and development (“R&D”) expenses decreased by approximately $0.6 million for the three months ended September 30, 2022 compared to the same period in 2021, primarily due to lower personnel expenses of approximately $0.3 million and lower clinical trial expenses related to OT-101 of approximately $0.3 million.

 

As a result of our JV, we expect our R&D expense to remain steady or reduce for the remainder of the year 2022, specifically for activities related to OT-101, including the initiation of new clinical trials. Any other development expenses will be subject to our continuing ability to secure sufficient funding to continue planned operations.

 

General and Administrative Expenses

 

General and administrative (“G&A”) expenses decreased by approximately $0.6 million for the three months ended September 30, 2022 compared to the three months ended September 30, 2021, primarily due to reduced compensation expense of approximately $0.6 million, which was borne by the JV, during the three months ended September 30, 2022 as compared to same period in 2021.

 

As a result of our JV, we expect our G&A activities to reduce, and therefore believe that G&A expenses will decrease for the remainder of 2022. Any other G&A expenses will be subject to our continuing ability to secure sufficient funding to continue planned operations.

 

Reimbursement of expenses

 

The Company was reimbursed approximately $0.25 million, by Autotelic Inc. a related party, during the three months ended September 30, 2022 on behalf of our JV.

 

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Interest Expense, Net

 

We recorded interest expense, including amortization of debt costs, of approximately $0.6 million for the three months ended September 30, 2022 primarily in connection with debt raised from convertible notes and the JH Darbie Financing, November/December 2021 Financing and May/June 2022 financing as compared to approximately $0.45 million for the same period of 2021, in connection with debt raised from convertible notes and JH Darbie during 2021. For more information on debt raised from convertible notes and the JH Darbie Financing, see Note 5 and Note 6 of the Unaudited Consolidated Financial Statements of this Quarterly Report.

 

PPP Loan Forgiveness

 

We recorded a PPP loan forgiveness of approximately $0.3 million during the three months ended September 30, 2021. No similar amount was recorded during the same period in 2022.

 

Change in Value of Derivatives

 

During the three months ended September, 2022, we recorded approximately $0.1 million due to a change in value upon conversion of certain debt to liabilities as a derivative on the convertible promissory notes issued to our CEO and a bridge investor (collectively, the “Convertible Notes”). The Company recorded approximately $0.15 million change during the same period in 2021. For more information on value of derivatives, refer to the Note 2 of the Unaudited Consolidated Financial Statements of this Quarterly Report.

 

Comparison of the Results of Operations for the Nine Months Ended September 30, 2022 to the Nine Months Ended September 30, 2021

 

A comparison of the Company’s operating results for the nine months ended September 30, 2022 and 2021, respectively, is as follows.

 

		September 30, 2022				September 30, 2021				Variance
Operating expense:
Research and development			690,705				3,135,413				(2,444,708	)
General and administrative			4,505,256				4,475,642				(29,614	)
Total operating expense			5,195,961				7,611,055				(2,415,094	)
Loss from operations			(5,195,961	)			(7,611,055	)			2,415,094
Reimbursement for expenses – related party			484,657				-				484,657
Interest expense, net			(1,999,164	)			(1,400,249	)			(598,915	)
Gain on derecognition of non-financial asset			16,951,477				-				16,951,477
PPP loan forgiveness			-				253,347				(253,347	)
Change in the value of derivatives on debt			37,740				239,278				(201,538	)
Loss on conversion of debt			(257,810	)			(27,504	)			(230,306	)
Net income (loss) before controlling interests		$	10,020,939			$	(8,546,183	)		$	18,567,122

 

Net Income

 

We recorded a net income of approximately $10 million for the nine months ended September 30, 2022, compared to a net loss of approximately $8.5 million for the nine months ended September 30, 2021. The higher net income of approximately $18.6 million for the nine months ended September 2022 as compared to the same period of 2021, was primarily due to due to gain on the derecognition of a non-financial asset of approximately $17 million, lower operating expense of approximately $2.4 million, increased reimbursement for expenses of approximately $0.5 million, higher loss on conversion of debt of approximately $0.2 million, and higher interest expense of $0.6 million and lower forgiveness of the PPP loan from the nine months ended September 30, 2021 of $0.25 million.

 

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Research and Development Expenses

 

Research and development (“R&D”) expenses decreased by approximately $2.4 million for the nine months ended September 30, 2022 compared to the same period in 2021 primarily due to reduced compensation cost of $0.8 million, reduced clinical trial cost of approximately $1.5 million and lower operational and other expenses of approximately $0.2 million. As a result of our JV with Dragon and GMP Bio, the JV has absorbed most of the compensation costs as well as some of the operational costs during the six months ended September 30, 2022.

 

As a result of our JV, we expect our R&D expense to remain steady or decrease for the remainder of the year 2022, specifically for activities related to OT-101, including the initiation of new clinical trials. Any other development expenses will be subject to our continuing ability to secure sufficient funding to continue planned operations.

 

General and Administrative Expenses

 

General and administrative (“G&A”) expenses marginally increased by approximately $0.1 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily due to higher stock-based compensation expense of approximately $ 0.9 million, offset by lower compensation costs of approximately $0.6 million, lower legal costs of approximately $0.1 million and lower operational costs of $0.1 million.

 

As a result of our JV, we expect our G&A activities to reduce, and therefore believe that G&A expenses will decrease for the remainder of 2022. Any other G&A expenses will be subject to our continuing ability to secure sufficient funding to continue planned operations.

 

Interest Expense, Net

 

We recorded interest expense, including amortization of debt costs, of approximately $2 million for the nine months ended September 30, 2022 primarily in connection with debt raised from convertible notes, JH Darbie Financing, November/December 2021 and March 2022 Financing and May/June 2022 Financing, as compared to approximately $1.4 million for the same period of 2021, in connection with debt raised from convertible notes during 2019 and JH Darbie Financing.

 

Reimbursement of expenses

 

The Company was reimbursed approximately $0.5 million, by Autotelic Inc. a related party, during the nine months ended September 30, 2022 on behalf of our JV.

 

Gain on Derecognition of Non-financial Asset

 

During the nine months ended September 30, 2022, we recorded a gain of approximately $16.9 million on the sale of our non-financial asset upon the transfer of OT-101 as our capital contribution for the JV. We adopted the fair value measurements under the equity method and the gain was net of the fair value of the asset of approximately $22.6 million as reduced by the removal of the value of the intangibles of approximately $0.8 million for OT-101 and the value of the goodwill of $4.9 million recorded at the time of the 2019 Merger with Oncotelic Inc.

 

PPP Loan Forgiveness

 

We recorded a PPP loan forgiveness of approximately $0.3 million during the nine months ended September 30, 2021. No similar amount was recorded during the same period in 2022.

 

Change in Value of Derivatives

 

During the nine months ended September, 2022, we recorded approximately $38 thousand due to a change in value upon conversion of certain debt to liabilities as a derivative on the convertible promissory notes issued to our CEO and a bridge investor (collectively, the “Convertible Notes”). The Company recorded approximately $0.24 million change during the same period in 2021. For more information on value of derivatives, refer to the Note 2 of the Unaudited Consolidated Financial Statements of this Quarterly Report.

 

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Loss on Conversion of Debt

 

During the nine months ended September 30, 2022, we recorded a loss of $0.25 million on conversion of debt as compared to a loss of $27 thousand related to the difference in fair value to the price at which the debt was converted.

 

Liquidity, Financial Condition and Capital Resources ($s in ‘000’s)

 

		September 30, 2022				December 31, 2021
Cash, including restricted cash of $20		$	274			$	589
Negative working capital			(15,898	)			(14,828	)
Stockholders’ Equity, after non-controlling interests			24,026				8,158

 

The Company has incurred net accumulated losses of approximately $20.6 million, negative working capital of approximately $15.9 million and negative cash flow from operations of approximately $1.4 million at September 30, 2022. Management expects to incur significantly lower costs losses, especially due to the transfer of costs over to the JV, especially in connection with the development of OT-10, in the foreseeable future but also recognizes the need to raise capital to remain viable. The Company’s limited capital resources, history of recurring losses and uncertainties as to whether the Company’s operations will become profitable raise substantial doubt about its ability to continue as a going concern. The financial statements contained in this report do not include any adjustments related to the recoverability of assets or classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

The principal source of the Company’s working capital deficit to date has been the issuance of convertible notes, a substantial part of which has been provided by officers and certain insiders, and sale of equity under the EPA with Peak One. The Company will need to raise additional capital in order to fund its operations and continue development of product candidates. The Company is evaluating the options to further the development of the Company’s product candidates, AL-101, Artemisinin for COVID-19, developing AI technologies to support the COVID-19 therapies; in addition to evaluating the development pathway of its product candidates; OXi4503 and/or CA4P. The Company is also independently planning to develop OT-101 for certain animal health indications and contemplating using crypto currencies for that platform.

 

The Company anticipates raising substantial additional capital through the sale of equity securities and/or debt, but no financing arrangements are in place at this time.

 

If the Company is unable to access additional funds when needed, it may not be able to continue the development of these investigational drugs and the Company could be required to delay, scale back or eliminate some or all of its development programs and operations. Any additional equity financing, if available, would be dilutive to the current stockholders and may not be available on favourable terms. Additional debt financing, if available, may involve restrictive covenants and could also be dilutive. The Company’s ability to access capital is not assured and, if access is not achieved on a timely basis, would materially harm the Company’s financial condition, the value of its Common Stock and its business prospects.

 

Cash Flows ($ in ‘000’s)

 

		Nine month ended September 30,
		2022				2021
Net cash used in operating activities		$	(1,372	)		$	(3,367	)
Net cash provided by financing activities			1,057				2,971
Increase (decrease) in cash		$	(315	)		$	(396	)

 

Operating Activities

 

Net cash used in operating activities was approximately $1.4 million for the nine months ended September 30, 2022. This was due to the net income of approximately $10.0 million, primarily offset by non-cash gain on the sale of its non-financial asset of approximately $17 million, non-cash amortization of debt discounts and deferred financing costs of $1.1 million, non-cash stock compensation costs of $0.3 million, fair value of the warrants issued during the nine months ended September 30, 2022 of $2.9 million, non-cash loss on debt conversion of approximately $0.5 million and changes in operating assets and liabilities of approximately $0.1 million.

 

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Net cash used in operating activities was approximately $3.4 million for the nine months ended September 30, 2021. This was due to the net loss of approximately $8.5 million, primarily offset by non-cash amortization of debt discounts and deferred financing costs of $1.1 million, non-cash stock compensation costs on fair value of the warrants issued during the nine months ended September 30, 2021 of $2.1 million, stock compensation cost recorded on fair value of restricted stocks of approximately $0.2 million, stock compensation on stock options granted during the three months ended September 30, 2021 of approximately $0.3 million; and changes in operating assets and liabilities of approximately $1.7 million.

 

Financing Activities

 

For the nine months ended September 30,2022, net cash provided by financing activities was approximately $1.1 million, due to a receipt of cash from sale of shares under the EPA of approximately $0.2 million, a short-term convertible loan GMP of $0.5 million, approximately $1.0 million under the March 2022, May 2022 and June 2022 notes, offset by repayments of debt of approximately $0.5 million to certain note holders and approximately $0.1 million repayments to one of our PPH note holder and certain short term lenders.

 

For the nine months ended September 30, 2021, net cash provided by financing activities was approximately $3.0 million, due to a receipt of cash from the JH Darbie Financing of $1.6 million, sale of equity of $0.1 million, proceeds of a convertible note of $0.3 million from Geneva and convertible notes and short-term loans from certain related parties, the CFO and bridge investors of $1.0 million, and approximately $0.1 million from the PPP, partially offset by repayments of debt of approximately $0.2 million.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

Effects of Inflation

 

We do not believe that inflation has had a material impact on our business, revenues or operating results during the periods presented.

 

Contractual Obligations

 

Our current drug development programs are based on a series of compounds called combretastatins, which we have exclusively licensed from Arizona State University, or ASU. If our current drug candidates are approved, we will be required to pay low to mid-single-digit royalties on future net sales of products associated with the ASU patent rights until these patent rights expire.

 

We also have an exclusive license from Bristol-Myers Squibb, or BMS, for certain patent rights to particular combretastatins, including CA4P. If CA4P is approved, we will be required to pay low-single-digit royalties on future net sales of products associated with the BMS patent rights until these patent rights expire.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Our cash is maintained in U.S. dollar accounts. We have adopted a policy for the cash that we hold, and also for any cash equivalents and investments that we may hold, the primary objective of which is to preserve principal, while also maintaining liquidity to meet our operating needs and maximize yields to the extent possible. Although our investments can be subject to credit risk, we follow procedures to limit the amount of credit exposure in any single issue, issuer or type of investment. Our investments are also subject to interest rate risk and would be likely to decrease in value if market interest rates increase. However, due to the generally conservative nature of our investments and relatively short duration, we believe that interest rate risk is mitigated.

 

Although we may from time-to-time manufacture drugs and conduct preclinical or clinical trials outside of the United States, we believe our exposure to foreign currency risk to be immaterial.

 

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Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports 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, as appropriate, to allow timely decisions regarding required disclosures. In designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives.

 

As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”) conducted an evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation, our CEO and our CFO each concluded that our disclosure controls and procedures are not effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act, (i) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) is accumulated and communicated to our management, including our CEO and our CFO, as appropriate to allow timely decisions regarding required disclosure.

 

Material Weaknesses in Internal Control over Financial Reporting

 

Management conducted an assessment of the effectiveness of our internal control over financial reporting as of September 30, 2022 based on the framework established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has determined that the Registrant’s internal control over financial reporting as of September 30, 2022 was not effective as a result of certain material weaknesses.

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

 

The ineffectiveness of our internal control over financial reporting was due to the following material weaknesses which are observed in many small companies with a small number of accounting and financial reporting staff:

 

●	Lack of formal policies and procedures;
●	Lack of a functioning audit committee and independent directors on the Company’s board of directors to oversee financial reporting responsibilities;
●	Inadequate or lack of segregation of duties;
●	Lack of dedicated resources and experienced personnel to design and implement internal control procedures to support financial reporting objectives;
●	Lack of qualified accounting personnel to prepare and report financial information in accordance with GAAP; and
●	Lack of risk assessment procedures on internal controls to detect financial reporting risks on a timely manner.

 

Management’s Plan to Remediate the Material Weaknesses

 

Management has been implementing and continues to implement measures designed to ensure that control deficiencies contributing to the material weakness are remediated, such that these controls are designed, implemented, and operating effectively. The remediation actions planned include:

 

●	Continue to search for, evaluate and recruit qualified independent outside directors;
●	Hire qualified accounting personnel to prepare and report financial information in accordance with GAAP;
●	Identify gaps in our skills base and the expertise of our staff required to meet the financial reporting requirements of a public company; and
●	Continue to develop policies and procedures on internal control over financial reporting and monitor the effectiveness of operations on existing controls and procedures.

 

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Changes in Internal Control over Financial Reporting

 

During the nine months ended September 30, 2022, we continued to execute upon our planned remediation actions which are all intended to strengthen our overall control environment. While we have made progress in our planned remediation efforts and we hope to complete its planned execution of internal controls over financial reporting before December 31, 2022, however, our ability to do so would greatly depend on our ability to obtain financial and other resources to complete the remediation.

 

We are committed to maintaining a strong internal control environment and believe that these remediation efforts, if addressed, will represent significant improvements in our control environment. Our management will continue to monitor and evaluate the relevance of our risk-based approach and the effectiveness of our internal controls and procedures over financial reporting on an ongoing basis and is committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

None.

 

Item 1A. Risk Factors

 

In addition to the risk factor described below, for information about the risks and uncertainties related to our business, please see the risk factors described in our 2021 Annual Report on Form 10-K for the year ended December 31, 2021 filed on April 15, 2022. The risks described below and in our Form 10-K are not the only risks facing our Company. 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.

 

Our business may suffer from the severity or longevity of the COVID-19 Global Outbreak.

 

The COVID-19 continues impacting countries, communities, supply chains and markets, as well as the global financial markets. To date, COVID-19 has not had a material impact on the Company, other than as set forth above. However, the Company cannot predict whether COVID-19 will have a material impact on our financial condition and results of operations due to understaffing, disruptions in government spending, among other factors. In addition, at this time we cannot predict the impact of COVID-19 on our ability to obtain financing necessary for the Company to fund its working capital requirements. In most respects, it is too early in the COVID-19 pandemic to be able to quantify or qualify the longer-term ramifications on our business, our customers and/or our potential investors.

 

Item 2. Unregistered Sales of Equity Securities and Use Of Proceeds

 

In January 2022, three of the five investors from the November/December 2021 financing made a cashless exercise for their warrants. In connection with this exercise, the Company issued 3,041,958 shares of Common Stock in exchange of approximately 5,769,231 million warrants.

 

In May 2022, Blue Lake made a cashless exercise for their warrants. In connection with this exercise, the Company issued 1,403,326 shares of Common Stock in exchange of 1,923,077 warrants.

 

In June 2022, Mast Hill converted their debt of approximately $0.28 million. In connection with the Note conversion, the Company issued 4,025,000 shares of Common Stock to Mast Hill.

 

In June 2022, Company issued 500,000 shares of Common Stock to First Fire as a partial repayment of convertible debt of $35,000.

 

In June 2022, First Fire made a cashless exercise for their warrants. In connection with this exercise, the Company issued 1,183,400 shares of Common Stock in exchange for 1,923,077 warrants.

 

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In August 2022, Fourth Man converted $0.14 million of their debt of approximately $0.28 million. In connection with the Note conversion, the Company issued 2,025,000 shares of Common Stock to Fourth Man.

 

In September 2022, Blue Lake converted $0.1 million of their debt of approximately $0.1 million. In connection with the Note conversion, the Company issued 1,428,571 shares of Common Stock to Blue Lake.

 

Item 3. Defaults upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not Applicable.

 

Item 5. Other Information

 

None.

 

ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

In reviewing the agreements included as exhibits to this Quarterly Report, please remember that they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about the Company or the other parties to the agreements. The agreements may contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the parties to the applicable agreement and:

 

	●	should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;
	●	have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;
	●	may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and
	●	were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.

 

Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about the Company may be found elsewhere in this Quarterly Report and the Company’s other public filings, which are available without charge through the SEC’s website at http://www.sec.gov.

 

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The following exhibits are included as part of this Quarterly Report. A more complete list of previously filed Exhibits can be found with our Annual Report on Form 10K filed with the SEC on April 15, 2022:

 

				Incorporated by Reference
Exhibit Number		Description		Form		Filing Date		Exhibit Number		Filed Herewith
10.1		Amendment to the Oncotelic Therapeutics, Inc. 2015 Equity Incentive Plan		S-8		4/19/2021		10.1
10.2		Equity Purchase Agreement by and between Oncotelic Therapeutics, Inc., and Peak One Opportunity Fund, L.P., dated May 3, 2021		8-K		5/7/2021		10.1
10.3		Registration Rights Agreement, by and between Oncotelic Therapeutics, Inc., and Peak One Opportunity Fund, L.P., dated May 3, 2020		8-K		5/7/2021		10.2
10.4		Joint Venture Agreement relating to GMP Biotechnology Limited between Dragon Overseas Capital Limited, Oncotelic Therapeutics, Inc. and GMP Biotechnology Limited dated March 31, 2022		8-K		4/6/2022		10.1
10.5		License Agreement between Oncotelic Therapeutics, Inc. and GMP Biotechnology Limited dated March 31, 2022		8-K		4/6/2022		10.2
10.6		License Agreement between Oncotelic Therapeutics, Inc. and Sapu Holdings, LLC dated March 31, 2022		8-K		4/6/2022		10.3
10.7		Independent consulting agreement between Oncotelic Therapeutics, Inc. and Fatih Uckun, MD, Ph.D. dated May 1, 2022		8-K		5/6/2022		10.1
10.8		Independent consulting agreement between Oncotelic Therapeutics, Inc. and Seymour Fein, MD dated May 1, 2022		8-K		5/6/2022		10.2
10.9		Securities Purchase Agreement between Oncotelic Therapeutics Inc. and certain accredited investors dated May 27, 2022		8-K		6/3/2022		10.1
10.10		Securities Purchase Agreement between Oncotelic Therapeutics Inc. and certain accredited investors dated June 22, 2022		8-K		6/27/2022		10.1
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a).								x
31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a).								x
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.								x
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.								x
101.1		Interactive Data Files for the fiscal years ended December 31, 2022 and December 31, 2021								x
101.INS		Inline XBRL Instance Document								x
101.SCH		Inline XBRL Taxonomy Extension Schema								x
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase								x
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase								x
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase								x
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase								x
104		Cover Page Interactive Data File (embedded within the Inline XBRL document)								x

 

*	Confidential treatment has been granted for portions of this Exhibit. Redacted portions filed separately with the Securities and Exchange Commission.
+	Management contract or compensatory plan or arrangement.

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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.

 

ONCOTELIC THERPAEUTICS INC.

 

By:	/s/ Vuong Trieu
	Vuong Trieu, Ph.D.
	Chief Executive Officer and Director (Principal Executive Officer)
Date:	November 18, 2022
By:	/s/ Amit Shah
	Amit Shah
	Chief Financial Officer (Principal Financial and Accounting Officer)
Date:	November 18, 2022

 

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