The following discussion of our financial condition and results of operations
should be read in conjunction with our financial statements and related notes
included elsewhere in this Annual Report on Form 10-K. This discussion contains
certain forward-looking statements that involve risk and uncertainties. Our
actual results may differ materially from those discussed below. Factors that
could cause or contribute to such differences include, but are not limited to,
those identified below and those set forth under the section titled "Risk
Factors," and other documents we file with the
Overview
We have put in place a business model in which we may derive future income from licensing and selling natural bioactive ingredients including algal biomass and products that may be derived from or are initially based on the algal biomass. We expect that these planned new products will likely be sold or licensed to much larger, better-financed human and animal pharma companies, and to food, dietary supplement, and skin care manufacturers. The anticipated income streams are to be generated from a) sales of algal biomass or extracts thereof, and b) license payments in the form of royalties and / or other contractual payments for licensed natural bioactive ingredients. Our manufacturing strategy is to create contract manufacturers for our non-licensed products which products will be sold by us to animal food, dietary supplement, and medical food processors and/or name-brand marketers. Further, we expect to license our bioactive molecules as lead compounds or templates for synthetic variants intended for therapeutic applications.
For our Wellmetrix, subsidiary, the Company's board of directors (the "Board") and management agreed to halt active product development and instead focus on prospective out-licensing of the existing IP, consisting of a patent and several patents pending. An ongoing commitment to patent prosecution and maintenance of the existing patent portfolio has been approved by the Board.
32 Table of Contents Financial Overview
General and Administrative Expenses
General and administrative expenses consist primarily of personnel-related costs for personnel in functions not directly associated with research and development activities, professional fees and consultant expenses, and other overhead spending. Personnel related costs include cash compensation, benefits, and stock-based compensation expenses. Professional fees and consultant expenses consist primarily of legal fees relating to corporate matters, intellectual property costs, professional fees for consultants assisting with regulatory, and financial matters. Other overhead spending includes cost to support information technology, rent, insurances, public company listing, and supplies.
We anticipate that our general and administrative expenses will significantly increase in the future to support our continued research and development activities, potential commercialization of our product candidates, hiring of additional personnel, legal and professional services, and other public company related costs.
Research and Development
Research and development expenses are incurred in developing our product candidates, compensation and benefits for research and development employees, including stock-based compensation, research related overhead expenses, cost of laboratory supplies, clinical trial and related clinical manufacturing expenses, costs related to regulatory operations, fees paid to research consultants and other outside expenses. Research and development costs are expensed as incurred and costs incurred by third parties are expensed as the contracted work is performed.
We expect our research and development expenses to significantly increase over the next several years as we continue to develop product candidates targeting additional pharma and algal biomass applications. These additional activities will increase the need to conduct preclinical testing and clinical trials and will depend on the duration, costs and timing to complete our preclinical programs and clinical trials.
33 Table of Contents Interest Expense
Interest expense primarily consists of interest costs related to our convertible notes and for interest on short term debt, as discussed in detail below.
Other Income
Other income consists of proceeds derived from activity outside of normal operating activity, including the forgiveness of the paycheck protection program loan in 2021.
Results of Operations
Comparison of Year Ended
The following table summarizes our results of operations for the year endedDecember 31, 2022 and 2021: Year ended December 31, 2022 2021 Revenue: $ - $ - Total revenue $ - $ - Costs and expenses: General and administrative 6,491,704 6,694,619 Research and development 2,240,270 1,950,500 Total costs and expenses$ 8,731,974 $ 8,645,119 Loss from operations$ (8,731,974 ) $ (8,645,119 ) Other income (expense): Interest (expense) (13,319 ) (233,282 ) Gain on forgiveness of debt and accrued interest - 122,520 Total other (expense), net$ (13,319 ) $ (110,762 ) Net loss$ (8,745,293 ) $ (8,755,881 )
General and Administrative Expenses
General and administrative expenses were
Research and Development Expenses
For the 12 months ended
Of these expenses, all
34 Table of Contents December 31, December 31, 2022 2021 Labor and other internal expenses$ 1,582,628 $ 832,221 External research expenses 1,431,667 1,674,025 Total gross R&D expenses$ 3,014,295 $ 2,506,246
Less contra-expense for amortization of deferred R&D obligation - Participation Agreements
(774,025 ) (555,746 ) Net R&D expenses$ 2,240,270 $ 1,950,500
Subject to the availability of funding, we expect our R&D costs to grow as we work to complete the research in the development of natural bioactive compounds for use as dietary supplements and food ingredients, as well as biologics for medicinal and pharmaceutical applications in humans and animals. The Company's scientific efforts presently are focused on the licensing products for healthy immune response in livestock and growing of our proprietary algal culture in commercial scale facilities.
Liquidity and Capital Resources
Historical Capital Resources
As of
We anticipate that our expenses will increase substantially as we develop and seek to commercialize our product candidates and continue to pursue pre-clinical and clinical trials, seek regulatory approvals, manufacture product candidates, hire additional staff, add operational, financial and management systems and continue to operate as a public company.
Our source of cash to date has been proceeds from the issuances of notes, common stock with and without warrants and unsecured loans, and the entry into Participation Agreements, the terms of which are further described below. See also "Funding Requirements and Outlook" below.
On
Convertible Notes
On
35 Table of Contents
Deferred R&D Obligations - Participation Agreements
From
The Participation Agreements allow the Company the option to buy back the right, title and interest in the Revenue Share for an amount equal to the amount funded plus a forty percent (40%) premium, if the option is exercised less than 18 months following execution, and for either forty (40%) or fifty percent (50%) if the option is exercised more than 18 months following execution. Pursuant to the terms of twelve of the Participation Agreements, the Company may not exercise its option until it has paid the Participants a revenue share equal to a minimum of thirty percent (30%) of the amount such Participant's total payment amount. Pursuant to the terms of the one of the Participation Agreements, the Company may not exercise its option until it has paid the Participant a revenue share equal to a minimum of one hundred forty percent (140%) of the amount such Participant's total payment amount. Five of the Participation Agreements have no minimum threshold payment. Once this minimum threshold is met, the Company may exercise its option by delivering written notice to a Participant of its intent to exercise the option, along with repayment terms of the amount funded, which may be paid, in the Company's sole discretion, in one lump sum or in four (4) equal quarterly payments. If the Company does not make such quarterly payments timely for any quarter, then the Company shall pay the prorate Revenue Share amount, retroactive on the entire remaining balance owed, that would have been earned during such quarter until the default payments have been made and the payment schedule is no longer in default.
Unsecured Loans
From
Private Placements
Between
Paycheck Protection Program Loan
In connection with the 2020 Coronavirus Aid, Relief, and Economic Security
("CARES Act"), the Company received loan funding of approximately
Funding Requirements and Outlook
At
Management has noted the existence of substantial doubt about our ability to
continue as a going concern. Additionally, our independent registered public
accounting firm included explanatory paragraphs in the reports on our financial
statements as of and for the years ended
36 Table of Contents
Our material cash requirements relate to the funding of our ongoing product
development. See "Item 1-
The development of our product candidates is subject to numerous uncertainties, and we could use our cash resources sooner than we expect. Additionally, the process of development is costly, and the timing of progress in pre-clinical tests and clinical trials is uncertain. Our ability to successfully transition to profitability will be dependent upon achieving further regulatory approvals and achieving a level of product sales adequate to support our cost structure. We cannot assure you that we will ever be profitable or generate positive cash flow from operating activities.
Cash Flows
Cash Flows from Operating Activities. During the 12 months ended
Cash Flows from Investing Activities. During the 12 months ended
Cash Flows from Financing Activities. During the 12 months ended
We estimate that we would require approximately
Twelve months ended December 31, 2022 2021 Net cash provided by (used in): Operating activities$ (7,102,612 ) $ (6,803,333 ) Investing activities - - Financing activities - 15,567,346 Net increase (decrease) in cash and cash equivalents$ (7,102,612 ) $ 8,764,013 37 Table of Contents Critical Accounting Estimates
Our management's discussion and analysis of our financial condition and results
of operations is based on our financial statements, which have been prepared in
accordance with accounting principles generally accepted in
While our significant accounting policies are more fully described in the notes to our financial statements appearing elsewhere in this Report, we believe the following are the critical accounting policies used in the preparation of our financial statements that require significant estimates and judgments.
Fair Value of Financial Instruments
We account for fair value measurements of assets and liabilities that are
recognized or disclosed at fair value in the financial statements on a recurring
or nonrecurring basis adhering to the
· Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the Company at the measurement date. · Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. · Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.
As of
Premium Conversion Derivatives
We evaluate all conversion and redemption features contained in a debt instrument to determine if there are any embedded derivatives that require separation from the host debt instrument. An embedded derivative that requires separation is bifurcated from its host debt instrument and a corresponding discount to the host debt instrument is recorded. The discount is amortized and recorded to interest expense over the term of the host debt instrument using the straight-line method which approximates the effective interest method. The separated embedded derivative is accounted for separately on a fair market value basis. We record the fair value changes of a separated embedded derivative at each reporting period in the consolidated statements of comprehensive loss as a fair value change in derivative and warrant liabilities.
38 Table of Contents Stock-Based Compensation
We account for sharebased compensation in accordance with the provisions of the
Recent Accounting Pronouncements
See "Note 4 - Summary of Significant Accounting Policies" in this Report regarding the impact of certain recent accounting pronouncements on our financial statements.
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