See accompanying condensed notes to unaudited consolidated financial statements.
See accompanying condensed notes to unaudited consolidated financial
statements.
SILO PHARMA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| |
For the Nine Months Ended | |
| |
September 30, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
CASH FLOWS FROM OPERATING ACTIVITIES: | |
| | |
| |
Net loss | |
$ | (2,245,720 | ) | |
$ | 4,992,427 | |
Adjustments to reconcile net loss to net cash used in operating activities | |
| | | |
| | |
Bad debt recovery | |
| (20,000 | ) | |
| (83,500 | ) |
Stock-based compensation and professional fees | |
| 95,925 | | |
| 83,728 | |
Amortization of prepaid stock-based professional fees | |
| - | | |
| 107,970 | |
Net realized loss (gain) on equity investments | |
| 104,700 | | |
| (6,655,120 | ) |
Net unrealized loss (gain) loss on equity investments | |
| 256,382 | | |
| (369,626 | ) |
Equity shares earned for lock up agreement | |
| (85,733 | ) | |
| - | |
Gain on forgiveness of PPP note payable and accrued interest | |
| - | | |
| (19,082 | ) |
Gain from disposal of assets from discontinued operations | |
| | | |
| (1,553 | ) |
Change in operating assets and liabilities: | |
| | | |
| | |
Prepaid expenses and other current assets | |
| (481,675 | ) | |
| (115,587 | ) |
Assets of discontinued operations | |
| - | | |
| (24,963 | ) |
Interest receivable | |
| (3,590 | ) | |
| - | |
Accounts payable and accrued expenses | |
| (194,292 | ) | |
| 84,399 | |
Insurance payable | |
| 16,447 | | |
| - | |
Deferred revenue | |
| (54,077 | ) | |
| 496,762 | |
| |
| | | |
| | |
NET CASH USED IN OPERATING ACTIVITIES | |
| (2,611,633 | ) | |
| (1,504,145 | ) |
| |
| | | |
| | |
CASH FLOWS FROM INVESTING ACTIVITIES: | |
| | | |
| | |
Net proceeds from sale of equity investments | |
| 66,707 | | |
| 6,736,070 | |
Collection on note receivable written off prior to 2019 | |
| - | | |
| 7,500 | |
Collection on note receivable | |
| 20,000 | | |
| 99,500 | |
| |
| | | |
| | |
NET CASH PROVIDED BY INVESTING ACTIVITIES | |
| 86,707 | | |
| 6,843,070 | |
| |
| | | |
| | |
CASH FLOWS FROM FINANCING ACTIVITIES: | |
| | | |
| | |
Net proceeds from sale of preferred stock | |
| - | | |
| 3,794,102 | |
Net proceeds from sale of common stock | |
| 4,940,948 | | |
| - | |
Advance from a related party | |
| - | | |
| 2,366 | |
Repayment of advance from a related party | |
| - | | |
| (2,366 | ) |
| |
| | | |
| | |
NET CASH PROVIDED BY FINANCING ACTIVITIES | |
| 4,940,948 | | |
| 3,794,102 | |
| |
| | | |
| | |
NET CHANGE IN CASH AND CASH EQUIVALENTS: | |
| 2,416,022 | | |
| 9,133,027 | |
| |
| | | |
| | |
CASH AND CASH EQUIVALENTS - beginning of the period | |
| 9,837,001 | | |
| 1,128,389 | |
| |
| | | |
| | |
CASH AND CASH EQUIVALENTS - end of the period | |
$ | 12,253,023 | | |
$ | 10,261,416 | |
| |
| | | |
| | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | |
| | | |
| | |
Cash paid during the period for: | |
| | | |
| | |
Interest | |
$ | 2,079 | | |
$ | - | |
Income taxes | |
$ | 25,159 | | |
$ | - | |
| |
| | | |
| | |
Non-cash investing and financing activities: | |
| | | |
| | |
Increase in equity investments recorded as deferred revenue pursuant to a patent license agreement | |
$ | - | | |
$ | 531,250 | |
Note receivable issued in connection with asset purchase agreement | |
$ | - | | |
$ | 60,000 | |
See accompanying condensed notes to unaudited consolidated financial
statements.
SILO PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
NOTE 1 – ORGANIZATION AND BUSINESS
Silo Pharma, Inc. (formerly Uppercut Brands, Inc.)
(the “Company”) was incorporated in the State of New York on July 13, 2010, under the name Gold Swap, Inc. On January 24,
2013, the Company changed its state of incorporation from New York to Delaware.
The Company is a developmental stage biopharmaceutical
company focused on merging traditional therapeutics with psychedelic research. The Company seeks to acquire and/or develop intellectual
property or technology rights from leading universities and researchers to treat rare diseases, including the use of psychedelic drugs,
such as psilocybin, and the potential benefits they may have in certain cases involving depression, mental health issues and neurological
disorders. The Company is focused on merging traditional therapeutics with psychedelic research for people suffering from indications
such as depression, post-traumatic stress disorder (“PTSD”), Alzheimer’s, Parkinson’s, and other rare neurological
disorders. The Company’s mission is to identify assets to license and fund the research which the Company’s believes will
be transformative to the well-being of patients and the health care industry. The Company was engaged in the development of a streetwear
apparel brand, NFID (see below).
On October 4, 2013, the Company filed a Form N-54A
and elected to become a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940
Act”). In addition, the Company previously elected to be treated for federal income tax purpose as a regulated investment company,
(“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended, (the “Code”). Through September 29,
2018, the Company met the definition of RIC in accordance with the guidance under Accounting Standards Codification (“ASC”)
Topic 946 “Financial Services – Investment Companies”. On September 29, 2018, the Company filed Form N-54C, Notification
of Withdrawal of Election to be Subject to Section 55 through 65 of the 1940 Act, as the Company changed the nature of its business so
as to cease to be a business development company (See Note 2 – Basis of Presentation). Additionally, since 2017, the Company has
been subject to income taxes at corporate tax rates.
On May 21, 2019, the Company filed an amendment
to its Certificate of Incorporation with the State of Delaware to change its name from Point Capital, Inc. to Uppercut Brands, Inc. Thereafter,
on September 24, 2020, the Company filed an amendment to its Certificate of Incorporation with the State of Delaware to change its name
from Uppercut Brands, Inc. to Silo Pharma, Inc.
On April 8, 2020, the Company incorporated a new
wholly-owned subsidiary, Silo Pharma Inc., in the State of Florida. The Company has also secured the domain name www.silopharma.com.
The Company has been exploring opportunities to expand the Company’s business by seeking to acquire and/or develop intellectual
property or technology rights from leading universities and researchers to treat rare diseases, including the use of psychedelic drugs,
such as psilocybin, and the potential benefits they may have in certain cases involving depression, mental health issues and neurological
disorders. In July 2020, through the Company’s newly formed subsidiary, the Company entered into a commercial evaluation license
and option agreement with University of Maryland, Baltimore (“UMB”) (see Note 8) pursuant to which, among other things, UMB
granted the Company an exclusive, option to negotiate and obtain an exclusive, sublicensable, royalty-bearing license to with respect
to certain technology. The option was extended and exercised on January 13, 2021. On February 12, 2021, the Company entered into a Master
License Agreement with UMB (see Note 8). The Company plans to actively pursue the acquisition and/or development of intellectual property
or technology rights to treat rare diseases, and to ultimately expand the Company’s business to focus on this new line of business.
On September 30, 2021, the Company entered into
and closed on an Asset Purchase Agreement (the “Asset Purchase Agreement) with NFID, LLC, a Florida limited liability company (the
“Buyer”), whereby the Buyer purchased from the Company certain assets, properties, and rights in connection with the Company’s
NFID trademark name, logos, domain, and apparel clothing and accessories for a purchase price of $60,000 in the form of a promissory note
amounting to $60,000. The promissory note bears 8% interest per annum and matures on October 1, 2023. Accordingly, the results of operations
of this component, for all periods presented, are separately reported as “discontinued operations” on the condensed consolidated
statements of operations (see Note 4).
On March 11, 2022, the Company stockholders approved
granting discretionary authority to the Company’s Board of Directors to amend the Company’s Certificate of Incorporation to
effect one or more consolidations of the Company’s issued and outstanding shares of common stock, pursuant to which the shares of
common stock would be combined and reclassified into one share of common stock at a ratio within the range from 1-for-5 up to 1-for-50
(the “Reverse Stock Split”), provided that, (X) that the Company shall not effect Reverse Stock Splits that, in the aggregate,
exceeds 1-for-50, and (Y) any Reverse Stock Split is completed no later than February 8, 2023.
On September 14, 2022, the Company filed a Certificate
of Amendment to the Amended and Restated Articles of Incorporation (the “Certificate of Amendment”) with the Secretary of
State of the State of Delaware to effect a 1-for-50 reverse stock split (the “Reverse Stock Split”) with respect to the outstanding
shares of the Company’s common stock. The Certificate of Amendment became effective on September 14, 2022. The Reverse Stock Split
was previously approved by the sole director and the majority of stockholders of the Company. The Reverse Stock Split was deemed effective
at the open of business on September 15, 2022. All share and per share data in the accompanying consolidated financial statements have
been retroactively adjusted to reflect the effect of the reverse stock split.
SILO PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The Company’s unaudited condensed consolidated
financial statements include financial statements for Silo Pharma, Inc and its inactive wholly-owned subsidiary with the same name as
the parent entity, Silo Pharma, Inc, as of September 30, 2022 and during the three and nine months ended September 30, 2022. All intercompany
balances and transactions have been eliminated in consolidation. Management acknowledges its responsibility for the preparation of the
accompanying unaudited condensed consolidated financial statements which reflect all adjustments, consisting of normal recurring and non-recurring
adjustments, considered necessary in its opinion for a fair statement of its consolidated financial position and the consolidated results
of its operations for the periods presented.
The accompanying unaudited condensed consolidated
financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States
of America (the “U.S. GAAP”) for interim financial information and with the instructions Article 8-03 of Regulation S-X. Operating
results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. Certain information
and note disclosure normally included in financial statements prepared in accordance with U.S. GAAP has been condensed or omitted from
these statements pursuant to such accounting principles and, accordingly, they do not include all the information and notes necessary
for comprehensive financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with
the summary of significant accounting policies and notes to the financial statements for the year ended December 31, 2021 included in
the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 28, 2022.
In accordance with, ASC 205-20 “Discontinued
Operations” establishes that the disposal or abandonment of a component of an entity or a group of components of an entity should
be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s
operations and financial results. As a result, the NFID, LLC component’s results of operations have been classified as discontinued
operations on a retrospective basis for all periods presented. Accordingly, the results of operations of this component, for all periods,
are separately reported as “discontinued operations” on the condensed consolidated statements of operations.
Liquidity
As reflected in the accompanying condensed consolidated
financial statements, the Company generated a net loss of $2,245,720 and used cash in operations of $2,611,633 during the nine months
ended September 30, 2022. Additionally, the Company has an accumulated deficit of $5,508,297 on September 30, 2022. However, as of September
30, 2022, the Company had working capital of $12,600,141.
The positive worthy capital serves to mitigate
the conditions that historically raised substantial doubt about the Company’s ability to continue as a going concern. The Company
believes that the Company has sufficient cash to meet its obligations for a minimum of twelve months from the date of this filing.
Use of Estimates
The preparation of unaudited condensed consolidated
financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Making estimates requires management to exercise significant judgment. It
is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the
date of the financial statements, which management considered in formulating its estimate could change in the near term due to one or
more future events. Accordingly, the actual results could differ significantly from estimates. Significant estimates during the nine months
ended September 30, 2022 and year ended December 31, 2021 include the collectability of notes receivable, valuation of equity investments,
estimates for obsolete and slow-moving inventory, estimates of the deemed dividend, valuation allowances for deferred tax assets, the
fair value of warrants issued with debt and for services, and the fair value of shares and stock options issued for services and in settlements.
Cash and Cash Equivalents
The Company considers all highly liquid investments
with a maturity of three months or less when acquired to be cash equivalents. The Company places its cash with high credit quality financial
institutions. The Company’s accounts at these institutions are insured by the Federal Deposit Insurance Corporation (“FDIC”)
up to $250,000 or by the Securities Investor Protection Corporation up to $250,000. To reduce its risk associated with the failure of
such financial institutions, the Company evaluates, at least annually, the rating of the financial institutions in which it holds deposits.
On September 30, 2022 and December 31, 2021, the Company had cash in excess of FDIC limits of approximately $11,750,000, and approximately
$9,100,000, respectively.
SILO PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
Notes Receivable
The Company recognizes an allowance for losses
on notes receivable in an amount equal to the estimated probable losses net of recoveries. The allowance is based on an analysis of historical
bad debt experience, current note receivable aging, and expected future write-offs, as well as an assessment of specific identifiable
accounts considered at risk or uncollectible. The expense associated with the allowance for doubtful accounts is recognized as general
and administrative expense.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets - current
of $581,373 and $145,324 on September 30, 2022 and December 31, 2021, respectively, consist primarily of costs paid for future services
which will occur within a year. Prepaid expenses and other current assets – non-current of $72,285 and $26,659 on September 30,
2022 and December 31, 2021, respectively, consist primarily of costs paid for license fees and future services which will occur after
a year. Prepaid expenses may include prepayments in cash and equity instruments for consulting, business advisory, legal services, license
fees, research and development fees, and insurance which are being amortized over the terms of their respective agreements.
Equity Investments, at Fair Value
Realized gain or loss is recognized when an investment
is disposed of and is computed as the difference between the Company’s carrying value and the net proceeds received from such disposition.
Realized gains and losses on investment transactions are determined by specific identification. Net unrealized appreciation or depreciation
is computed as the difference between the fair value of the investment and the cost basis of such investment. Net unrealized gains or
losses for equity investments are recognized in operations as the difference between the carrying value at the beginning of the period
and the fair value at the end of the period.
Equity Investments, at Cost
Equity investments, at cost are comprised mainly
of non-marketable capital stock and stock warrants, are recorded at cost, as adjusted for other than temporary impairment write-downs
and are evaluated for impairment periodically.
Revenue Recognition
The Company applies ASC Topic 606, Revenue from
Contracts with Customers (“ASC 606”). ASC 606 establishes a single comprehensive model for entities to use in accounting for
revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance. This standard requires
an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services and also requires certain additional disclosures.
The Company records interest and dividend income
on an accrual basis to the extent that the Company expects to collect such amounts.
For the license and royalty income, revenue is
recognized when the Company satisfies the performance obligation based on the related license agreement. Payments received from the licensee
that are related to future periods are recorded as deferred revenue to be recognized as revenues over the term of the related license
agreement (see Note 8).
Product sales were recognized when the NFID products
were shipped to the customer and title was transferred and were recorded net of any discounts or allowances which are separately reported
as “discontinued operations” on the condensed consolidated statements of operations.
Cost of Revenues
The primary components of cost of revenues on
license fees included the cost of the license fees. Payments made to the licensor that are related to future periods are recorded as prepaid
expense to be amortized over the term of the related license agreement (see Note 8).
The primary components of cost of revenues on
NFID apparel include the cost of the product, production costs, warehouse storage costs and shipping fees which are separately reported
as “discontinued operations” on the condensed consolidated statements of operations.
SILO PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
Stock-Based Compensation
Stock-based compensation is accounted for based
on the requirements of ASC 718 – “Compensation – Stock Compensation”, which requires recognition in the financial
statements of the cost of employee, director, and non-employee services received in exchange for an award of equity instruments over the
period the employee, director, or non-employee is required to perform the services in exchange for the award (presumptively, the vesting
period). The ASC also requires measurement of the cost of employee, director, and non-employee services received in exchange for an award
based on the grant-date fair value of the award. The Company has elected to recognize forfeitures as they occur as permitted under Accounting
Standards Update (“ASU”) 2016-09 Improvements to Employee Share-Based Payment.
Income Taxes
Deferred income tax assets and liabilities arise
from temporary differences between the financial statements and tax basis of assets and liabilities, as measured by the enacted tax rates,
which are expected to be in effect when these differences reverse. Deferred tax assets and liabilities are classified as current or non-current,
depending upon the classification of the asset or liabilities to which they relate. Deferred tax assets and liabilities not related to
an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected
to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
The Company follows the provisions of Financial
Accounting Standards Board (“FASB”) ASC 740-10, “Uncertainty in Income Taxes”. Certain recognition thresholds
must be met before a tax position is recognized in the financial statements. An entity may only recognize or continue to recognize tax
positions that meet a “more-likely-than-not” threshold. The Company does not believe it has any uncertain tax positions as
of September 30, 2022 and December 31, 2021 that would require either recognition or disclosure in the accompanying condensed consolidated
financial statements.
The Company did not recognize income tax expense
for the nine months ended September 30, 2022.
Research and Development
In accordance with ASC 730-10, “Research
and Development-Overall,” research and development costs are expensed when incurred. During the three months ended September 30,
2022 and 2021, research and development costs were $375,795 and $70,514, respectively. During the nine months ended September 30, 2022
and 2021, research and development costs were $651,750 and $217,962, respectively.
Leases
In February 2016, the FASB issued ASU 2016-02,
“Leases (Topic 842)”. ASU 2016-02 sets out the principles for the recognition, measurement, presentation and disclosure
of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying
leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by
the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line
basis over the term of the lease. A lessee is also required to recognize a right-of-use asset and a lease liability for all leases with
a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar
to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially
equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The pronouncement requires a modified
retrospective method of adoption and is effective on January 1, 2019, with early adoption permitted. As of September 30, 2022, the Company
has no leases. The Company will analyze any lease to determine if it would be required to record a lease liability and a right of use
asset on its consolidated balance sheets at fair value upon adoption of ASU 2016-02. The Company has elected not to recognize right-of-use
assets and lease liabilities for short-term leases that have a term of 12 months or less.
Net Loss per Common Share
Basic loss per share is computed by dividing net
loss allocable to common shareholders by the weighted average number of shares of common stock outstanding during each period. Diluted
earnings per share is computed by dividing net income available to common shareholders by the weighted average number of shares of common
stock, common stock equivalents and potentially dilutive securities outstanding during the period using the as-if converted method. Potentially
dilutive securities which included convertible preferred shares and stock options are excluded from the computation of diluted shares
outstanding if they would have an anti-dilutive impact on the Company’s net losses.
SILO PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
The following are the potentially dilutive shares
for the nine months ended September 30, 2022 and 2021:
| |
September 30, | |
| |
2022 | | |
2021 | |
Series C convertible preferred stock | |
| — | | |
| 15,133 | |
Stock options | |
| 28,849 | | |
| 6,000 | |
Warrants | |
| 404,580 | | |
| 347,080 | |
| |
| 433,429 | | |
| 368,080 | |
The following is a reconciliation of the numerator
and denominator used in the basic and diluted earnings per share (“EPS”) calculations.
| |
Three months ended September 30, 2022 | | |
Three months ended September 30, 2021 | | |
Nine months ended September 30, 2022 | | |
Nine months ended September 30, 2021 | |
Numerator: | |
| | |
| | |
| | |
| |
Net (loss) income | |
$ | (983,246 | ) | |
$ | 6,385,119 | | |
$ | (2,245,720 | ) | |
$ | 3,588,430 | |
| |
| | | |
| | | |
| | | |
| | |
Denominator: | |
| | | |
| | | |
| | | |
| | |
Weighted-average shares of common stock | |
| 2,000,700 | | |
| 1,972,739 | | |
| 1,987,170 | | |
| 1,871,898 | |
Dilutive effect of convertible instruments | |
| - | | |
| 21,130 | | |
| - | | |
| 21,130 | |
Diluted weighted-average of common stock | |
| 2,000,700 | | |
| 1,993,869 | | |
| 1,987,170 | | |
| 1,893,028 | |
| |
| | | |
| | | |
| | | |
| | |
Net (loss) income per common share: | |
| | | |
| | | |
| | | |
| | |
Basic | |
$ | (0.49 | ) | |
$ | 3.20 | | |
$ | (1.13 | ) | |
$ | 1.80 | |
Diluted | |
$ | (0.49 | ) | |
$ | 3.16 | | |
$ | (1.13 | ) | |
$ | 1.78 | |
Recent Accounting Pronouncements
In August 2020, the FASB issued Accounting Standards
Update (“ASU”) 2020-06, which simplifies the guidance on the issuer’s accounting for convertible debt instruments by
removing the separation models for convertible debt with a cash conversion feature and convertible instruments with a beneficial conversion
feature. As a result, entities will not separately present in equity an embedded conversion feature in such debt and will account for
a convertible debt instrument wholly as debt, unless certain other conditions are met. The elimination of these models will reduce reported
interest expense and increase reported net income for entities that have issued a convertible instrument that is within the scope of ASU
2020-06. ASU 2020-06 is applicable for fiscal years beginning after December 15, 2021, with early adoption permitted no earlier than fiscal
years beginning after December 15, 2020. The Company adopted this ASU in the first quarter of 2022 and the adoption of this ASU did not
have a material impact on the Company’s consolidated financial statements and related disclosures.
In May 2021, the FASB issued ASU 2021-04, Earnings
Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives
and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40). The new ASU addresses issuer’s accounting for certain modifications
or exchanges of freestanding equity-classified written call options. This amendment is effective for all entities, for fiscal years beginning
after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted. The Company adopted ASU 2020-06
during the three months ended March 31, 2022 and the adoption did not have material impact on its condensed consolidated financial statements
Management does not believe that any other recently
issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the Company’s consolidated
financial statements.
NOTE 3 – FAIR VALUE OF FINANCIAL INSTRUMENTS
AND FAIR VALUE MEASUREMENTS
FASB ASC 820 - Fair Value Measurements and Disclosures,
defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. FASB ASC 820 requires disclosures about the fair value of all financial instruments, whether
or not recognized, for financial statement purposes. Disclosures about the fair value of financial instruments are based on pertinent
information available to the Company on September 30, 2022. Accordingly, the estimates presented in these financial statements are not
necessarily indicative of the amounts that could be realized on disposition of the financial instruments. FASB ASC 820 specifies a hierarchy
of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect
market data obtained from independent sources, while unobservable inputs reflect market assumptions. 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).
SILO PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
|
Level 1 - |
Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date. |
|
|
|
|
Level 2 - |
Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data. |
|
|
|
|
Level 3 - |
Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information. |
The Company analyzes all financial instruments
with features of both liabilities and equity under the FASB’s accounting standard for such instruments. Under this standard, financial
assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The carrying amounts reported in the consolidated
balance sheets for cash, prepaid expenses and other current assets, accounts payable and accrued expenses approximate their fair market
value based on the short-term maturity of these instruments.
Equity Investments at Fair Value
The Company accounted for certain equity investments
at fair value using level 1, level 2 and level 3 valuations. Assets and liabilities measured at fair value on a recurring basis are as
follows on September 30, 2022 and December 31, 2021:
| |
On September 30, 2022 | | |
On December 31, 2021 | |
Description | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Level 1 | | |
Level 2 | | |
Level 3 | |
Equity investments consisting of common stock, at fair value | |
$ | 77,939 | | |
$ | — | | |
$ | — | | |
$ | 419,995 | | |
| — | | |
$ | — | |
The following table summarizes activity in the
Company’s equity investments, at fair value for the periods presented:
| |
September 30, 2022 | | |
December 31, 2021 | |
Balance, beginning | |
$ | 419,995 | | |
$ | — | |
Additions | |
| 85,733 | | |
| 531,250 | |
Sales at original cost | |
| (171,407 | ) | |
| (359,843 | ) |
Unrealized (loss) gain | |
| (256,382 | ) | |
| 248,588 | |
Balance as of September 30, 2022 | |
$ | 77,939 | | |
$ | 419,995 | |
During the nine months ended September 30, 2022,
the Company received 77,939 shares of Home Bistro, Inc. common stock with grant date fair value of $85,733 or $1.10 per share, in exchange
for entering into a lock up and leak out agreement which was recorded as other income from equity shares earned for services in the accompanying
condensed consolidated statement of operations. The Company measures equity securities received for services at fair value on the date
of receipt.
During the nine months ended September 30, 2022,
the Company sold its equity investments in Aikido Pharma, Inc. with cost of $171,407 for gross proceeds of $66,707 and the Company recorded
a net realized loss on equity investments amounting to $104,700 as reflected in the accompanying condensed consolidated statement of operations.
On December 31, 2021, equity investments, at fair
value consisted of common equity securities of two entities, Home Bistro, Inc. and Aikido Pharma, Inc. and at September 30, 2022, the
investment consisted of only Home Bistro, Inc. (see Note 8).
Equity investments are carried at fair value with
unrealized gains or losses which is recorded as net unrealized gain (loss) on equity investments in the accompanying condensed consolidated
statement of operations. Realized gains and losses are determined on a specific identification basis which is recorded as net realized
gain (loss) on equity investments in the consolidated statement of operations. The Company reviews equity investments, at fair value for
impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recovered.
ASC 825-10 “Financial Instruments”
allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair
value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value
option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent
reporting date. The Company did not elect to apply the fair value option to any outstanding equity instruments.
SILO PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
Equity Investments at Cost
On September 30, 2022 and December 31, 2021, the
Company did not have non-marketable capital stock and stock warrants recorded at cost.
NOTE 4 – DISPOSAL OF THE DISCONTINUED
OPERATIONS OF THE NFID BUSINESS
On September 30, 2021, the Company entered into
and closed on an Asset Purchase Agreement (see Note 1) with NFID, LLC, an unrelated party, a Florida limited liability company, whereby
the Company sold certain assets, properties, and rights in connection with its NFID trademark name, logos, domain, and apparel clothing
and accessories for a purchase price of $60,000 in the form of a promissory note amounting to $60,000. The promissory note bears 8% interest
per annum and matures on October 1, 2023. Note receivable – non-current amounted to $60,000 as of September 30, 2021.
ASC 205-20 “Discontinued Operations”
establishes that the disposal or abandonment of a component of an entity or a group of components of an entity should be reported in discontinued
operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial
results. As a result, the component’s results of operations have been classified as discontinued operations on a retrospective basis
for all periods presented. Accordingly, the results of operations of this component, for all periods, are separately reported as “discontinued
operations” on the condensed consolidated statements of operations.
The following table set forth the selected financial
data of the Company’s gain from sale of the NFID business on September 30, 2021:
| |
September 30, 2021 | |
Assets: | |
| |
Current assets: | |
| |
Inventory, net | |
$ | 58,447 | |
Total assets | |
$ | 58,447 | |
| |
| | |
Liabilities: | |
| | |
Current liabilities: | |
| | |
Total liabilities | |
$ | — | |
Net asset of NFID business disposed | |
$ | 58,447 | |
Consideration in the form of a note receivable | |
| 60,000 | |
Gain from sale of NFID business | |
$ | 1,553 | |
The summarized operating result of discontinued
operations of the NFID Business included in the Company’s condensed consolidated statements of operations for the nine months ended
September 30, 2022 and 2021 is as follows:
| |
For the Nine Months Ended | |
| |
September 30, | |
| |
2022 | | |
2021 | |
Product sales, net | |
$ | — | | |
$ | 119,541 | |
Cost of sales | |
| 1,079 | | |
| 98,998 | |
Gross profit (loss) | |
| (1,079 | ) | |
| 20,543 | |
Total operating and other non-operating expenses | |
| (84 | ) | |
| (249,565 | ) |
Gain from sale of NFID business | |
| | | |
| 1,553 | |
Loss from discontinued operations | |
$ | (1,163 | ) | |
$ | (227,469 | ) |
SILO PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
NOTE 5 – NOTES RECEIVABLE
As of September 30, 2022 and December 31, 2021,
notes receivable, net, consisted of the following:
| |
September 30, 2022 | | |
December 31, 2021 | |
Principal amounts of notes receivable | |
$ | 115,500 | | |
$ | 220,000 | |
Additional notes receivable | |
| - | | |
| 60,000 | |
Collections on notes receivables | |
| (20,000 | ) | |
| (164,500 | ) |
Less: allowance for doubtful accounts | |
| (35,500 | ) | |
| (55,500 | ) |
Total Notes receivable, net | |
| 60,000 | | |
| 60,000 | |
Less: notes receivable, net – current portion | |
| — | | |
| — | |
Notes receivable – non-current | |
$ | 60,000 | | |
$ | 60,000 | |
On September 28, 2018, the Company and Blind Faith
Concepts Holdings, Inc. (the “Seller”) executed a two-year promissory note receivable agreement with a principal balance of
$200,000 of which $100,000 was funded to the Seller in September 2018 and the remaining $100,000 was funded in October 2018. The promissory
note accrued interest at a rate of 6% per annum, and the Company was repaid in interest only payments on a quarterly basis, until the
maturity date of September 27, 2020, at which time the full principal and any interest payments was due to the Company. At the time the
promissory note receivable agreement was executed, the Company also executed a security interest and pledge agreement with the borrower
pursuant to which the borrower pledged all of the assets of its company as security for the performance of the note obligations.
On November 2, 2018, the Company and Seller entered
into a promissory note agreement (“Promissory Note Agreement”) with a principal balance of $50,000. Pursuant to the Promissory
Note Agreement, the $50,000 note was a deposit and credit towards the acquisition of the assets of Lust for Life Group such as inventory,
trademarks and logos. Pursuant to the Promissory Note Agreement, since the purchase did not close within 30 days from date of the Promissory
Note, the note receivable became immediately due. Through the date of default, the outstanding principal balance accrued interest at an
interest rate of 10% per annum payable on a monthly basis. Upon default, the interest rate increased to 18% per annum. As of December
31, 2018, the Company determined that this note receivable was doubtful and accordingly, recorded an allowance for doubtful account and
bad debt expense of $50,000.
In December 2019, pursuant to claim purchase agreements
(“Claim Purchase Agreements”), the Company sold its notes receivable and related interest receivable balances in the aggregate
amount of $277,305 to an investor. Pursuant to the Claim Purchase Agreements, the investor agreed to pay the Company the purchase price
of $277,305 on the earlier of the payment of six-monthly installments or upon the liquidation of settlement securities of the Seller pursuant
to Section 3(a)(10) of the Securities Act of 1933, as amended. The first installment was be made following entry and full effectuation
of a court order approving the settlement of the claim which occurred on March 6, 2020 in the United States District Court for the District
of Maryland Northern Division. Additionally, on January 6, 2020, the Company and the Seller entered into a settlement agreement related
to notes receivable. In lieu of the Company seeking default and foreclosure against the Seller pursuant to the note agreements, the Company
received 10,420 shares of the Seller’s convertible Series B Preferred Stock. Since the shares of Series B Preferred Stock have limited
marketability, no value was placed on these shares. Between April 2020 and December 2020, the Company collected an aggregate of $30,000
on the notes receivable balance. During the year ended December 31, 2020, the Company recorded a total allowance for doubtful account
and bad debt expense of $174,376 (consisting of the principal balance of $146,500 and interest receivable of $27,876) due to slow collection
of the installment payments pursuant to the Claim Purchase Agreements.
During the year ended December 31, 2021, the Company
recovered an aggregate of $7,500 of bad debt previously written off during the periods between 2018 to 2020, recorded as bad debt recovery
in the accompanying unaudited condensed consolidated statement of operations.
On June 7, 2021, the Company and the investor,
entered into a settlement agreement whereby both parties agreed to settle the remaining balance of this note receivable which was previously
written off in year 2020 for a total settlement amount of $196,000 to be paid as follows; (i) an initial payment of $46,000 upon execution
of the settlement agreement and (ii) $10,000 per month for fifteen months. During the year ended December 31, 2021, the Company received
$23,500 of payments and recovered $141,000 of the $196,500 of bad debt allowance. During the nine months ended September 30, 2022, $20,000
was collected under this settlement agreement and $35,500 remains collectible under this settlement agreement and such amount has been
fully reserved as of September 30, 2022.
SILO PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
On September 30, 2021, the Company executed a
note receivable agreement with NFID, LLC in connection with an Asset Purchase Agreement (see Note 4). The promissory note bears 8% interest
per annum and matures on October 1, 2023. The outstanding principal and accrued interest shall be due and payable on maturity. As of December
31, 2021, this note receivable had outstanding principal receivable of $60,000 and accrued interest receivable of $1,210 for a total receivable
balance of $61,210. As of September 30, 2022, this note receivable had outstanding principal receivable of $60,000 and accrued interest
receivable of $4,800 for a total receivable balance of $64,800 which is reflected in the accompanying unaudited condensed consolidated
balance sheet as note receivable – non-current.
NOTE 6 – STOCKHOLDERS’ EQUITY
Shares Authorized
The Company has 505,000,000 shares authorized
which consist of 500,000,000 shares of common stock and 5,000,000 shares of preferred stock.
Preferred Stock
In April 2013, the Company designated 1,000,000
shares of preferred stock as Series A Convertible Preferred Stock and in November 2019, the Company designated 2,000 shares of preferred
stock as Series B Convertible Preferred Stock. As of September 30, 2022 and December 31, 2021, there were no shares of the Series A and
Series B preferred stock issued and outstanding.
Series C Convertible Preferred Stock
On February 9, 2021, the Company filed a Certificate
of Designation of Preferences, Rights and Limitations of Series C Convertible Preferred Stock (the “Certificate of Designations”)
with the Delaware Secretary of State, designating 4,280 shares of preferred stock as Series C Convertible preferred stock.
| ● | Designation. The Company has designated 4,280 shares of preferred stock as Series C Convertible preferred stock. Each share of Series C Convertible Preferred Stock has a par value of $0.0001 per share and a stated value of $1,000 (the “Series C Stated Value”). |
|
● |
Dividends. Holders of Series C Convertible preferred stock shall be entitled to receive dividends (on an as-if-converted-to-common-stock basis) in the same form as dividends actually paid on shares of the common stock when, as and if such dividends are paid on shares of the common stock. No other dividends shall be paid on shares of the Series C Convertible preferred stock. |
|
● |
Liquidation. Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, the holders of Series C Convertible preferred stock shall be entitled to receive the same amount that a holder of common stock would receive if the Series C Convertible preferred stock were fully converted (disregarding any conversion limitations) which amounts shall be paid pari passu with all holders of common stock. |
|
● |
Voting Rights. Except as otherwise provided in the Certificate of Designations or as otherwise required by law, the Series C Convertible preferred stock shall have no voting rights. However, as long as any shares of Series C Convertible preferred stock are outstanding, the Company shall not, without the affirmative vote of the holders of a majority of the then outstanding shares of the Series C Convertible preferred stock, (a) alter or change adversely the powers, preferences or rights given to the Series C Convertible preferred stock or alter or amend the Certificate of Designations, (b) amend its Certificate of Incorporation or other charter documents in any manner that adversely affects any rights of the holders of the Series C Convertible preferred stock, (c) increase the number of authorized shares of Series C Convertible preferred stock, or (d) enter into any agreement with respect to any of the foregoing. |
| ● | Conversion. Each share of Series C Convertible preferred stock is convertible, at any time and from time to time after the issuance date, at the option of the holder, into such number of shares of common stock determined by dividing the Series C Stated Value by the Series C Conversion Price. “Series C Conversion Price” means $15.00, subject to adjustment in the event of stock split, stock dividends, subsequent right offerings and similar recapitalization transactions. |
|
● |
Forced Conversion. Notwithstanding anything herein to the contrary, after the date that the Company’s stockholder approval is obtained and deemed effective, the Company may deliver a written notice to all holders (the “Forced Conversion Notice Date”) to cause each holder to convert all or part of such holder’s Series C Convertible preferred stock pursuant to Section 6 (“Forced Conversion”), it being agreed that the “Conversion Date” shall be deemed to occur no later than the earlier of (i) two (2) trading days and (ii) the number of trading days comprising the standard settlement period following the Forced Conversion Notice Date; provided, however, a holder shall only be required to convert pursuant to a Forced Conversion to the extent that such conversion would not cause a holder to exceed its beneficial ownership limitation. On March 10, 2021, the Company obtained the stockholders’ approval forcing the conversion of all the Series C Convertible preferred stock. On April 12, 2021, the Company notified holders of its Series C Convertible preferred stock of its election to force the conversion to its Series C Convertible preferred stock into shares of the Company’s common stock (see below for additional conversions in 2022). |
SILO PHARMA, INC. AND
SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
| ● | Exercisability. A holder of Series C Convertible preferred stock may not convert any portion of the Series C Convertible preferred stock to the extent that the holder, together with its affiliates and any other person or entity acting as a group, would own more than 4.99% (or, upon election by a holder prior to issuance, 9.99%) of the outstanding shares of the Company’s common stock after conversion, which beneficial ownership limitation may be increased by the holder up to, but not exceeding, 9.99%. |
Series C Convertible Preferred Stock Financing
On February 9, 2021 (the “Effectiveness
Date”), the Company entered into securities purchase agreements (collectively, the “Series C Purchase Agreements”) with
certain institutional and accredited investors for the sale of an aggregate of 4,276 shares of the Company’s Series C Convertible
Preferred Stock and warrants (the “February Warrants”) to purchase up to 285,066 shares (the “February Warrant Shares”)
of the Company’s common stock for gross proceeds of approximately $4,276,000, before deducting placement agent and other offering
expenses of $481,898 which are offset against the proceeds in additional paid in capital. The offering closed on February 12, 2021. Accordingly,
the Company recognized a total deemed dividend of $1,403,997 for the beneficial conversion feature in connection with the issuance of
these Series C Convertible preferred stock.
The February Warrants are exercisable for a period
of five years from the date of issuance at an exercise price of $15.00 per share. If, after a period of 180 days after the date of issuance
of the February Warrants, a registration statement covering the resale of the February Warrant Shares is not effective, the holders may
exercise the February Warrants by means of a cashless exercise.
The Series C Convertible preferred stock and the
February Warrants each contain a beneficial ownership limitation that restricts each of the investor’s ability to exercise the February
Warrants and convert the Series C Convertible preferred stock such that the number of shares of the Company common stock held by each
of them and their affiliates after such conversion or exercise does not exceed 4.99% (or, at the election of the Investor, 9.99%) of the
Company’s then issued and outstanding shares of common stock.
The Series C Purchase Agreement also provides
that until the 18 month anniversary of the Effectiveness Date, in the event of a subsequent financing (except for certain exempt issuances
as provided in the Series C Purchase Agreement) by the Company, each investor will have the right to participate in such subsequent financing
up to an amount equal to the investor’s proportionate share of the subsequent financing based on such investor’s participation
in the offering on the same terms, conditions and price provided for in the subsequent financing up to an amount equal to 50% of the subsequent
financing. In addition, pursuant to the Series C Purchase Agreement, the Company has agreed that neither it nor its subsidiaries will
enter into any agreement to issue or announce the issuance or proposed issuance of any shares of common stock or common stock equivalents
to file any registration statement other than as contemplated pursuant to the Registration Rights Agreement (as defined below) for a period
of 90 days from the Effectiveness Date. Furthermore, subject to certain exceptions, the Company is prohibited from effecting or entering
into an agreement to effect any issuance by the Company or any of its subsidiaries of common stock or common stock equivalents involving
a Variable Rate Transaction (as defined in the Series C Purchase Agreement).
In connection with the offering, the Company entered
into separate registration rights agreements (“Registration Rights Agreements”) with the investors pursuant to which the Company
agreed to undertake to file a registration statement (the “Registration Statement”) to register the resale of the Registrable
Securities (as defined in the Registration Rights Agreement) within ten calendar days following the Effectiveness Date. The Company agreed
to use its best efforts to cause the Registration Statement covering the Registrable Securities to be declared effective no later than
the 60th calendar day following the Effectiveness Date, or in the event of a full review by the Securities and Exchange
Commission, the 90th calendar day following the Effectiveness Date, and to maintain the effectiveness of the Registration
Statement until all of the Registrable Securities have been sold or are otherwise able to be sold pursuant to Rule 144 under the Securities
Act of 1933, as amended. If the Company fails to file the Registration Statement or have it declared effective by the dates set forth
above, amongst other things, the Company will be obligated to pay the investors damages in the amount of 1% of their subscription amount,
per month, until such events are satisfied. The Registration Statement was filed and declared effective in April 2021.
SILO PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
In addition, pursuant to the terms of the offering,
the Company issued Bradley Woods & Co, Ltd. and Katalyst Securities LLC warrants (the “Placement Agent Warrants”) to purchase
up to an aggregate of 57,013 shares of common stock, or 10% of the shares of common stock issuable upon conversion of the Series C Preferred
Stock and February Warrant Shares sold in the offering. The Placement Agent Warrants are exercisable for a period of five years from the
closing date of the offering at an exercise price of $17.50 per share, subject to adjustment. The Placement Agent Warrants were valued
at the grant date using a Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 0.50%, expected
dividend yield of 0%, expected term of 5 years using the simplified method and expected volatility of 169% based on comparable and calculated
volatility. The aggregate grant date fair value of these Placement Agent Warrants amounted to approximately $1,106,000 and was recorded
against the proceeds with no net effect on the consolidated financials.
The net proceeds of the offering are expected
to be used for working capital purposes and to further execute on the Company’s existing business.
Sale of common stock
On September 26, 2022, the Company entered into
an underwriting agreement (the “Underwriting Agreement”) with Laidlaw & Company (UK) Ltd., as representative of the several
underwriters identified therein (the “Underwriters”), relating to the public offering (the “Offering”) of 1,000,000
shares of the Company’s common stock (the “Firm Shares”), at public offering price of $5.00 per share. Under the terms
of the Underwriting Agreement, the Company granted the Underwriters an option, exercisable for 45 days following the closing of the Offering,
to purchase up to an additional 150,000 shares of common stock at the public offering price to cover over-allotments, if any. On September
28, 2022, the Underwriters fully exercised their over-allotment option and purchased an additional 150,000 shares (the “Option Shares,”
together with the Firm Shares, the “Shares”). On September 29, 2022 the Company closed the Offering and issued the Shares
for aggregate net proceeds of $4,940,948, after deducting underwriting discounts and commissions and offering expenses. The Company intends
to use the net proceeds from the offering for research and development activities, sales and marketing, general working capital purposes,
potential acquisitions of other companies, products or technologies, and to repay certain indebtedness. Concurrently with the closing
of the Offering, the Company also issued warrants to purchase an aggregate of up to 57,500 shares of its common stock to the representative
of the Underwriters or its designees, at an exercise price of $6.25 per share (the “Representative’s Warrants”). The
Representative’s Warrants are exercisable beginning on March 25, 2023, and expire on September 26, 2027, pursuant to the terms and
conditions of the Representative’s Warrants.
Conversion of Series C Convertible Preferred
Stock into Common Stock
On March 31, 2022, the Company notified holders
of its Series C Convertible preferred stock of its election to force the conversion to its Series C Convertible preferred stock into shares
of the Company’s common stock pursuant to the Certificate of Designations unless such conversion would cause the holder to exceed
its beneficial ownership limitation pursuant to the Certificate of Designations. On March 31, 2022, the Company converted 227 Series C
Convertible preferred stock into 15,167 shares of common stock. As of September 30, 2022, there were no shares of Series C Convertible
preferred stock issued and outstanding.
Stock Options
On January 18, 2021, the Company’s board
of directors (“Board”) approved the Silo Pharma, Inc. 2020 Omnibus Equity Incentive Plan (the “2020 Plan”) to
incentivize employees, officers, directors and consultants of the Company and its affiliates. 170,000 shares of common stock are reserved
and available for issuance under the 2020 Plan, provided that certain exempt awards (as defined in the 2020 Plan), shall not count against
such share limit. The 2020 Plan provides for the grant, from time to time, at the discretion of the Board or a committee thereof, of cash,
stock options, including incentive stock options and nonqualified stock options, restricted stock, dividend equivalents, restricted stock
units, stock appreciation units and other stock or cash-based awards. The 2020 Plan shall terminate on the tenth anniversary of the
date of adoption by the Board. Subject to certain restrictions, the Board may amend or terminate the Plan at any time and for any reason.
An amendment of the 2020 Plan shall be subject to the approval of the Company’s stockholders only to the extent required by applicable
laws, rules or regulations. On March 10, 2021, the 2020 Plan was approved by the stockholders.
SILO PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
On December 29, 2021, the Board granted an aggregate
of 6,849 incentive stock options under the 2020 Plan, to two non-employee board members, exercisable at $7.30 per share which expire on
December 26, 2026 and vest on the first anniversary date of the grant date. These options were valued at $30,224 on the grant date using
a Binomial Lattice option pricing model with the following assumptions: risk-free interest rate of 0.75%, expected dividend yield of 0%,
expected term of 2 years using the simplified method and expected volatility of 115% based on historical volatility. The Company recorded
the fair value of the unvested stock options, in the amount of $30,224, as deferred compensation which is being amortized over the vesting
period. During the nine months ended September 30, 2022, the Company amortized $22,668 of the deferred compensation which was recorded
as compensation expenses in the accompanying condensed consolidated statement of operations. As of September 30, 2022, the deferred compensation
related to this issuance had a balance of $7,556.
On January 27, 2022, pursuant to an Employment
Agreement (see Note 8), an aggregate of 16,000 incentive stock options were issued under the 2020 Plan, to Dr. Kou, exercisable at $10.00
per share and expires on January 31, 2032. The stock options vest as follows: (i) 6,000 stock options upon issuance; (ii) 5,000 vests
on October 31, 2022 and; (iii) 5,000 vests on October 31, 2023. The 16,000 stock options had a fair value of $94,915 which were valued
at the grant date using a Binomial Lattice option pricing model with the following assumptions: risk-free interest rate of 1.18%, expected
dividend yield of 0%, expected term of 2 years using the simplified method and expected volatility of 117% based on historical volatility.
The Company recorded the fair value of the stock options, in the amount of $94,915, as deferred compensation which is being amortized
over the vesting period. During the nine months ended September 30, 2022, the Company amortized $73,257 of the deferred compensation which
was recorded as compensation expenses in the accompanying condensed consolidated statement of operations. As of September 30, 2022, the
deferred compensation related to his employment agreement had a balance of $21,658.
Stock option activities for the nine months ended
September 30, 2022 are summarized as follows:
| |
Number of Options | | |
Weighted
Average Exercise Price | | |
Weighted
Average Remaining Contractual Term (Years) | | |
Aggregate Intrinsic Value | |
Balance Outstanding, December 31, 2021 | |
| 6,000 | | |
$ | 0.005 | | |
| 1.8 | | |
$ | — | |
Granted as incentives | |
| 6,849 | | |
$ | 7.30 | | |
| 4.2 | | |
$ | — | |
Granted pursuant to employment agreement (see Note 8) | |
| 16,000 | | |
$ | 10.00 | | |
| 9.3 | | |
$ | — | |
Forfeited | |
| — | | |
| — | | |
| — | | |
| — | |
Balance Outstanding, September 30, 2022 | |
| 28,849 | | |
$ | 7.28 | | |
| 6.6 | | |
$ | — | |
Exercisable, September 30, 2022 | |
| 12,000 | | |
$ | 5.00 | | |
| 5.6 | | |
$ | 32,250 | |
Stock Warrants
On January 18, 2021, the Company granted warrants
to purchase up to 5,000 shares of the Company’s common stock in exchange for legal services rendered. The warrants have a term of
five years from the date of grant and are exercisable at an exercise price of $10.00 per share. The warrants were valued on the grant
date at approximately $16.50 per warrant for a total of $83,728 using a Black-Scholes option pricing model with the following assumptions:
stock price of $17.50 per share (based on the quoted trading price on the date of grant), volatility of 169%, expected term of five year,
and a risk-free interest rate of 0.46%. During the year ended December 31, 2021, the Company recorded stock-based compensation of $83,728.
On February 9, 2021, the Company entered into
pursuant to securities purchase agreements with certain investors pursuant to which it sold warrants to purchase up to 285,067 shares
of the Company’s common stock and 4,276 shares of the Company’s Series C Convertible preferred stock. The February Warrants
are exercisable for a period of five years from the date of issuance at an exercise price of $15.00 per share, subject to adjustment.
If, after a period of 180 days after the date of issuance of the February Warrants, a registration statement covering the resale of the
February Warrant Shares is not effective, the holders may exercise the February Warrants by means of a cashless exercise. In addition,
pursuant to the terms of the offering, the Company issued the Placement Agent Warrants to purchase up to an aggregate of 57,013 shares
of common stock to its placement agents, or 10% of the shares of common stock issuable upon conversion of the Series C preferred stock
and February Warrant Shares sold in the offering. The Placement Agent Warrants are exercisable for a period of five years from the closing
date of the offering at an exercise price of $17.50 per share, subject to adjustment (see Series C Convertible Preferred Stock Financing
above). Such warrants issued to various investors and to the placement agents were recorded as additional paid in capital with an offsetting
debit applied against additional paid in capital, thus these warrants have no further accounting effect within the equity section.
On September 26, 2022, concurrently with the closing
of the Offering as discussed above, the Company also issued warrants to purchase an aggregate of up to 57,500 shares of its common stock
to the representative of the Underwriters or its designees, at an exercise price of $6.25 per share (the “Representative’s
Warrants”). The Representative’s Warrants are exercisable beginning on March 25, 2023, and expire on September 26, 2027, pursuant
to the terms and conditions of the Representative’s Warrants.
SILO PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
Warrant activities for the nine months ended September
30, 2022 are summarized as follows:
|
|
Number of
Warrants |
|
|
Weighted
Average
Exercise
Price |
|
|
Weighted
Average
Remaining
Contractual Term
(Years) |
|
|
Aggregate
Intrinsic
Value |
|
Balance Outstanding, December 31, 2021 |
|
|
347,080 |
|
|
$ |
15.50 |
|
|
|
4.1 |
|
|
$ |
— |
|
Granted |
|
|
57,500 |
|
|
|
6.25 |
|
|
|
5.0 |
|
|
|
— |
|
Balance Outstanding, September 30, 2022 |
|
|
404,580 |
|
|
$ |
14.05 |
|
|
|
3.6 |
|
|
$ |
— |
|
Exercisable, September 30, 2022 |
|
|
404,580 |
|
|
$ |
14.05 |
|
|
|
3.6 |
|
|
$ |
— |
|
NOTE 7 – CONCENTRATIONS
Customer Concentration
For the nine months ended September 30, 2022 and
2021, no customer accounted for over 10% of total revenues from apparel sales included in discontinued operations.
For the nine months ended September 30, 2022 and
2021, one licensee accounted for 100% total revenues from customer license fee.
Vendor Concentrations
For the nine months ended September 30, 2022 and
2021, one licensor accounted for 100% of the Company’s vendor license agreements (see below) related to the Company’s biopharmaceutical
operation.
NOTE 8 – COMMITMENTS AND CONTINGENCIES
Employment Agreements
Eric Weisblum
On April 17, 2020, the Company entered into an
employment agreement (“Employment Agreement”) with Eric Weisblum to serve as Chief Executive Officer and Chief Financial Officer
of the Company. The term of the Employment Agreement will continue for a period of one year from the date of execution date thereof and
automatically renews for successive one-year periods at the end of each term until either party delivers written notice of their intent
not to renew at least six months prior to the expiration of the then effective term. The Employment Agreement provided for a base salary
of $120,000 and 152,619 of vested shares of the Company’s common stock in April 2020. In addition, Mr. Weisblum shall be eligible
to earn a bonus, subject to the sole discretion of the Company’s Board of Directors (“Board”). The Employment Agreement
may be terminated by either the Company or Mr. Weisblum at any time and for any reason upon 60 days prior written notice. Upon termination
of the Employment Agreement, Mr. Weisblum shall be entitled to (i) any equity award that has vested prior to the termination date, (ii)
reimbursement of expenses incurred on or prior to such termination date and (iii) such employee benefits to which he may be entitled as
of the termination date (collectively, the “Accrued Amounts”). Mr. Weisblum employment may also be terminated by the Company
at any time, with cause, death or disability (as defined in the Employment Agreement). Upon the termination of the Employment Agreement
for death or disability, Mr. Weisblum shall be entitled to receive the Accrued Amounts. The Employment Agreement also contains covenants
prohibiting Mr. Weisblum from disclosing confidential information with respect to the Company. On January 18, 2021, the Company and Mr.
Weisblum entered into the first amendment (the “Amendment”) to the Employment Agreement, effective as of January 1, 2021.
Pursuant to the Amendment Mr. Weisblum’s base salary was increased from $120,000 per year to $180,000 per year and all the terms
and provisions of the Employment Agreement shall remain in full force and effect. On October 12, 2022, the Company entered into a new
employment agreement with Mr. Weisblum (See Note 9 – Subsequent Events).
Daniel Ryweck
On September 27, 2022, the Board appointed Daniel
Ryweck as Chief Financial Officer of the Company On September 28, 2022, the Company entered into an employment agreement (the “Ryweck
Employment Agreement”) with Mr. Ryweck. Pursuant to the terms of the Ryweck Employment Agreement, Mr. Ryweck will (i) receive a
base salary at an annual rate of $42,000 (the “Base Compensation”) payable in equal monthly installments, and (ii) be eligible
to receive an annual discretionary bonus. The term of Mr. Ryweck’s engagement under the Ryweck Employment Agreement commenced on
September 28, 2022 and continues until September 28, 2023, unless earlier terminated in accordance with the terms of the Ryweck Employment
Agreement. The term of Mr. Ryweck’s Employment Agreement is automatically renewed for successive one-year periods until terminated
by Mr. Ryweck or the Company. On October 12, 2022, the Company amended the Ryweck Employment Agreement (See Note 9 – Subsequent
Events).
SILO PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
Dr. James Kuo
On January 27, 2022, the Company and Dr. James
Kuo entered into an employment agreement (“Kuo Employment Agreement”) for Dr. Kuo to serve as the Vice President of Research
& Development. The Kuo Employment Agreement shall be effective as of the date of the agreement and shall automatically renew for a
period of one year at every anniversary of the effective date, with the same terms and conditions, unless either party provides written
notice of its intention not to extend the term of the Kuo Employment Agreement at least thirty days prior to the applicable renewal date.
Dr. Kuo shall be paid an annual base salary of $30,000. For each twelve-month period of his employment, Dr. Kuo shall be entitled to a
bonus whereby amount and terms shall be in the sole and absolute discretion of the Board of Directors (“Board”) and shall
be payable at the Company’s sole option in stock or in cash. In addition, an aggregate of 16,000 incentive stock options were granted
under the 2020 Plan to Dr. Kou, exercisable at $10.00 per share and expires on January 31, 2032. The stock options vest as follows: (i)
6,000 stock options upon issuance; (ii) 5,000 vests on October 31, 2022 and; (iii) 5,000 vests on October 31, 2023. The 16,000 stock options
had a fair value of $94,915 which valued at grant date using Binomial Lattice option pricing model with the following assumptions: risk-free
interest rate of 1.18%, expected dividend yield of 0%, expected term of 2 years using the simplified method and expected volatility of
117% based on calculated volatility. The Company recorded the fair value of the stock options, in the amount of $95,915, as deferred compensation
which is being amortized over the vesting period. During the nine months ended September 30, 2022, the Company amortized $73,257 of the
deferred compensation which was recorded as compensation expenses in the accompanying condensed consolidated statement of operations.
As of September 30, 2022, the deferred compensation had a balance of $21,658 (see Note 6).
License Agreements between the Company and
Vendors
University of Maryland, Baltimore - License
Agreement for Development and Use of Central Nervous System-Homing Peptides
Commercial Evaluation License and Option Agreement
with the University of Maryland, Baltimore
Effective as of July 15, 2020, the Company, through
its wholly-owned subsidiary, Silo Pharma, Inc. (see Note 1) and University of Maryland, Baltimore (“UMB”) (collectively as
“Parties”), entered into a commercial evaluation license and option agreement (“License Agreement”), granting
the Company an exclusive, non-sublicensable, non-transferable license to with respect to the exploration of the potential use of central
nervous system-homing peptides in vivo and their use for the investigation and treatment of multiple sclerosis and other neuroinflammatory
pathology. The License Agreement also granted the Company an exclusive option to negotiate and obtain an exclusive, sublicensable, royalty-bearing
license (“Exclusive Option”) to with respect to the subject technology. The License Agreement had a term of six months from
the effective date however if the Company exercises the Exclusive Option, the License Agreement shall expire at the end of the negotiation
period (as defined in the License Agreement) or upon execution of a master license agreement, whichever occurs first. The Company exercised
its Exclusive Option on January 13, 2021 and entered into a Master License Agreement on February 12, 2021. Both parties may terminate
this agreement within thirty days by giving a written notice. In July 2020, the Company paid a license fee of $10,000 to UMB pursuant
to the License Agreement which was recorded in professional fees during the year ended December 31, 2020 since the Company could not conclude
that such costs would be recoverable for this early-stage venture.
University of Maryland, Baltimore - License
Agreement for Development and Use of Joint-Homing Peptides
Commercial Evaluation License and Option Agreement
with the University of Maryland, Baltimore
Effective as of February 26, 2021, the Company,
through its wholly-subsidiary, Silo Pharma, Inc., and University of Maryland, Baltimore (“UMB”) (collectively as “Parties”),
entered into a commercial evaluation license and option agreement (“License Agreement”), which granted the Company an exclusive,
non-sublicensable, non-transferable license to with respect to the exploration of the potential use of joint-homing peptides for use in
the investigation and treatment of arthritogenic processes. The License Agreement also granted the Company an exclusive option to negotiate
and obtain an exclusive, sublicensable, royalty-bearing license (“Exclusive Option”) to with respect to the subject technology.
The License Agreement had a term of six months from the effective date. Both parties could have terminated the License Agreement within
thirty days by giving a written notice.
SILO PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
On July 6, 2021, the Company entered into a First
Amendment Agreement (“First Amendment”) with UMB to extend the term of the original License Agreement by an additional six
months such that the First Amendment was effective until February 25, 2022 however, if the Company exercises the Exclusive Option, the
License Agreement shall expire at the end of the negotiation period (as defined in the License Agreement) or upon execution of a master
license agreement, whichever occurs first. The Company paid a license fee of $10,000 to UMB in March 2021 pursuant to the License Agreement
which was recorded in professional fees during the year ended December 31, 2021, since the Company could not conclude that such costs
would be recoverable for this early-stage venture.
On January 28, 2022, the Parties entered into
a second amendment to the commercial evaluation and license agreement dated February 26, 2021 (“Second Amendment”). The Second
Amendment extends the term of the original license agreement until December 31, 2022. However, if the Company exercises the Exclusive
Option, the License Agreement shall expire at the end of the negotiation period (as defined in the License Agreement) or upon execution
of a master license agreement, whichever occurs first.
On June 30, 2022, the Parties entered into a third
amendment to the commercial evaluation and license agreement dated February 26, 2021 (“Third Amendment”). The Third Amendment
expands the scope of the license granted in the License Agreement to add additional patent rights with respect to an invention generally
known as Peptide-Targeted Liposomal Delivery for Treatment Diagnosis, and Imaging of Diseases and Disorders. In consideration of
the licenses granted under this Third Amendment, Company agreed to pay a one-time, non-refundable fee of $2,500 which was recorded as
research and development expense in the condensed consolidated statement of operations.
Master License Agreement with the University
of Maryland, Baltimore
As disclosed above, effective as of February 12,
2021, the Company and University of Maryland, Baltimore (“UMB”), entered into the Master License Agreement (“Master
License Agreement”) which grants the Company an exclusive, worldwide, sublicensable, royalty-bearing license to certain intellectual
property: (i) to make, have made, use, sell, offer to sell, and import certain licensed products and: (ii) to use the invention titled,
“Central nervous system-homing peptides in vivo and their use for the investigation and treatment of multiple sclerosis and other
neuroinflammatory pathology” and UMB’s confidential information to develop and perform certain licensed processes for the
therapeutic treatment of neuroinflammatory disease.
The Master License Agreement will remain in effect
on a Licensed Product-by-Licensed Product basis and country-by-country basis until the later of: (a) the last patent covered under the
Master License Agreement expires, (b) the expiration of data protection, new chemical entity, orphan drug exclusivity, regulatory exclusivity,
or other legally enforceable market exclusivity, if applicable, or (c) 10 years after the first commercial sale of a Licensed Product
in that country, unless earlier terminated in accordance with the provisions of the Master License Agreement. The term of the Master License
Agreement shall expire 15 years after the Master License Agreement Effective Date in which (a) there were never any patent rights, (b)
there was never any data protection, new chemical entity, orphan drug exclusivity, regulatory exclusivity, or other legally enforceable
market exclusivity or (c) there was never a first commercial sale of a Licensed Product.
The Company may assign, sublicense, grant, or
otherwise convey any rights or obligations under the Master License Agreement to a Company affiliate, without obtaining prior written
consent from UMB provided that it meets the terms defined in the Master License Agreement. The Company may grant sublicenses of some or
all of the rights granted by the Master License Agreement, provided that there is no uncured default or breach of any material term or
condition under the Master License Agreement, by Company, at the time of the grant, and that the grant complies with the terms and conditions
of the Master License Agreement. The Company shall be and shall remain responsible for the performance by each of the Company’s
sublicensee. Any sublicense shall be consistent with and subject to the terms and conditions of the Master License Agreement and shall
incorporate terms and conditions sufficient to enable Company to comply with the Master License Agreement. The Company or Company affiliates
shall pay to UMB a percentage of all income received from its sublicensee as follows: (i) 25% of the Company’s sublicense income
which is receivable with respect to any sublicense that is executed before the filing of an NDA (or foreign equivalent) for the first
licensed product; and (b) 15% of the Company’s sublicense income which is receivable with respect to any sublicense that is executed
after the filing of an NDA (or foreign equivalent) for the first licensed product.
SILO PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
Pursuant to the Master License Agreement, the
Company shall pay UMB; (i) a license fee, (ii) certain event-based milestone payments (see below for payment terms), (iii) royalty payments
depending on net revenues (see below for payment terms), and (iv) a tiered percentage of sublicense income. The Company shall pay to UMB
a license fee of $75,000, payable as follows: (a) $25,000 shall be due within 30 days following the effective date; and (b) $50,000 on
or before the first anniversary of the effective date, which was paid in February 2022. The license fee is non-refundable and is not creditable
against any other fee, royalty or payment. The Company shall be responsible for payment of all patent expenses in connection with preparing,
filing, prosecution and maintenance of patents or patent applications relating to the patent rights. The Company paid $25,000 license
fee on February 17, 2021 and $50,000 in February 2022 which was recorded as prepaid expense and is being amortized over the 15-year term.
The Company recognized amortization expense of $4,375 in 2021. During the nine months ended September 30, 2022, the Company recognized
amortization expense of $3,750. On December 31, 2021, prepaid expense and other current assets – current amounted $5,000 and prepaid
expense – non-current amounts $15,625. On September 30, 2022, prepaid expense and other current assets – current amounted
$5,000 and prepaid expense – non-current amounts $61,875 as reflected in the accompanying condensed consolidated balance sheets.
Milestone Payment Terms:
Milestone | |
Payment | |
Filing of an Investigational New Drug (or any foreign equivalent) for a Licensed Product | |
$ | 50,000 | |
Dosing of first patient in a Phase 1 Clinical Trial of a Licensed Product | |
$ | 100,000 | |
Dosing of first patient in a Phase 2 Clinical Trial of a Licensed Product | |
$ | 250,000 | |
Receipt of New Drug Application (“NDA”) (or foreign equivalent) approval for a Licensed Product | |
$ | 500,000 | |
Achievement of First Commercial Sale of Licensed Product | |
$ | 1,000,000 | |
Royalty Payments Terms:
| (i) | 3%
on sales of licensed products (as defined in the Master License Agreement) during the applicable calendar year for sales less than $50,000,000;
and |
| (ii) | 5%
on sales of licensed products during the applicable calendar year for sales greater than $50,000,000; and |
| (iii) | minimum
annual royalty payments, as follows: |
Years |
|
Minimum
Annual
Royalty |
|
Prior to First Commercial Sale |
|
$ |
N/A |
|
Year of First Commercial Sale |
|
$ |
N/A |
|
First calendar year following the First Commercial Sale |
|
$ |
25,000 |
|
Second calendar year following the First Commercial Sale |
|
$ |
25,000 |
|
Third calendar year following the First Commercial Sale |
|
$ |
100,000 |
|
In April 2021, in connection with the Company’s
Sublicense Agreement with Aikido Pharma Inc. (see below - Patent License Agreement with Aikido Pharma Inc.), the Company paid 25%
of its sublicense income to UMB, pursuant to the Master License Agreement, which amounted to $12,500. The Company recognized amortization
expense of $628 in 2021. During the nine months ended September 30, 2022, the Company recognized amortization expense of $629. On December
31, 2021, prepaid expense and other current assets – current amounted $838 and prepaid expenses – non-current amounts $11,034.
On September 30, 2022, prepaid expense and other current assets – current amounted $833 and prepaid expenses – non-current
amounts $10,410 as reflected in the accompanying condensed consolidated balance sheets.
License Agreements between the Company and
Customer
Customer Patent License Agreement with Aikido
Pharma Inc.
On January 5, 2021, the Company and its subsidiary
Silo Pharma, Inc., a Florida corporation, entered into a patent license agreement (“License Agreement”) (collectively, the
“Licensor”) and Aikido Pharma Inc. (“Aikido” or the “Customer”), as amended on April 12, 2021, pursuant
to which the Licensor granted Aikido an exclusive, worldwide (“Territory”), sublicensable, royalty-bearing license to certain
intellectual property: (i) to make, have made, use, provide, import, export, lease, distribute, sell, offer for sale, develop and advertise
certain licensed products and (ii) to develop and perform certain licensed processes for the treatment of cancer and symptoms caused by
cancer (“Field of Use”).
SILO PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
The License Agreement also provided that, if the
Licensor exercised the option granted to it pursuant to its commercial evaluation license and option agreement with UMB, effective as
of July 15, 2020, it would grant Aikido a non-exclusive sublicense (“Right”) to certain UMB patent rights in the field of
neuroinflammatory diseases occurring in patients diagnosed with cancer (“Field”). Pursuant to the License Agreement, Aikido
agreed to pay the Licensor, among other things, (i) a one-time non-refundable cash payment of $500,000 and (ii) royalty payments equal
to 2% of net sales (as defined in the License Agreement) in the Field of Use in the Territory. In addition, Aikido agreed to issue the
Licensor 500 shares of Aikido’s newly designated Series M Convertible Preferred Stock which were to be converted into an aggregate
of 625,000 shares of the Aikido’s common stock. On April 12, 2021, the Company entered into an amendment to the License Agreement
(“Amended License Agreement”) with Aikido dated January 5, 2021 whereby Aikido issued an aggregate of 625,000 restricted shares
of Aikido’s common stock instead of the 500 shares of the Series M Convertible Preferred Stock.
Pursuant to the License Agreement, the Company
is required to prepare file, prosecute, and maintain the licensed patents. Unless earlier terminated, the term of the license to the licensed
patents will continue until the expiration or abandonment of all issued patents and filed patent applications within the licensed patents.
The Company may terminate the License Agreement upon 30 day written notice if Aikido fails to pay any amounts due and payable to the Company
or if Aikido or any of its affiliates brings a patent challenge against the Company, assists others in bringing a legal or administrative
challenge to the validity, scope, or enforceability of or opposes any of the licensed patents (“Patent Challenge”) against
the Company (except as required under a court order or subpoena). Aikido may terminate the Agreement at any time without cause, and without
incurring any additional penalty, (i) by providing at least 30 days’ prior written notice and paying the Company all amounts due
to it through such termination effective date. Either party may terminate the Agreement for material breaches that have failed to be cured
within 60 days after receiving written notice. The Company collected the non-refundable cash payment of $500,000 on January 5, 2021 which
was recorded as deferred revenue to be recognized as revenues over the 15 year term of the License Agreement.
With respect to a vote of Aikido’s stockholders
to approve a reverse split of its common stock no later than December 31, 2021 (“Reverse Stock Split Vote”), each share of
the Series M Convertible Preferred Stock shall be entitled to such number of votes equal to 20,000 shares of Aikido’s common stock.
In addition, each share of the Series M Convertible Preferred Stock shall be convertible, at any time after the earlier of (i) the date
that the Reverse Stock Split Vote is approved by Aikido’s stockholders and (ii) December 31, 2021, at the option of the holder,
into such number of shares of Aikido’s common stock determined by dividing the Stated Value by the Conversion Price. “Stated
Value” means $1,000. “Conversion Price” means $0.80, subject to adjustment.
Prior to the April 12, 2021, issuance of the common
stock in lieu of the Series M Convertible Preferred Stock as discussed above, the Company valued the 500 Series M Convertible Preferred
stock which was equivalent into Aikido’s 625,000 shares of common stock at a fair value of $0.85 per common share or $531,250 based
quoted trading price of Aikido’s common stock on the date of grant. The Company recorded an equity investment of $531,250 (see Note
3) and deferred revenue of $531,250 to be recognized as revenues over the term of the license. Accordingly, the Company recorded a total
deferred revenue of $1,031,250 ($500,000 cash received and $531,250 value of equity securities received) to be recognized as revenues
over the 15-year term. The Company recognized revenue of $68,750 in 2021. During the nine months ended September 30, 2022, the Company
recognized revenue of $51,562. On December 31, 2021, deferred revenue – current portion amounted $68,750 and deferred revenue –
long-term portion amounted $893,750. On September 30, 2022, deferred revenue – current portion amounted $68,750 and deferred revenue
– long-term portion amounted $842,187 as reflected in the accompanying condensed consolidated balance sheets.
SILO PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
The Right shall be to the full extent permitted
by and on terms and conditions required by UMB for a term consistent with the term of patent and technology licenses that UMB normally
grants. In the event that the Company exercises its option and executes a license with UMB to the UMB patent rights within 40 days after
the execution of such UMB license, for consideration to be agreed upon and paid by Aikido, which consideration shall in no event exceed
110% of any fee payable by the Company to UMB for the right to sublicense the UMB patent rights. The Company shall grant Aikido a nonexclusive
sublicense in the United States to the UMB patent rights in the Field, subject to the terms of any UMB license Licensor obtains, including
any royalty obligations on sublicensees required under any such sublicense. The option was exercised on January 13, 2021. Accordingly,
on April 6, 2021, the Company entered into the Sublicense Agreement with Aikido pursuant to which it granted Aikido a worldwide exclusive
sublicense to its licensed patents under the Master License Agreement.
Customer Sublicense Agreement with
Aikido Pharma Inc.
On April 6, 2021 (the “Sublicense Agreement
Effective Date”), the Company entered into the Sublicense Agreement with Aikido pursuant to which the Company granted Aikido an
exclusive worldwide sublicense to (i) make, have made, use, sell, offer to sell and import the Licensed Products (as defined below) and
(ii) in connection therewith to (A) use an invention known as “Central nervous system-homing peptides in vivo and their use for
the investigation and treatment of multiple sclerosis and other neuroinflammatory pathology” which was sublicensed to the Company
pursuant to the Master License Agreement and (B) practice certain patent rights (“Patent Rights”) for the therapeutic
treatment of neuroinflammatory disease in cancer patients. “Licensed Products” means any product, service, or process, the
development, making, use, offer for sale, sale, importation, or providing of which: (i) is covered by one or more claims of the Patent
Rights; or (ii) contains, comprises, utilizes, incorporates, or is derived from the Invention or any technology disclosed in the Patent
Rights.
Pursuant to the Sublicense Agreement, Aikido agreed
to pay the Company (i) an upfront license fee of $50,000, (ii) the same sales-based royalty payments that the Company is subject
to under the Master License Agreement and (iii) total milestone payments of up to $1.9 million. The Sublicense Agreement shall continue
on a Licensed Product-by-Licensed Product and country-by-country basis until the later of (i) the date of expiration of the last to expire
claim of the Patent Rights covering such Licensed Product in such country, (ii) the expiration of data protection, new chemical entity,
orphan drug exclusivity, regulatory exclusivity or other legally enforceable market exclusivity, if applicable and (iii) 10 years after
the first commercial sale of a Licensed Product in that country, unless terminated earlier pursuant to the terms of the Sublicense Agreement.
Furthermore, the Sublicense Agreement shall expire 15 years after the Sublicense Agreement Effective Date with respect to any country
in which (i) there were never any Patent Rights, (ii) there was never any data protection, new chemical entity, orphan drug exclusivity,
regulatory exclusivity or other legally enforceable market exclusivity with respect to a Licensed Product and (ii) there was never a commercial
sale of a Licensed Product, unless such agreement is earlier terminated pursuant to its terms. The Company collected the upfront license
fee of $50,000 in April 2021. The Company recognized revenue of $2,514 in 2021. During the nine months ended September 30, 2022, the Company
recognized revenue of $2,514. On December 31, 2021, deferred revenue – current portion amounted $3,352 and deferred revenue –
long-term portion amounted $44,134. On September 30, 2022, deferred revenue – current portion amounted $3,352 and deferred revenue
– long-term portion amounted $41,620 as reflected in the accompanying condensed consolidated balance sheets.
SILO PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
Sponsored Study and Research Agreements
between the Company and Vendors
Investigator-Sponsored Study Agreement with
University of Maryland, Baltimore
On January 5, 2021, the Company entered into an
investigator-sponsored study agreement (“Sponsored Study Agreement”) with the University of Maryland, Baltimore. The research
project is a clinical study to examine a novel peptide-guided drug delivery approach for the treatment of multiple sclerosis (“MS”).
More specifically, the study is designed to evaluate (1) whether MS-1-displaying liposomes can effectively deliver dexamethasone to the
CNS and (2) whether MS-1-displaying liposomes are superior to plain liposomes, also known as free drug, in inhibiting the relapses and
progression of experimental autoimmune encephalomyelitis. Pursuant to the Sponsored Study Agreement, the research shall commence on March
1, 2021 and will continue until substantial completion, subject to renewal upon mutual written consent of the parties. The total cost
under the Sponsored Study Agreement shall not exceed $81,474 which is payable in two equal installments of $40,737 upon execution of the
Sponsored Study Agreement and $40,737 upon completion of the project with an estimated project timeline of nine months. The Company paid
$40,737 on January 13, 2021 which was recorded in prepaid expense to be amortized over the nine-month period. Currently, the project has
not been completed due to the delays cause by the Covid-19 pandemic. During the year ended December 31, 2021, the Company fully amortized
the prepaid expense of $40,737. This project was postponed until further notice and the second payment is not due.
Sponsored Research Agreement with The Regents
of the University of California
On June 1, 2021 (the “Effective Date”),
the Company entered into a sponsored research agreement (the “Sponsored Research Agreement”) with The Regents of the University
of California, on behalf of its San Francisco Campus (“UCSF”) pursuant to which UCSF shall conduct a study to examine psilocybin’s
effect on inflammatory activity in humans to accelerate its implementation as a potential treatment for Parkinson’s Disease, chronic
pain, and bipolar disorder. Pursuant to the Agreement, the Company shall pay UCSF a total fee of $342,850 to conduct the research over
the two-year period. The Agreement shall be effective for a period of two years from the Effective Date, subject to renewal or earlier
termination as set forth in the Sponsored Research Agreement. The Company paid the first payment of $40,000 pursuant to the payment schedule
on the Sponsored Research Agreement on June 15, 2021, the second payment of $40,000 on September 9, 2021 and $20,570 on November 18, 2021,
the third payment of $60,570 on March 1, 2022 and a fourth payment of $60,570 in August 2022, which were recorded to prepaid expense and
other current assets – current to be amortized over the two-year period. In 2021, the Company amortized $92,855 of the prepaid expense.
During the nine months ended September 30, 2022, the Company amortized $128,855 of the prepaid expense leaving a prepaid asset of $0 on
September 30, 2022.
Sponsored Research Agreement with University
of Maryland, Baltimore
On July 6, 2021, the Company and University of
Maryland, Baltimore (“UMB”) entered into a sponsored research agreement (“July 2021 Sponsored Research Agreement”)
pursuant to which UMB shall evaluate the pharmacokinetics of dexamethasone delivered to arthritic rats via liposome. The research
pursuant to the July 2021 Sponsored Research Agreement shall commence on September 1, 2021 and will continue until the substantial completion
thereof, subject to renewal upon written consent of the parties. The July 2021 Sponsored Research Agreement may be terminated by either
party upon 30 days’ prior written notice to the other party. In addition, if either party commits any material breach of or defaults
with respect to any terms or conditions of the July 2021 Sponsored Research Agreement and fails to remedy such default or breach within
10 business days after written notice from the other party, the party giving notice may terminate the July 2021 Sponsored Research Agreement
as of the date of receipt of such notice by the other party. If the Company terminates the July 2021 Sponsored Research Agreement for
any reason other than an uncured material breach by UMB, the Company shall relinquish any and all rights it may have in the Results (as
defined in the July 2021 Sponsored Research Agreement) to UMB. In addition, if the July 2021 Sponsored Research Agreement is terminated
early, the Company, among other things, will pay all costs incurred and accrued by UMB as of the date of termination.
Pursuant to the terms of the July 2021 Sponsored
Research Agreement, UMB granted the Company an option (the “Option”) to negotiate and obtain an exclusive license to any UMB
Arising IP (as defined in the July 2021 Sponsored Research Agreement) and UMB’s rights in any Joint Arising IP (as defined in the
July 2021 Sponsored Research Agreement) (collectively, the “UMB IP”). The Company may exercise the Option by giving UMB written
notice within 60 days after it receives notice from UMB of the UMB IP. Pursuant to the July 2021 Sponsored Research Agreement, the Company
shall pay UMB the fees below:
|
|
Payment |
|
|
|
1 |
|
$ |
92,095 |
|
|
Upon execution of the July 2021 Sponsored Research Agreement |
2 |
|
$ |
92,095 |
|
|
Six months after the start of project work as outlined in the July 2021 Sponsored Research Agreement |
3 |
|
$ |
92,095 |
|
|
Upon completion of the project work as outlined in the July 2021 Sponsored Research Agreement |
The Company paid the first payment of $92,095 on September
1, 2021, which was recorded to prepaid expense and other current assets – current and was amortized during the year ended December
31, 2021. On August 31, 2022, the Company paid the second payment of $92,095, which was recorded to prepaid expense and other current
assets – current and was amortized into research and development expense during the nine months ended September 30, 2022.
SILO PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
On June 7, 2022, the Company and UMB amended the
July 2021 Sponsored Research Agreement whereby both parties agreed to make changes to the original project work and budget. The amendment
had no effect on the consolidated financial statements.
Sponsored Research Agreement with Columbia
University
On October 1, 2021, the Company entered into a sponsored
research agreement with Columbia University pursuant to which the Company has been granted an option to license certain assets currently
under development, including Alzheimer’s disease. The term of the option will commence on the effective date of this agreement and
will expire upon the earlier of (i) 90 days after the date of the Company’s receipt of a final research report for each specific
research proposal as defined in the agreement or (ii) termination of the research. If the Company elects to exercise the option, both
parties will commence negotiation of a license agreement and will execute a license agreement no later than 3 months after the dated of
the exercise of the option. Columbia University and the Company will work towards developing a therapeutic treatment for patients suffering
from Alzheimer’s disease to post-traumatic stress disorder. During a one-year period from the date of this agreement, the Company
shall pay a total of $1,436,082 to Columbia University for the support of the research according to the payment schedule as follows: (i)
30% at signing, (ii) 30% at four and half months after the start of the project, (iii) 30% at nine months after the start of the project
and, (iv)10% at completion of the project. The Company paid the first payment of $430,825 in November 2021 and the second payment of $430,825
in July 2022, which were recorded to prepaid expense and other current assets – current to be amortized over the estimated project
timeline of twelve months. On October 13, 2022, the Company entered into an amendment to the Columbia Agreement (the “Columbia Amendment”),
pursuant to which the parties agreed to extend the payment schedule, whereby the third payment of $430,825 is due in March 2023 and the
remaining payment of $143,607 is due upon completion.
In 2021, the Company amortized $359,021 of the
prepaid expense. During the nine months ended September 30, 2022, the Company amortized the prepaid expense of $215,412. As of September
30, 2022 and December 31, 2021, prepaid expense related to this sponsored research agreement were $287,217 and $71,804, respectively.
On September 30, 2022, future amounts due under
sponsored study and research agreements between the Company and vendors is as follows:
Year ended
September 30, |
|
Amount |
|
2023 |
|
$ |
828,404 |
|
Total |
|
$ |
828,404 |
|
Joint Venture Agreement with Zylö Therapeutics,
Inc.
On April 22, 2021 (“Effective Date”),
the Company entered into a Joint Venture Agreement (“JV Agreement”) with Zylö Therapeutics, Inc. (“ZTI”)
pursuant to which the parties agreed to form a joint venture entity, to be named Ketamine Joint Venture, LLC (“Joint Venture”),
to, among other things, focus on the clinical development of ketamine using ZTI’s Z-pod™ technology (“Venture”).
Pursuant to the JV Agreement, the Company shall act as the manager (“Manager”) of the Joint Venture. The Joint Venture shall
terminate if the development program does not meet certain specifications and milestones as set forth in the JV Agreement within 30 days
of the date set forth in the JV Agreement. Notwithstanding the foregoing, the Manager may, in its sole discretion, terminate the Joint
Venture at any time.
Pursuant to the terms of the JV Agreement, (A)
the Company shall contribute (1) $225,000 and (2) its expertise and the expertise of its science advisory board and (B) ZTI shall contribute
(1) certain rights to certain of its patented technology as set forth in the JV Agreement, (2) a license to the know-how and trade secrets
with respect to its Z-pod™ technology for the loading and release of ketamine, (3) ketamine to be used for clinical purposes, (4)
reasonable use of its facilities and permits and (5) its expertise and know-how. Pursuant to the JV Agreement, 51% of the interest in
the Joint Venture shall initially be owned by the Company and 49% of the interest in the Joint Venture shall initially be owned by ZTI,
subject to adjustment in the event of additional contributions by either party. Notwithstanding the foregoing, in no event shall either
party own more than 60% of the interest in the Joint Venture. As of September 30, 2022 and as of the current date of this report, the
joint venture entity has not been formed yet.
Furthermore, pursuant to the terms of the JV Agreement,
ZTI shall grant the Joint Venture a sublicense pursuant to its license agreement (the “License Agreement”) with Albert Einstein
College of Medicine dated November 27, 2017, in the event that the Company or a third party makes a request indicating that the patented
technology (the “Patented Technology”) licensed to ZTI pursuant to the License Agreement is needed to advance the development
of the Joint Venture or it is contemplated or determined that the Patented Technology will be sold. Furthermore, pursuant to the JV Agreement,
ZTI granted the Company an exclusive option to enter into a separate joint venture for the clinical development of psilocybin using ZTI’s
Z-pod™ technology on the same terms and conditions set forth in the JV Agreement, which option shall expire 24 months after the
JV Effective Date.
SILO PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
Amended Service Agreement
On September 10, 2021 (“Effective Date”),
the Company entered into an Amendment Agreement (“Amended Service Agreement”) to a certain service agreement dated on September
8, 2020 with the University of Texas (“University”) at Austin whereby the University will provide advisory service and assist
the Company on identifying license and sponsored research opportunities for the Company. The Company shall pay the University $5,000 per
quarter starting on the Effective Date. Any cost incurred will be reimbursed only after prior written consent by the Company. The term
of the Amended Service Agreement is for 36 months unless earlier terminated by either party upon giving a written notice as defined in
the agreement. In 2021, the Company paid $5,000 related to this agreement. During the nine months ended September 30, 2022, the Company
paid $15,000 related to this agreement.
NOTE 9 – SUBSEQUENT EVENTS
On October 12, 2022, the Company entered into
an employment agreement with Eric Weisblum (the “2022 Weisblum Employment Agreement”) pursuant to which Mr. Weisblum’s
(i) base salary will be $350,000 per year, (ii) Mr. Weisblum will be paid a one-time signing bonus of $100,000, and (iii) Mr. Weisblum
shall be entitled to receive an annual bonus of up to $350,000, subject to the sole discretion of the Compensation Committee of the Board
of Directors of the Company (the “Compensation Committee”), and upon the achievement of additional criteria established by
the Compensation Committee from time to time (the “Annual Bonus”). In addition, pursuant to the 2022 Weisblum Employment Agreement,
upon termination of Mr. Weisblum’s employment for death or Total Disability (as defined in the 2022 Weisblum Employment Agreement),
in addition to any accrued but unpaid compensation and vacation pay through the date of his termination and any other benefits accrued
to him under any Benefit Plans (as defined in the 2022 Weisblum Employment Agreement) outstanding at such time and the reimbursement of
documented, unreimbursed expenses incurred prior to such termination date (collectively, the “Weisblum Payments”), Mr. Weisblum
shall also be entitled to the following severance benefits: (i) 24 months of his then base salary; (ii) if Mr. Weisblum elects continuation
coverage for group health coverage pursuant to COBRA Rights (as defined in the 2022 Weisblum Employment Agreement), then for a period
of 24 months following Mr. Weisblum’s termination he will be obligated to pay only the portion of the full COBRA Rights cost of
the coverage equal to an active employee’s share of premiums (if any) for coverage for the respective plan year; and (iii) payment
on a pro-rated basis of any Annual Bonus or other payments earned in connection with any bonus plan to which Mr. Weisblum was a participant
as of the date of his termination (together with the Weisblum Payments, the “Weisblum Severance”). Furthermore, pursuant to
the 2022 Weisblum Employment Agreement, upon Mr. Weisblum’s termination (i) at his option (A) upon 90 days prior written notice
to the Company or (B) for Good Reason (as defined in the 2022 Weisblum Employment Agreement), (ii) termination by the Company without
Cause (as defined in the 2022 Weisblum Employment Agreement) or (iii) termination of Mr. Weisblum’s employment within 40 days of
the consummation of a Change in Control Transaction (as defined in the Weisblum Employment Agreement), Mr. Weisblum shall receive the
Weisblum Severance; provided, however, Mr. Weisblum shall be entitled to a pro-rated Annual Bonus of at least $200,000. In addition, any
equity grants issued to Mr. Weisblum shall immediately vest upon termination of Mr. Weisblum’s employment by him for Good Reason
or by the Company at its option upon 90 days prior written notice to Mr. Weisblum, without Cause.
On October 12, 2022, the Company entered into
an amendment to the Ryweck Employment Agreement by and between the Company and Daniel Ryweck dated September 27, 2022, pursuant to which
Mr. Ryweck’s base salary was increased to $60,000 per year.