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ADTX Aditxt

Filed: 12 Nov 20, 7:00pm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended September 30, 2020

 

or

 

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

 

For the transition period from ________________ to ________________

 

Commission File Number: 001-39336

 

Aditx Therapeutics, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware 82-3204328
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification No.)
   

2569 Wyandotte, St., Suite 101

Mountain View, CA

 94043
(Address of principal executive offices) (Zip Code)

 

(909) 488-0844

(Registrant’s telephone number, including area code)

 

11161 Anderson Street

Suite 105-10014

Loma Linda, CA 92354

(Former name, former address and former fiscal year, if changed since last report)

 

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

 

Title of each class Trading Symbol(s) Name of each exchange on which registered

Common Stock, par value $0.001 per share

 ADTX The Nasdaq Stock Market LLC

 

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

 

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

 

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

 

Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
  Emerging growth company

 

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

 

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

 

As of November 11, 2020, the registrant had 12,380,495 and 12,279,692 shares of common stock, $0.001 par value per share, issued and outstanding, respectively.

 

 

 

 

 

 

Table of Contents

 

INDEX Page No.
Cautionary Note Regarding Forward-Looking Statements and Industry Data ii
   
PART I FINANCIAL INFORMATION 1
Item 1.Financial Statements (Unaudited) 1
 Balance Sheets as of September 30, 2020 and December 31, 2019 1
 Statements of Operations for the three and nine months ended September 30, 2020 and 2019 2
 Statements of Stockholders’ Equity (Deficit) for the three and nine months ended September 30, 2020 and 2019 3
 Statements of Cash Flows for the nine months ended September 30, 2020 and 2019 5
 Notes to Financial Statements 6
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations 15
Item 3.Quantitative and Qualitative Disclosures About Market Risk 22
Item 4.Controls and Procedures 22
    
PART II OTHER INFORMATION 23
Item 1.Legal Proceedings 23
Item 1A.Risk Factors 23
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 3.Defaults Upon Senior Securities 24
Item 4.Mine Safety Disclosures 24
Item 5.Other Information 24
Item 6.Exhibits 25
    
Signatures 26

 

-i-

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

 

This Quarterly Report on Form 10-Q contains forward-looking statements which are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements may be identified by such forward-looking terminology as “may,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. Our forward-looking statements are based on a series of expectations, assumptions, estimates and projections about our company, are not guarantees of future results or performance and involve substantial risks and uncertainty. We may not actually achieve the plans, intentions or expectations disclosed in these forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in these forward-looking statements. Our business and our forward-looking statements involve substantial known and unknown risks and uncertainties, including the risks and uncertainties inherent in our statements regarding:

 

 Our plans to initiate clinical trials for our product candidates;
   
 Our plans to research, develop and commercialize our product candidates

 

 Our ability to comply with the provisions of our license agreements with Loma Linda University and Leland Stanford Junior University;

 

 The results of clinical testing and trial activities of our product candidates;

 

 Our ability to obtain regulatory approval and market acceptance of, and reimbursement for our products;

 

 Our ability to protect our intellectual property and to develop, maintain and enhance a strong brand;

 

 Our ability to compete and succeed in a highly competitive and evolving industry;

 

 Our lack of operating history on which to judge our business prospects and management;

 

 Our ability to raise capital and the availability of future financing;

 

 Our ability to manage our research, development, expansion, growth and operating expenses;

 

 Our reliance on third parties to conduct our research, preclinical studies and expected clinical trials; and

 

 the impacts of COVID-19, or other future pandemics on our business;

 

 the impact of government laws and regulation.

 

All of our forward-looking statements are as of the date of this Quarterly Report on Form 10-Q only. In each case, actual results may differ materially from such forward-looking information. We can give no assurance that such expectations or forward-looking statements will prove to be correct. An occurrence of, or any material adverse change in, one or more of the risk factors or risks and uncertainties referred to in this Quarterly Report on Form 10-Q or included in our other public disclosures or our other periodic reports or other documents or filings filed with or furnished to the U.S. Securities and Exchange Commission (the “SEC”) could materially and adversely affect our business, prospects, financial condition and results of operations. Except as required by law, we do not undertake or plan to update or revise any such forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections or other circumstances affecting such forward-looking statements occurring after the date of this Quarterly Report on Form 10-Q, even if such results, changes or circumstances make it clear that any forward-looking information will not be realized. Any public statements or disclosures by us following this Quarterly Report on Form 10-Q that modify or impact any of the forward-looking statements contained in this Quarterly Report on Form 10-Q will be deemed to modify or supersede such statements in this Quarterly Report on Form 10-Q.

 

This Quarterly Report on Form 10-Q may include market data and certain industry data and forecasts, which we may obtain from internal company surveys, market research, consultant surveys, publicly available information, reports of governmental agencies and industry publications, articles and surveys. Industry surveys, publications, consultant surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but the accuracy and completeness of such information is not guaranteed. While we believe that such studies and publications are reliable, we have not independently verified market and industry data from third-party sources.

 

References to Aditxt

 

Throughout this Quarterly Report on Form 10-Q, the “Company,” “Aditxt,” “we,” “us,” and “our” refers to Aditx Therapeutics, Inc. and “our board of directors” refers to the board of directors of Aditx Therapeutics, Inc.

   

-ii-

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ADITX THERAPEUTICS, INC.

BALANCE SHEETS

(Unaudited)

 

  September 30,  December 31, 
  2020  2019 
ASSETS        
CURRENT ASSETS:        
Cash $13,715,534  $4,090 
Prepaid expenses  238,308   - 
ROU asset - short term  324,289   - 
TOTAL CURRENT ASSETS  14,278,131   4,090 
         
Fixed Assets  157,738   - 
Deferred offering costs  -   119,442 
ROU asset - long term  870,311   - 
Deposits  61,586   - 
TOTAL ASSETS $15,367,766  $123,532 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)        
CURRENT LIABILITIES:        
Accounts payable and accrued expenses $422,601  $1,847,458 
Accrued compensation to related parties  3,668   962,651 
Notes payable - related party  -   10,000 
Notes payable, net of discount  -   155,600 
Deferred rent  2,615   - 
Lease liability - short term  326,904   - 
TOTAL CURRENT LIABILITIES  755,788   2,975,709 
         
Lease liability - long term  865,081   - 
         
TOTAL LIABILITIES  1,620,869   2,975,709 
         
COMMITMENTS AND CONTINGENCIES        
         
STOCKHOLDERS’ EQUITY (DEFICIT)        
Preferred stock, $0.001 par value, 3,000,000 shares authorized, zero shares issued and outstanding, respectively  -   - 
Common stock, $0.001 par value, 27,000,000 shares authorized, 11,823,545 and 3,915,900 shares issued and 11,722,742 and 3,821,087 shares outstanding, respectively  11,827   3,916 
Treasury stock, 100,803 and 94,813 shares, respectively  (201,605)  (189,625)
Additional paid-in capital  30,134,728   9,063,483 
Accumulated deficit  (16,198,053)  (11,729,951)
TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)  13,746,897   (2,852,177)
         
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) $15,367,766  $123,532 

 

See accompanying notes to the financial statements.

 

-1-

 

 

ADITX THERAPEUTICS, INC.

STATEMENTS OF OPERATIONS

(Unaudited)

 

  Three Months Ended  Three Months Ended  Nine Months Ended  Nine Months Ended 
  September 30,
2020
  September 30,
2019
  September 30,
2020
  September 30,
2019
 
OPERATING EXPENSES                
General and administrative expenses, $874,363, $720,649, $1,564,129, and $3,543,016, in stock-based compensation $2,453,725  $1,060,346  $3,677,490  $4,771,567 
Research and development, includes $0, $0, $0, and $0 in stock-based compensation  285,813   19,603   514,478   108,449 
Sales and marketing $0, $0, $0, and $0 in stock-based compensation  5,000   -   7,848   147 
Total Operating Expenses  2,744,538   1,079,949   4,199,816   4,880,163 
                 
NET LOSS FROM OPERATIONS  (2,744,538)  (1,079,949)  (4,199,816)  (4,880,163)
                 
OTHER INCOME (EXPENSE)                
Interest expense  -   (454)  (902)  (1,481)
Interest income  116   -   116   - 
Gain on forgiveness of debt  -   -   32,500   45,000 
Amortization of debt discount  -   -   (300,000)  - 
Total Other Income (Expense)  116   (454)  (268,286)  43,519 
Net loss before income taxes  (2,744,422)  (1,080,403)  (4,468,102)  (4,836,644)
Income tax provision  -   -   -   - 
                 
NET LOSS $(2,744,422) $(1,080,403) $(4,468,102) $(4,836,644)
                 
Net loss per share - basic and diluted $(0.37) $

(0.28

) $(0.88) $

(1.26

)
                 
Weighted average number of shares outstanding during the period - basic and diluted  7,439,225   

3,866,751

   5,091,854   

3,836,659

 

 

See accompanying notes to the financial statements.

 

-2-

 

 

ADITX THERAPEUTICS, INC.

STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(Unaudited)

 

  Common
Shares
  Par  Preferred
Shares
  Preferred
Shares
Par
  Treasury
Shares
  Additional
Paid-in
Capital
  Accumulated
Deficit
  Total
Stockholders’
Equity (Deficit)
 
Balance December 31, 2019  3,821,087  $3,916   -  $-  $(189,625) $9,063,483  $(11,729,951) $(2,852,177)
Issuance of shares for services  104,750   105   -   -   -   418,895   -   419,000 
Stock option and warrant compensation  -   -   -   -   -   110,437   -   110,437 
Treasury stock  (5,990)  -   -   -   (11,980)  -   -   (11,980)
Net loss  -   -   -   -   -   -   (1,189,363)  (1,189,363)
Balance March 31, 2020 (unaudited)  3,919,847  $4,021   -  $-  $(201,605) $9,592,815  $(12,919,314) $(3,524,083)
                                 
Exercise of warrants  30,975   31   -   -   -   185,819   -   185,850 
Stock option and warrant compensation  -   -   -   -   -   77,138   -   77,138 
Issuance of shares for services  17,500   18   -   -   -   83,174   -   83,192 
Adjustment to Common Shares due to reverse stock split  (10)  (1)  -   -   -   -   -   (1)
Net loss  -   -   -   -   -   -   (534,317)  (534,317)
Balance June 30, 2020 (unaudited)  3,968,312  $4,069   -  $-  $(201,605) $9,938,946  $(13,453,631) $(3,712,221)
                                 
Exercise of warrants  3,709,778   3,712   -   -   -   20,982   -   24,694 
Stock option and warrant compensation  -   -   -   -   -   63,621   -   63,621 
Issuance of shares for services  208,666   209   -   -   -   810,533   -   810,742 
Issuance of shares for the settlement of accrued compensation and accounts payable  146,818   147   -   -   -   1,221,878   -   1,222,025 
Issuance of shares and warrants for IPO, net of offering costs  1,226,668   1,227   -   -   -   9,429,455   -   9,430,682 
Issuance of shares and warrants for offering, net of offering costs  1,150,000   1,150   1,250,000   1,250   -   8,524,376   -   8,526,776 
Issuance of shares for the conversion of debt  62,500   63   -   -   -   124,937   -   125,000 
Exercise conversion of preferred shares  1,250,000   1,250   (1,250,000)  (1,250)  -   -   -   - 
Net loss  -   -   -   -   -   -   (2,744,422)  (2,744,422)
Balance September 30, 2020 (unaudited)  11,722,742   11,827   -  $-   (201,605)  30,134,728   (16,198,053)  13,746,897 

 

-3-

 

 

  Common
Shares
  Par  Preferred
Shares
  Preferred
Shares
Par
  Treasury
Shares
  Additional
Paid-in
Capital
  Accumulated
Deficit
  Total
Stockholders’
Equity (Deficit)
 
Balance December 31, 2018  3,763,925  $3,764     -  $        -  $-  $4,361,725  $(5,902,223) $(1,536,734)
Issuance of shares for cash, net of offering costs  60,250   60   -   -   -   198,594   -   198,654 
Issuance of shares for services and licenses  13,000   13   -   -   -   51,987   -   52,000 
Stock option and warrant compensation  -   -   -   -   -   671,608   -   671,608 
Net loss  -   -   -   -   -   -   (1,200,268)  (1,200,268)
Balance March 31, 2019 (unaudited)  3,837,175  $3,837   -  $-  $-  $5,283,914  $(7,102,491) $(1,814,740)
                                 
Issuance of shares for cash, net of offering costs  11,250   11   -   -   -   36,799   -   36,810 
Issuance of shares for services and licenses  7,500   8   -   -   -   29,992   -   30,000 
Stock option and warrant compensation  -   -   -   -   -   2,068,759   -   2,068,759 
Treasury stock  (45,356)  -   -   -   (90,712)  -   -   (90,712)
Net loss  -   -   -   -   -   -   (2,555,973)  (2,555,973)
Balance June 30, 2019 (unaudited)  3,810,569  $3,856   -  $-  $(90,712) $7,419,464  $(9,658,464) $(2,325,856)
                                 
Issuance of shares for cash, net of offering costs  34,975   35   -   -   -   134,678   -   134,713 
Stock option and warrant compensation  -   -   -   -   -   720,649   -   720,649 
Treasury stock  (55,447)  -   -   -   (110,893)  -   -   (110,893)
Net loss  -   -   -   -   -   -   (1,080,403)  (1,080,403)
Balance September 30, 2019 (unaudited) $3,790,097  $3,891   -  $-  $(201,605) $8,274,791  $(10,738,867) $(2,661,790)

 

See accompanying notes to the financial statements.

 

-4-

 

 

ADITX THERAPEUTICS, INC.

STATEMENTS OF CASH FLOWS

(Unaudited)

 

  Nine Months Ended  Nine Months Ended 
  September 30,
2020
  September 30,
2019
 
CASH FLOWS FROM OPERATING ACTIVITIES:      
Net loss $(4,468,102) $(4,836,644)
Adjustments to reconcile net loss to net cash used in operating activities        
Stock-based compensation  1,564,129   3,543,016 
Depreciation expense  2,796   - 
Amortization of debt discount  300,000   - 
Changes in operating assets and liabilities:        
Security deposit  (61,586)  - 
Prepaid expenses  (238,308)  - 
Accounts payable and accrued expenses  (1,302,192)  477,185 
Accrued compensation to related parties  128,396   401,036 
Net cash used in operating activities  (4,074,867)  (415,407)
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
Fixed Assets  (160,534)  - 
Net Cash Used In Investing Activities  (160,534)  - 
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Proceeds from notes payable - related party  -   10,000 
Proceeds from notes payable  375,000   - 
Repayments of notes payable - related party  -   (42,502)
Repayments of notes payable  (715,600)  (5,000)
Common stock issued for cash, net of offering costs  18,500,039   370,177 
Deferred offering costs  (423,139)  - 
Exercise of warrants  210,546   - 
Net cash provided by financing activities  17,946,845   332,675 
         
NET INCREASE (DECREASE) IN CASH  13,711,444   (82,732)
         
CASH AT BEGINNING OF PERIOD  4,090   115,709 
         
CASH AT END OF PERIOD $13,715,534  $32,977 
         
Supplemental cash flow information:        
Cash paid for income taxes $-  $- 
Cash paid for interest expense $5,842  $- 
         
NON-CASH INVESTING AND FINANCING ACTIVITIES:        
Liabilities assumed for common stock $11,980  $189,625 
Issuance of shares for the conversion of notes payable $125,000  $- 
Issuance of units for the settlement of accrued compensation and accounts payable $1,222,025  $- 
Original offering discount on notes payable $300,000  $- 
Lease liability recognized from right of use asset $1,191,985  $- 

 

See accompanying notes to the financial statements.

 

-5-

 

  

ADITX THERAPEUTICS, INC.

NOTES TO FINANCIAL STATEMENTS

(unaudited)

 

NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS

 

Company Background

 

Overview

 

Aditx Therapeutics, Inc. (“Aditxt” or the “Company”) was incorporated in the State of Delaware on September 28, 2017 and our headquarters are located in Mountain View, CA. The Company is a life sciences company with a mission of prolonging life and enhancing its quality by improving the health of the immune system.

 

We are developing biotechnologies specifically focused on improving the health of the immune system through immune reprogramming and monitoring. Our immune reprogramming technologies are currently at the pre-clinical stage and are designed to retrain the immune system to induce tolerance with an objective of addressing rejection of transplanted organs, autoimmune diseases, and allergies. Our immune monitoring technologies are designed to provide a personalized comprehensive profile of the immune system and we plan to utilize them in our upcoming reprogramming clinical trials to monitor subjects’ immune response before, during and after drug administration.

 

Offerings

 

On July 2, 2020, the Company completed its initial public offering (“IPO”). In connection therewith, the Company issued 1,226,668 Units (the “Units”), excluding the underwriters’ option to cover overallotments, at an offering price of $9.00 per Unit, resulting in gross proceeds of approximately $11.0 million. The Units issued in the IPO consisted of one share of common stock, one Series A warrant, and one Series B warrant. The Series A warrants originally had an exercise price of $9.00 and a term of 5 years. In addition, the Company issued a Unit Purchase Option at an exercise price of $11.25 per unit to the underwriters to purchase up to 67,466 units, with each unit consisting of (i) one share of common stock and (ii) one Series A Warrant. On August 19, 2020 the Company modified the exercise price of the Series A Warrants from $9.00 per share to $4.50 per share. The term of the Series A Warrants was not modified. The Series B warrants have an exercise price of $11.25 per share, a term of 5 years and contain a cashless exercise option upon certain criteria being met. As of September 30, 2020, substantially all of the Series B warrants issued in the IPO have been exercised pursuant to a cashless provision therein.

 

On September 10, 2020, the Company completed a follow-on public offering (“September 2020 Offering”). In connection therewith, the Company issued 2,400,000 Units (the “Follow-On Units”), excluding the underwriters’ option to cover overallotments, at an offering price of $4.00 per Follow-On Unit, resulting in gross proceeds to the Company of approximately $9.6 million. The Follow-On Units issued in the September 2020 Offering consisted of one share of common stock (or Series A Preferred Stock for investors who would own more than 4.99% of the Company if they invested in common stock), one Series A-1 warrant, and one Series B-1 warrant. The Series A-1 warrants have an exercise price of $3.19 per share and a term of 5 years. The Series B-1 warrants have exercise price of $5.00 per share, a term of 5 years and contain a cashless exercise option upon certain criteria being met. In addition, the Company issued a warrant to the underwriters to purchase up to 60,000 shares of common stock at an exercise price of $5.00 per share. Subsequent to quarter end, substantially all of the Series B-1 warrants issued in the September 2020 Offering have been exercised pursuant to a cashless provision therein.

 

Risks and Uncertainties

 

The Company has a limited operating history and has not generated revenue from intended operations. The Company’s business and operations are sensitive to general business and economic conditions in the U.S. and worldwide along with local, state, and federal governmental policy decisions. A host of factors beyond the Company’s control could cause fluctuations in these conditions. Adverse conditions may include: changes in biotechnology regulatory environment, technological advances that render our technologies obsolete, availability of resources for clinical trials, acceptance of technologies into the medical community, and competition from larger, more well-funded companies. These adverse conditions could affect the Company’s financial condition and the results of its operations.

 

-6-

 

 

On January 30, 2020, the World Health Organization declared the COVID-19 novel coronavirus outbreak a “Public Health Emergency of International Concern” and on March 10, 2020, declared it to be a pandemic. Actions taken around the world to help mitigate the spread of the coronavirus include restrictions on travel, and quarantines in certain areas, and forced closures for certain types of public places and businesses. The COVID-19 coronavirus and actions taken to mitigate it have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the geographical area in which the Company operates. While it is unknown how long these conditions will last and what the financial impact will be to the Company, it is reasonably possible that future capital raise efforts and additional development of our technologies may be negatively affected.

 

NOTE 2 – GOING CONCERN ANALYSIS

 

Management Plans

 

The Company was incorporated on September 28, 2017 and has not generated revenues to date. During the nine months ended September 30, 2020, the Company had a net loss of $4,468,102 and cash of $13,715,534. The Company will be conducting medical research and development, and the time at which the Company will begin generating revenue is unknown. The Company believes, however, that the funds raised by the IPO and the September 2020 Offering will be sufficient to fund the Company’s operation for at least the next 12 months. Because of these factors, the Company believes that this alleviates issues in connection with the Company’s ability to continue as a going concern. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.

 

The financial statements included in this report do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the matters discussed herein. While we believe in the viability of our strategy to generate sufficient revenue, control costs and raise additional funds when necessary, there can be no assurances to that effect. The Company’s ability to continue as a going concern is dependent upon the ability to complete clinical studies and implement the business plan, generate sufficient revenues and to control operating expenses.

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of the Company’s management, the accompanying financial statements reflect all adjustments, consisting of normal, recurring adjustments, considered necessary for a fair presentation of the results for the interim periods ended September 30, 2020 and 2019. Although management believes that the disclosures in these unaudited financial statements are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in financial statements that have been prepared in accordance U.S. GAAP have been or omitted pursuant to the rules and regulations of the SEC.

 

The accompanying unaudited financial statements should be read in conjunction with the Company’s financial statements for the year ended December 31, 2019, which contain the audited financial statements and notes thereto, included in the Company’s Prospectus, dated September 1, 2020, filed with the SEC pursuant to Rule 424(b). The interim results for the nine months ended September 30, 2020 are not necessarily indicative of the results to be expected for the year ended December 31, 2020 or for any future interim periods.

 

Use of Estimates

 

The preparation of 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 revenue and expense during the reporting period. Actual results could differ from those estimates. Significant estimates underlying the financial statements include the fair value of stock options and warrants.

 

-7-

 

 

Fair Value Measurements and Fair Value of Financial Instruments

 

The Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements. ASC Topic 820 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

 

Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

 

Level 2 - Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.

 

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 did not identify any assets or liabilities that are required to be presented on the balance sheets at fair value in accordance with ASC Topic 820.

 

Due to the short-term nature of all financial assets and liabilities, their carrying value approximates their fair value as of the balance sheet dates.

 

Concentrations of Credit Risk

 

The Company maintains its cash accounts at financial institutions which are insured by the Federal Deposit Insurance Corporation. At times, the Company may have deposits in excess of federally insured limits.

 

Cash and Cash Equivalents

 

Cash and cash equivalents include short-term, liquid investments. As of September 30, 2020 and December 31, 2019, $12,760,084 and $0 was invested in the J.P. Morgan U.S. Government Money Market Fund, respectively. 

 

Fixed Assets

 

Fixed assets are stated at cost less accumulated depreciation. Cost includes expenditures for furniture, office equipment, laboratory equipment, and other assets. Maintenance and repairs are charged to expense as incurred. When assets are sold, retired, or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in operations. The cost of fixed assets are depreciated using the straight-line method over the estimated useful lives of the related assets. Depreciation expense was $2,796 for the three and nine months ended September 30, 2020 and zero for the three and nine months ended for September 30, 2019.

 

Offering Costs

 

The Company accounts for offering costs in accordance with ASC 340, Other Assets and Deferred Costs. Prior to the completion of an offering, offering costs were capitalized as deferred offering costs on the balance sheet. The deferred offering costs are netted against the proceeds of the offering in stockholders’ equity (deficit) or the related debt, as applicable. Costs related to unsuccessful offerings are expensed.

 

Leases

 

Under Topic 842, operating lease expense is generally recognized evenly over the term of the lease. The Company has operating leases consisting of office and laboratory space with remaining lease terms of 46 months. Rent and Lease costs were $46,698 and $23,731 for the nine months ended September 30, 2020 and 2019. There was no sublease rental income for the nine months ended September 30, 2020 and 2019. Rent and Lease costs were $43,573 and $9,467 for the three months ended September 30, 2020 and 2019. There was no sublease rental income for the three months ended September 30, 2020 and 2019.

 

Leases with an initial term of twelve months or less are not recorded on the balance sheet. For lease agreements entered into or reassessed after the adoption of Topic 842, we combine the lease and non-lease components in determining the lease liabilities and right of use (“ROU”) assets.

 

-8-

 

 

Our lease agreements generally do not provide an implicit borrowing rate, therefore an internal incremental borrowing rate is determined based on information available at lease commencement date for purposes of determining the present value of lease payments. We used the incremental borrowing rate on September 30, 2020 and December 31, 2019 for all leases that commenced prior to that date. In determining this rate, which is used to determine the present value of future lease payments, we estimate the rate of interest we would pay on a collateralized basis, with similar payment terms as the lease and in a similar economic environment.

 

Lease Costs

 

  Nine Months Ended
September 30,
2020
  Nine Months Ended
September 30,
2019
 
Components of total lease costs:        
Operating lease expense $46,698  $      - 
Total lease costs $46,698  $- 

 

Lease Positions as of September 30, 2020

 

ROU lease assets and lease liabilities for our operating leases were recorded in the balance sheet as follows:

 

  September 30,
2020
  December 31,
2019
 
Assets        
Right of use asset – short term $324,289  $      - 
Right of use asset – long term  870,311   - 
Total assets $1,194,600  $- 
         
Liabilities        
Operating lease liabilities – short term $326,904  $- 
Operating lease liabilities – long term  865,081   - 
Total lease liability $1,191,985  $- 

 

Lease Terms and Discount Rate

 

Weighted average remaining lease term (in years) – operating lease  3.83 
Weighted average discount rate – operating lease  8.00%

 

The future minimum lease payments under the leases are as follows:

  

2020 (remainder) $84,536 
2021  342,500 
2022  352,958 
2023  363,416 
2024  215,551 
Total future minimum lease payments  1,358,961 
Less: Lease imputed interest  166,976 
Total $1,191,985 

 

-9-

 

 

Stock-Based Compensation

 

The Company accounts for stock-based compensation costs under the provisions of ASC 718, Compensation—Stock Compensation, which requires the measurement and recognition of compensation expense related to the fair value of stock-based compensation awards that are ultimately expected to vest. Stock based compensation expense recognized includes the compensation cost for all stock-based payments granted to employees, officers, and directors based on the grant date fair value estimated in accordance with the provisions of ASC 718. ASC. 718 is also applied to awards modified, repurchased, or cancelled during the periods reported. Stock-based compensation is recognized as expense over the employee’s requisite vesting period and over the nonemployee’s period of providing goods or services.

 

Patents

 

The Company incurs fees from patent licenses. During the nine months ended September 30, 2020 and 2019, the Company had a licensing fee for the patents of $258,635 and $18,071, respectively.

 

Research and Development

 

We incur research and development costs during the process of researching and developing our technologies and future offerings. Our research and development costs mainly consist of licensing costs. We expense these costs as incurred unless such costs qualify for capitalization under applicable guidance.

 

Basic and Diluted Net Loss per Common Share

 

Basic loss per common share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding for each period. Diluted loss per share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding plus the dilutive effect of shares issuable through the common stock equivalents. The weighted-average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive. As of September 30, 2020, 1,110,000 stock options and 6,237,296 warrants were excluded from dilutive earnings per share as their effects were anti-dilutive. As of September 30, 2019, 2,205,000 stock options and 2,632,456 warrants were excluded from dilutive earnings per share as their effects were anti-dilutive.

 

Recent Accounting Pronouncements

 

In February 2016, FASB issued Accounting Standards Update (“ASU”) 2016-02: Leases (Topic 842). The new guidance generally requires an entity to recognize on its balance sheet operating and financing lease liabilities and corresponding right-of-use assets. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2018 and early adoption is permitted. The new standard requires a modified retrospective transition for existing leases to each prior reporting period presented. The Company has elected to early adopt this standard. This standard will be effective for the interim period beginning July 1, 2020. The adoption of this standard is not expected to have a significant impact our financial statements   other than the presentation of right of use asset and lease liability on the balance sheet.

 

The FASB issues ASUs to amend the authoritative literature in ASC. There have been several ASUs to date, including those above, that amend the original text of ASC. Management believes that those issued to date either (i) provide supplemental guidance, (ii) are technical corrections, (iii) are not applicable to us or (iv) are not expected to have a significant impact our financial statements.

 

NOTE 4 – RELATED PARTY TRANSACTIONS

 

The Company’s Chief Executive Officer (“CEO”) has provided certain periods of service without payment. As of September 30, 2020 and December 31, 2019, the CEO is owed $0 and $309,500, respectively, related to compensation. During the three months ended September 30, 2020, the Company issued 38,055 Units consisting of one share of common stock and one Series A warrant and one Series B warrant to settle $342,500 in accrued compensation.

 

-10-

 

 

The Company’s Chief Innovation Officer (“CIO”) has provided certain periods of service without payment. As of September 30, 2020 and December 31, 2019, the CIO is owed $0 and $377,000, respectively, related to compensation. During the three months ended September 30, 2020, the Company issued 47,222 Units consisting of one share of common stock, one Series A warrant, and one Series B warrant to settle $425,000 in accrued compensation.

 

Effective July 10, 2020, the Board of Directors appointed the Company’s Chief Operations Officer (“COO”). Prior to the appointment, the COO was an independent operations consultant and had provided certain periods of service without payment. As of September 30, 2020 and December 31, 2019, the COO is owed $0 and $275,000, respectively, related to compensation. During the three months ended September 30, 2020, the Company issued 35,555 Units consisting of one share of common stock, one Series A warrant, and one Series B warrant to settle $320,000 in accrued compensation.

 

On March 21, 2019, the Company entered into a note with a related party. The note had a principal of $10,000, a maturity date of September 21, 2019, and an interest rate of 4% per year. During the three months ended September 30, 2020, this note was paid in full.

 

During the nine months ended September 30, 2020, the Company assumed $11,980 of liabilities from a related party in exchange for the return of 5,990 shares of the Company’s common stock. 

 

NOTE 5 – STOCKHOLDERS’ EQUITY (DEFICIT)

 

Preferred Stock

 

The Company is authorized to issue 3,000,000 shares of preferred stock, par value $0.001 per share.

 

Common Stock

 

The Company is authorized to issue 27,000,000 shares of common stock, par value $0.001 per share.

 

During the nine months ended September 30, 2020, the Company issued 330,916 shares of common stock and recognized expense of $1,312,930 in stock compensation for consulting services. The Company also issued 3,740,753 shares of commons stock for the exercise of warrants and received $210,546 for the exercise of the warrants. The Company issued 1,250,000 shares of common stock for the exercise of 1,250,000 shares of Series A Preferred Stock. The Company issued 146,818 shares of common stock for the settlement of accounts payable and issued 62,500 shares of common stock for the settlement of debt. The Company issued 1,226,668 shares of common stock related to the IPO and issued 1,150,000 shares of common stock related to the September 2020 Offering. The stock compensation for the period was valued based on prior private placements or based on management’s estimates of value immediately prior to the IPO and the value of the shares based on public information post IPO.

 

During nine months ended September 30, 2019, the Company issued 20,500 shares of common stock for services and recognized expense of $82,000 in stock compensation, issued 106,475 shares of common stock for $370,177 in cash, net of offering costs, and received 100,803 shares of the Company’s common stock in exchange for the assumption of $201,605 in liabilities. Shares issued for compensation were valued based on the price which common shares were being sold in the above private placements.

 

Reverse Stock Split

 

On June 29, 2020, the Company effectuated a 1-for-2 reverse stock split of its issued and outstanding shares of common stock by filing a certificate of amendment to its amended and restated certificate of incorporation with the Secretary of State of the State of Delaware. Accordingly, all share and per share amounts for all periods presented in the accompanying financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect this reverse stock split.

 

-11-

 

 

Stock-Based Compensation

 

In October 2017, our Board of Directors adopted the Aditx Therapeutics, Inc. 2017 Equity Incentive Plan (the “2017 Plan”). The 2017 Plan provides for the grant of equity awards to employees, and consultants. Up to 2,500,000 shares of our common stock may be issued pursuant to awards granted under the 2017 Plan. The 2017 Plan is administered by our Board of Directors, and expires ten years after adoption, unless terminated earlier by the Board. 

 

During the nine months ended September 30, 2020, the Company granted 7,500 stock options with an exercise price of $11.00 per share vesting on issuance. The total grant date fair value was determined to be $27,799.

 

During the nine months ended September 30, 2019, the Company granted 700,000 stock options with exercise prices of $4.00 per share vesting on issuance. The total grant date fair value was determined to be $2,495,556. For all periods presented, the fair value of each stock option granted was estimated using the Black-Scholes assumption ranges and or factors as follows:

 

Exercise price $ 4.00-11.00  
Expected dividend yield 0% 
Risk free interest rate 0.39%-2.65% 
Expected life in years 2.54-7.27  
Expected volatility 141-146% 

 

The risk-free interest rate assumption for options granted is based upon observed interest rates on the United States government securities appropriate for the expected term of stock options.

 

The expected term of stock options is calculated using either the simplified method for employee options which takes into consideration the contractual life and vesting terms of the options, unless the options are expected to vest in which case the contractual term of the options.

 

The Company determined the expected volatility assumption for options granted using the historical volatility of comparable public companies’ common stock. The Company will continue to monitor peer companies and other relevant factors used to measure expected volatility for future stock option grants, until such time that the Company’s common stock has enough market history to use historical volatility.

 

The dividend yield assumption for options granted is based on the Company’s history and expectation of dividend payouts. The Company has never declared or paid any cash dividends on its common stock, and the Company does not anticipate paying any cash dividends in the foreseeable future.

 

Management estimated the fair value of common stock by looking at a market approach which takes into consideration past sales of stock to third parties and Company developments to date.

 

The Company recognizes stock option forfeitures as they occur as there is insufficient historical data to accurately determine future forfeitures rates.

 

The following is an analysis of the stock option grant activity under the Plan:

 

     Weighted
Average
  Weighted
Average
 
Stock Options Number  Exercise
Price
  Remaining
Life
 
Outstanding December 31, 2019  1,102,500  $4.00   7.77 
Granted  7,500   11.00   4.47 
Expired or forfeited  -   -   - 
Outstanding September 30, 2020 (unaudited)  1,110,000  $4.05   7.00 

 

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Nonvested Options Shares  Weighted-
Average
Exercise
Price
 
Nonvested at December 31, 2019  -  $- 
Granted  7,500   11.00 
Vested  (7,500)  

11.00

 
Expired or forfeited  -   - 
Nonvested at September 30, 2020 (unaudited)  -  $- 

 

The Company recognized compensation expense related to options issued and vesting of $27,799 during the nine months ended September 30, 2020, which is included in general and administrative expenses in the accompanying statements of operations. There is no additional expense to be recognized on previously granted options as of September 30, 2020. The Company recognized compensation expense related to options issued and vesting of $2,513,826 during the period ended September 30, 2019, which is included in general and administrative expenses in the accompanying statements of operations.

 

Warrants

 

A summary of warrant issuances are as follows:

 

  Number  Weighted
Average
Exercise
Price
  Weighted
Average
Remaining
Life
 
Warrants            
Outstanding December 31, 2019  1,382,478   4.44   2.84 
Granted  

8,786,381

   

6.30

   5.00 
Expired or forfeited  (190,810)  8.12   - 
Exercised  (3,740,753)  7.53   - 
Outstanding September 30, 2020 (unaudited)  

6,237,296

  $5.10   

4.30

 

 

Nonvested Warrants Shares  Weighted-
Average
Exercise
Price
 
Nonvested at December 31, 2019  200,000   4.00 
Granted  

65,000

   

6.30

 
Vested  -   - 
Expired or forfeited  (65,000)  

4.00

 
Nonvested at September 30, 2020 (unaudited)  

200,000

  $

4.30

 

 

The warrants granted for compensation are valued using similar inputs as noted in the stock options section above, with the exception of the expected life which is the contractual life.

 

The Company recognized compensation expense related to warrants issued and vesting of $223,398 and $947,190 during the nine months ended September 30, 2020 and 2019, which is included in general and administrative in the accompanying Statements of Operations. The remaining value to be expensed is $148,472 with a weighted average vesting term of 0.52 years as of September 30, 2020.

 

During the nine months ended September 30, 2020, 3,740,753 warrants were exercised for 3,740,753 shares of common stock. The Company recognized proceeds of $210,546 related to the exercises.

 

During the three months ended September 30, 2020, the Company issued 60,000 warrants to the underwriters related to the September 2020 Offering. These warrants have an exercise price of $5.00, a term of five years, and become exercisable beginning on March 1, 2021. The value of these warrants were both an increase and decrease to additional paid in capital as a cost of the offering for net a zero impact on the financial statements.

 

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NOTE 6 – AGREEMENTS

 

On July 1, 2020, the Company entered into an amendment to patent and technology licensing agreement with Loma Linda University (“LLU”), dated March 15, 2018. Pursuant to the amendment, the Company paid LLU $455,000 within four days of the signing of such amendment. The amendment also updated the milestone payment dates to be $175,000 on March 31, 2022; $100,000 on March 31, 2024; $500,000 on March 31, 2026; and $500,000 on March 31, 2027.

 

During the three months ended September 30, 2020, the Company entered in to three consulting agreements that required the Company to issue a total of 62,000 shares of the Company’s common stock to the consultants.

 

NOTE 7 – NOTES PAYABLE

 

On April 12, 2018, the Company issued an unsecured promissory note for $35,000 that accrued interest of 4% annually. The note was due on the earlier of November 12, 2018 or in the event of default, as defined in the agreement. During the three months ended September 30, 2020, this note was paid in full.

 

On July 10, 2018, the Company entered into a bridge loan with a principal of $15,600. The note was due on the earlier of October 8, 2018 or in the event of default, as defined in the agreement. During the three months ended September 30, 2020, this note was paid in full.

 

On July 18, 2018, the Company entered into a bridge loan with a principal of $130,000. The note was due on the earlier of October 16, 2018 or in the event of default, as defined in the agreement. During the three months ended September 30, 2020, this note was paid in full.

 

On November 1, 2019, the Company entered into a bridge loan with a principal of $50,000. This loan did not accrue any interest. The note was due on the earlier of April 28, 2020 or in the event of default, as defined in the agreement. The note was convertible into the same class of securities as those sold in the public offering with a conversion price of $2.00 per share. During the three months ended September 30, 2020, the note was converted into securities of the Company in full.

 

On January 10, 2020, the Company entered into a bridge loan with a principal amount of $75,000. This Note carried an original issue discount of $40,000. This loan did not accrue any interest. The note was due on the earlier of July 8, 2020 or in the event of default, as defined in the agreement, as amended. The note was convertible into the same class of securities as those sold in the public offering with a conversion price of $2.00 per share. During the three months ended September 30, 2020, the note was converted into securities of the Company in full.  

 

During the first quarter of 2020, the Company entered into six bridge loans with a total principal amount of $600,000. These notes carried a total original issue discount of $300,000. The notes were due on the earlier of April 19, 2020 or ten days after the close of the Company’s IPO. During the three months ended September 30, 2020, these notes were paid in full.

 

NOTE 8 – SUBSEQUENT EVENTS

 

The Company has evaluated subsequent events through the filing of this Form 10-Q and has determined that there have been no events that have occurred that would require adjustments to the Company’s disclosures in the consolidated financial statements except for the following:

 

During October 2020, the Company entered into a 24 month financing agreement for lab equipment. The aggregate cost of this financing agreement will be $467,691.

 

During November 2020, the Company entered into a 24 month financing agreement for lab equipment. The aggregate cost of this financing agreement will be $215,192.

 

On October 6, 2020, the Board of Directors approved the issuance of an aggregate of 40,000 stock options as compensation for the non-employee members of the Board of Directors under the Company’s 2017 Equity Incentive Plan. The options are subject to certain vesting provisions.

 

On November 2, 2020 the Compensation Committee approved the issuance of an aggregate of 883,000 stock options to employees and service providers under the 2017 Equity Incentive Plan.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our financial condition and results of operations should be read together with the unaudited financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and related notes for the year ended December 31, 2019 included in the final prospectus filed with the Securities and Exchange Commission, or SEC, pursuant to Rule 424(b) of the Securities Act, dated September 1, 2020, which we refer to as the Prospectus, of Aditx Therapeutics, Inc. (the “Company,” “Aditxt”, “we,” or “our”). In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors. We discuss factors that we believe could cause or contribute to these differences below and elsewhere in this Quarterly Report on Form 10-Q, including those factors set forth in the section entitled “Cautionary Note Regarding Forward-Looking Statements and Industry Data” and in the section entitled “Risk Factors” in Part II, Item 1A.

 

Overview

 

We are a life sciences company with a mission of prolonging life and enhancing its quality by improving the health of the immune system. Our immune reprogramming technology is currently at the pre-clinical stage and designed to retrain the immune system to induce tolerance with an objective of addressing rejection of transplanted organs, autoimmune diseases, and allergies. Our immune monitoring technology is designed to provide a personalized comprehensive profile of the immune system and we plan to utilize it in our upcoming clinical trials to monitor subjects’ immune response before, during and after drug administration. We are also evaluating plans to obtain FDA approval for this monitoring tool’s use as a clinical assay.

 

Immune Reprogramming

 

The discovery of immunosuppressive (anti-rejection and monoclonal) drugs over 40 years ago has made possible life-saving organ transplantation procedures and blocking of unwanted immune responses in autoimmune diseases. However, immune suppression leads to significant undesirable side effects, such as increased susceptibility to life-threatening infections and cancers, because it indiscriminately and broadly suppresses immune function throughout the body. While the use of these drugs has been justifiable because they prevent or delay organ rejection, their use for treatment of autoimmune diseases and allergies may not be acceptable because of the aforementioned side effects. Furthermore, transplanted organs often ultimately fail despite the use of immune suppression, and about 40% of transplanted organs survive no more than 5 years.

 

New, focused therapeutic approaches are needed that modulate only the small portion of immune cells that are involved in rejection of the transplanted organ, as this approach can be safer for patients than indiscriminate immune suppression. Such approaches are referred to as immune tolerance, and when therapeutically induced, may be safer for patients and also potentially allow long-term survival of transplanted tissues and organs.

 

In the late 1990s, academic research on these approaches was conducted at the Transplant Center in Loma Linda University (“LLU”) in connection with a project that secured initial grant funding from the U.S. Department of Defense. The focus of that project was for skin grafting for burn victims. Twenty years of research at LLU and an affiliated incubator led to a series of discoveries that have been translated into a large patent portfolio of therapeutic approaches that may be applied to the modulation of the immune system in order to induce tolerance to self and transplanted organs.

 

We have an exclusive worldwide license for commercializing this nucleic acid-based technology (which is currently at the pre-clinical stage), named Apoptotic DNA Immunotherapy™ (ADi™) from LLU, which utilizes a novel approach that mimics the way the body naturally induces tolerance to our own tissues (“therapeutically induced immune tolerance”). While immune suppression requires continuous administration to prevent rejection of a transplanted organ, induction of tolerance has the potential to retrain the immune system to accept the organ for longer periods of time. Thus, ADi™ may allow patients to live with transplanted organs with significantly reduced immune suppression. ADi™ is a technology platform which we believe can be engineered to address a wide variety of indications. 

 

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We are developing ADi™ products for organ transplantation including skin grafting, autoimmune diseases, and allergies, with the initial focus on skin allografts and psoriasis, as we believe these indications will be most efficient in providing safety and efficacy data in clinical trials. To submit a Biologics License Application (“BLA”) for a biopharmaceutical product, clinical safety and efficacy must be demonstrated in a series of clinical studies conducted with human subjects. For products in our class of drugs, the first-in-human trials will be a combination of Phase I (safety/tolerability) and Phase II (efficacy) in affected subjects. To obtain approval to initiate the Phase I/IIa studies, an Investigational New Drug Application will be submitted to compile non-clinical efficacy data as well as manufacturing and pre-clinical safety/toxicology data. To date, we have conducted non-clinical studies in a stringent model of skin transplantation using genetically mismatched donor and recipient animals demonstrating a 3-fold increase in the survival of the skin graft in animals that were tolerized with ADi™ compared to animals that receive immune suppression alone. Prolongation of graft life was observed despite discontinuation of immune suppression after the first 5 weeks. Additionally, in an induced non-clinical model for psoriasis, ADi™ treatment resulted in a 69% reduction in skin thickness and a 38% decrease in skin flaking (two clinical parameters for assessment of psoriasis skin lesions). The Phase I/IIa studies in psoriasis will evaluate the safety/tolerability of ADi™ in patients diagnosed with psoriasis. Since the drug will be administered in subjects diagnosed with psoriasis, effectiveness of the drug to improve psoriatic lesions will also be evaluated. In another Phase I/IIa study, patients requiring skin allografts will receive weekly intra-dermal injections of ADi™ in combination with standard immune suppression to assess safety/tolerability and possibility of reducing levels of immunosuppressive drugs as well as prolongation of graft life. Later phase trials are planned after successful completion of these studies in preparation for submission for a BLA to regulatory agencies.

 

Immune Monitoring

 

We believe that understanding the status of an individual’s immune system is key to developing and administering immunotherapies such as ADi™. We have secured an exclusive worldwide license for commercializing a technology platform named AditxtScore™, which provides a personalized comprehensive profile of the immune system. It is intended to be informative for individual immune responses to viruses, bacterial antigens, peptides, drugs, bone marrow and solid organ transplants, and cancer. It has broad applicability to many other agents of clinical interest impacting the immune system, including those not yet identified such as future infectious agents.

 

AditxtScore™ is being designed to allow individuals to understand, manage and monitor their immune profiles in order to be informed about attacks on or by their immune system. We believe AditxtScore™ can also assist the medical community in anticipating possible immune responses and reactions to viruses, bacteria, allergens and transplanted organs. It can be useful in anticipating attacks on the body by having the ability to determine its potential response and for developing a plan to deal with an undesirable reaction by the immune system. Its advantages include the ability to provide a simple, rapid, accurate, high throughput, single platform assay that can be multiplexed to determine the immune status with respect to several factors simultaneously, in 3-16 hours, as well as detect antigen and antibody in a single test (i.e. infectious, recovered, immune). In addition, it can determine and differentiate between various types of cellular and humoral immune responses (T and B cells). It also provides for simultaneous monitoring of cell activation and levels of cytokine release (i.e., cytokine storms).

 

We plan to utilize AditxtScore™ in our upcoming clinical trials to monitor subjects’ immune response before, during and after ADi™ drug administration. We are also evaluating plans to obtain FDA approval for AditxtScore™’s use as a clinical assay and seeking to secure manufacturing, marketing and distribution partnerships for application in the Infectious Diseases market, by end of 2020. To obtain FDA approval to use AditxtScore™ as a clinical assay, we plan to conduct validation studies comparing AditxtScore™ to other immunological tests to demonstrate reproducibility of data and to demonstrate the sensitivity of the assays for use in different indications (e.g., detection of antigens present in infectious agents or antibodies against infectious agents). We believe that these data will show AditxtScore™’s ability to multiplex in two ways using a single assay: (i) evaluating the immune response to multiple antigens (from different infectious agents) and (ii) measuring quantities of multiple cytokines. Furthermore, we believe that the additional validation studies will demonstrate AditxtScore™’s ability to measure the presence of several antibody isotypes against several antigens in a single reaction. Our plan is to submit a 510(K) application to the FDA after successful completion of these studies. We have engaged consultants for our communications and submissions to the FDA. Beyond 2020, we plan to develop AditxtScore™for applications in additional markets such as Organ Rejection, Allergies, Drug/Vaccine Response, and Disease Susceptibility.

 

-16-

 

 

License Agreement with Loma Linda University

 

On March 8, 2018, we entered into an Assignment Agreement (the “Assignment Agreement”) with Sekris Biomedical, Inc. (“Sekris”). Sekris was a party to a License Agreement with Loma Linda University (“LLU”), entered into and made effective on May 25, 2011, and amended on June 24, 2011, July 16, 2012 and December 27, 2012 (the “Original Agreement,” and together with the Assignment Agreement, the “Sekris Agreements”). Pursuant to the Assignment Agreement, Sekris transferred and assigned all of its rights and obligations in and to and liabilities under the Original Agreement, of whatever kind or nature, to us. In exchange, on March 8, 2018, we issued a warrant to Sekris to purchase up to 500,000 shares of our common stock (the “Sekris Warrant”). The warrant was immediately exercisable and has an exercise price of $4.00 per share. The expiration date of the warrant is March 8, 2023. On March 15, 2018, as amended on July 1, 2020, we entered into a LLU License Agreement directly with Loma Linda University, which amends and restates the Sekris Agreements.

 

Pursuant to the LLU License Agreement, we obtained the exclusive royalty-bearing worldwide license in and to all intellectual property, including patents, technical information, trade secrets, proprietary rights, technology, know-how, data, formulas, drawings, and specifications, owned or controlled by LLU and/or any of its affiliates (the “LLU Patent and Technology Rights”) and related to therapy for immune-mediated inflammatory diseases (the ADi™ technology). In consideration for the LLU License Agreement, we issued 25,000 shares of common stock to LLU.

 

Pursuant to the LLU License Agreement, we are required to pay an annual license fee to LLU. Also, we agreed to pay LLU $455,000 in July 2020 in payment of outstanding milestone payments and license fees. We are also required to pay to LLU milestone payments in connection with certain development milestones. Specifically, we are required to make the following milestone payments: $175,000 on March 31, 2022; $100,000 on March 31, 2024; $500,000 on March 31, 2026; and $500,000 on March 31, 2027. Additionally, as consideration for prior expenses incurred by LLU to prosecute, maintain and defend the LLU Patent and Technology Rights, we are obligated to make the following payments to LLU:, $70,000 due at the end of December 2018, and a final payment of $60,000 due at the end of March 2019. We are required to defend the LLU Patent and Technology Rights during the term of the LLU License Agreement. Additionally, we will owe royalty payments of (i) 1.5% of Net Product Sales and Net Service Sales on any Licensed Products (defined as any finished pharmaceutical products which utilizes the LLU Patent and Technology Rights in its development, manufacture or supply), and (ii) 0.75% of Net Product Sales and Net Service Sales for Licensed Products and Licensed Services not covered by a valid patent claim for technology rights and know-how for a three (3) year period beyond the expiration of all valid patent claims. We also are required to produce a written progress report to LLU, discussing our development and commercialization efforts, within 45 days following the end of each year. All intellectual property rights in and to LLU Patent and Technology Rights shall remain with LLU (other than improvements developed by or on our behalf).

 

The LLU License Agreement shall terminate on the last day that a patent granted in to us by LLU is valid and enforceable or the day that the last patent application licensed to us is abandoned. The LLU License Agreement may be terminated by mutual agreement or by us upon 90 days written notice to LLU. LLU may terminate the LLU License Agreement in the event of (i) non-payments or late payments of royalty, milestone and license maintenance fees not cured within 90 days after delivery of written notice by LLU, (ii) a breach of any non-payment provision (including the provision that requires us to meet certain deadlines for milestone events (each, a “Milestone Deadline”)) not cured within 90 days after delivery of written notice by LLU and (iii) LLU delivers notice to us of three or more actual breaches of the LLU License Agreement by us in any 12-month period. Additional Milestone Deadlines include: (i) the requirement to have regulatory approval of an IND application to initiate a first-in-human clinical trials on or before March 31, 2022, (ii) the completion of first-in-human (phase I/II) clinical trials by March 31, 2024, (iii) the completion of Phase III clinical trials by March 31, 2026 and (iv) biologic licensing approval by the FDA by March 31, 2027.

 

-17-

 

 

License Agreement with Leland Stanford Junior University (“Stanford”)

 

On February 3, 2020, we entered into an exclusive license agreement (the “February 2020 License Agreement”) with Stanford with regard to a patent concerning a method for detection and measurement of specific cellular responses. Pursuant to the February 2020 License Agreement, we received an exclusive worldwide license to Stanford’s patent with regard to use, import, offer, and sale of Licensed Products (as defined in the agreement). The license to the patented technology is exclusive, including the right to sublicense, beginning on the effective date of the agreement and ending when the patent expires. Under the exclusivity agreement, we acknowledged that Stanford had already granted a non-exclusive license in the Nonexclusive Field of Use, under the Licensed Patents in the Licensed Field of Use in the Licensed Territory (as those terms are defined in the February 2020 License Agreement”). However, Stanford agreed to not grant further licenses under the Licensed Patents in the Licensed Field of Use in the Licensed Territory. 

 

We were obligated to pay a fee of $25,000 to Stanford within 60 days of February 3, 2020. We also issued 18,750 shares of the Company’s common stock to Stanford. An annual licensing maintenance fee is payable by us on the first anniversary of the February 2020 License Agreement in the amount of $40,000 for 2021 through 2024 and $60,000 in starting in 2025 until the license expires upon the expiration of the patent. The Company will pay milestone fees of $50,000 on the first commercial sales of a licensed product and $25,000 at the beginning of any clinical study for regulatory clearance of an in vitro diagnostic product developed and a potential licensed product. We are also required to: (i) provide a listing of the management team or a schedule for the recruitment of key management positions by March 31, 2020 (which has been completed), (ii) provide a business plan covering projected product development, markets and sales forecasts, manufacturing and operations, and financial forecasts until at least $10,000,000 in revenue by June 30, 2020, (iii) conduct validation studies by September 30, 2020, (iv) hold a pre-submission meeting with the FDA by September 30, 2020, (v) submit a 510(k) application to the FDA , Emergency Use Authorization (“EUA”), or a Laboratory Developed Test (“LDT”) by March 31, 2021, (vi) obtain FDA approval by December 31, 2021, (vii) complete a prototype assay kit by December 31, 2021 and (viii) have a written agreement with Stanford on further development and commercialization milestones for specific fields of use by December 31, 2021.

 

In addition to the annual license maintenance fees outlined above, we will pay Stanford royalties on Net Sales (as such term is defined in the February 2020 License Agreement) during the of the term of the agreement as follows: 4% when Net Sales are below or equal to $5 million annually or 6% when Net Sales are above $5 million annually. The February 2020 License Agreement may be terminated upon our election on at least 30 days advance notice to Stanford, or by Stanford if we: (i) are delinquent on any report or payment; (ii) are not diligently developing and commercializing Licensed Product; (iii) miss certain performance milestones; (iv) are in breach of any provision of the February 2020 License Agreement; or (v) provide any false report to Stanford. Should any events in the preceding sentence occur, we have a thirty (30) day cure period to remedy such violation.

 

Our Team

 

We have assembled a team of experts from a variety of scientific fields and commercial backgrounds, with many years of collective experience that ranges from founding startup biotech companies, to developing and marketing biopharmaceutical products, to designing clinical trials, and to management of private and public companies.

 

Going Concern

 

We were incorporated on September 28, 2017 and has not generated revenues to date. During the nine months ended September 30, 2020 we had a net loss of $4,468,102 and will require significant additional capital in order to operate in the normal course of business and fund clinical studies in the long-term. As a result of the IPO and the September 2020 Offering, we received net proceeds of approximately $18 million during the period. We believe that the funds raised by the IPO will be sufficient to fund our operations for at least the next 12 months. As a result, these conditions have alleviated the doubt regarding our ability to continue as a going concern beyond one year.

 

-18-

 

 

Financial Results

 

We have a limited operating history. Therefore, there is limited historical financial information upon which to base an evaluation of our performance. Our prospects must be considered in light of the uncertainties, risks, expenses, and difficulties frequently encountered by companies in their early stages of operations. Our financial statements as of September 30, 2020, show a net loss of $4,468,102. We expect to incur additional net expenses over the next several years as we continue to maintain and expand our existing operations. The amount of future losses and when, if ever, we will achieve profitability are uncertain.

 

On July 2, 2020, we completed its IPO. In connection therewith, we issued 1,226,668 Units, excluding the underwriters’ overallotment, at an offering price of $9.00 per Unit, resulting in gross proceeds of approximately $11.0 million. The Units issued in the IPO consisted of one share of common stock, one Series A warrant, and one Series B warrant. The Series A warrants originally had an exercise price of $9.00 and a term of 5 years. In addition, the Company issued a Unit Purchase Option at an exercise price of $11.25 per unit to the underwriters to purchase up to 67,466 units, with each unit consisting of (i) one share of common stock and (ii) one Series A Warrant. On August 19, 2020 the Company modified the exercise price of the Series A Warrants from $9.00 per share to $4.50 per share. The term of the Series A Warrants was not modified. The Series B warrants have an exercise price of $11.25 per share and a term of 5 years. Substantially all of the Series B warrants issued in the IPO as part of the Units have been exercised pursuant to a cashless provision therein. 

 

On September 10, 2020, we completed a follow-on public offering (“September 2020 Offering”). In connection therewith, we issued 2,400,000 units, or Follow-On Units, excluding the underwriters’ option to cover overallotments, at an offering price of $4.00 per Follow-On Unit, resulting in gross proceeds to the Company of approximately $9.6 million. Each of the Follow-On Units issued in the September 2020 Offering consisted of one share of common stock or Series A Preferred Stock for investors who would own more than 4.99% of the Company if they invested in common stock, one Series A-1 warrant, and one Series B-1 warrant. The Series A-1 warrants have an exercise price of $3.19 per share and a term of 5 years. The Series B-1 warrants have exercise price of $5.00 per share, a term of 5 years and contain a cashless exercise option upon certain criteria being met. In addition, the Company issued a warrant to the underwriters to purchase up to 60,000 shares of common stock at an exercise price of $5.00 per share. Subsequent to quarter end, substantially all of the Series B-1 warrants issued in the September 2020 Offering have been exercised pursuant to a cashless provision therein.

 

Results of Operations

 

Results of operations for the three months ended September 30, 2020

 

During the three months ended September 30, 2020, we incurred a loss from operations of $2,744,538. This is due to general and administrative expenses of $2,453,725, which includes $874,363 in stock-based compensation, research and development of $285,813, and sales and marketing expenses of $5,000. The $285,813 in research and development is comprised of $131,965 in licensing fees, $30,000 in product development, and $152,178 in other research and development expense.

 

During the three months ended September 30, 2019, we incurred a loss from operations of $1,079,949. This is due to general and administrative expenses of $1,060,346, which includes $720,649 in stock-based compensation, research and development of $19,603, and sales and marketing expenses of $0. The $19,603 in research and development is comprised of $2,890 in licensing fees, $13,500 in product development and $3,213 in other research and development expense.

 

The increase in expenses during the three months ended September 30, 2020 compared to the three months ended September 30, 2019 was due to the Company beginning to execute its business plan and incur costs of being a public company.  

 

Results of operations for the nine months ended September 30, 2020

 

During the nine months ended September 30, 2020, we incurred a loss from operations of $4,199,816. This is due to general and administrative expenses of $3,677,490, which includes $1,564,129 in stock-based compensation, research and development of $514,478, and sales and marketing expenses of $7,848. The $514,478 in research and development is comprised of $258,635 in licensing fees, $57,000 in product development, and $198,843 in other research and development expense.

 

-19-

 

 

During the nine months ended September 30, 2019, we incurred a loss from operations of $4,880,163. This is due to general and administrative expenses of $4,771,567, which includes $3,543,016 in stock-based compensation, research and development of $108,449, and sales and marketing expenses of $147. The $108,449 in research and development is comprised of $18,071 in licensing fees, $40,500 in product development and $49,878 in other research and development expense.

 

The increase in expenses during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was due to the Company beginning to execute its business plan and incur costs of being a public company.

 

Liquidity and Capital Resources

 

We have incurred substantial operating losses since inception and expect to continue to incur significant operating losses for the foreseeable future and may never become profitable. As of September 30, 2020, we had an accumulated deficit of $16,198,053. We had working capital of $13,522,343 as of September 30, 2020. During the three and nine months ended September 30, 2020, we paid off outstanding notes payable with a principal totaling $715,600 and accrued interest totaling $5,842. During the three and nine months ended September 30, 2020, we paid $160,534 for the purchase of fixed assets. These fixed assets were purchased to furnish our new office and laboratory. Approximately $105,000 of these fixed assets were lab equipment and $55,000 was for office furniture and equipment

 

Our financial statements have been prepared assuming that we will continue as a going concern.

 

We have funded our operations from proceeds from the sale of equity and debt securities. On July 2, 2020, we completed our IPO and raised approximately $9.5 million in net proceeds. At the time of the IPO, we believed that these funds would be sufficient to fund our operations for the foreseeable future.

 

On September 10, 2020, we completed a follow-on public offering. In connection therewith, we issued 2,400,000 units, or Follow-On Units, excluding the underwriters’ option to cover overallotments, at an offering price of $4.00 per Follow-On Unit, resulting in gross proceeds of approximately $9.6 million. Each of the Follow-On Units issued in the September 2020 Offering consisted of one share of common stock or Series A Preferred stock for investors who would own more than 4.99% of the company if they invested in common stock, one Series A-1 warrant, and one Series B-1 warrant. The Series A-1 warrants have an exercise price of $3.19 and a term of 5 years. The Series B-1 warrants have exercise price of $5.00, a term of 5 years and contain a cashless exercise option upon certain criteria being met. Subsequent to quarter end, substantially all of the Series B-1 warrants issued in the September 2020 Offering have been exercised pursuant to a cashless provision therein.

 

We may need to raise significant additional capital to continue to fund our operations and the clinical trials for our product candidates. We may seek to sell common stock, preferred stock or convertible debt securities, enter into a credit facility or another form of third-party funding or seek other debt financing. In addition, we may seek to raise cash through collaborative agreements or from government grants. The sale of equity and convertible debt securities may result in dilution to our stockholders and certain of those securities may have rights senior to those of our common shares. If we raise additional funds through the issuance of preferred stock, convertible debt securities or other debt financing, these securities or other debt could contain covenants that would restrict our operations. Any other third-party funding arrangement could require us to relinquish valuable rights.

 

The source, timing and availability of any future financing will depend principally upon market conditions, and, more specifically, on the progress of our clinical development program. Funding may not be available when needed, at all, or on terms acceptable to us. Lack of necessary funds may require us to, among other things, delay, scale back or eliminate expenses including some or all of our planned development, including our clinical trials. While we may need to raise funds in the future, we believed its current cash reserves should be sufficient to fund the our operation for the foreseeable future. Because of these factors, we believe that this alleviates the issues about the our ability to continue as a going concern.

 

-20-

 

 

Contractual Obligations

 

The following table shows our contractual obligations as of September 30, 2020:

 

     Payment Due by Year 
  Total  2020
(remainder)
  2021  2022  2023  2024 
Lease $1,358,961  $84,536  $342,500  $352,958  $363,416  $215,551 
                         
Total contractual obligations $1,358,961  $84,536  $342,500  $352,958  $363,416  $215,551 

 

Critical Accounting Polices and Estimates

 

Our financial statements are prepared in accordance with generally accepted accounting principles in the United States. The preparation of our financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, revenue, costs and expenses, and related disclosures. We believe that of our critical accounting policies described under the heading “Management’s Discussion and Analysis of Financial Condition and Plan of Operations—Critical Accounting Policies” in the our Prospectus, dated September 1, 2020, filed with the SEC pursuant to Rule 424(b), the following involve the most judgment and complexity:

 

 Research and development
   
 Stock-based compensation expense
   
 Fair value of common stock

 

Accordingly, we believe the policies set forth above are critical to fully understanding and evaluating our financial condition and results of operations. If actual results or events differ materially from the estimates, judgments and assumptions used by us in applying these policies, our reported financial condition and results of operations could be materially affected.

 

Off-Balance Sheet Arrangements

 

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC. 

 

JOBS Act

 

On April 5, 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.

 

We have chosen to take advantage of the extended transition periods available to emerging growth companies under the JOBS Act for complying with new or revised accounting standards until those standards would otherwise apply to private companies provided under the JOBS Act. 

 

-21-

 

 

We are in the process of evaluating the benefits of relying on other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, as an “emerging growth company,” we intend to rely on certain of these exemptions, including without limitation, (i) providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and (ii) complying with any requirement that may be adopted by the Public Company Accounting Oversight Board (“PCAOB”) regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. We will remain an “emerging growth company” until the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more; (ii) the last day of our fiscal year following the fifth anniversary of the date of the completion of this offering; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the Securities and Exchange Commission.

 

Recently Issued and Adopted Accounting Pronouncements

 

See Note 3 - Summary of Significant Accounting Policies to the accompanying financial statements for a description of other accounting policies and recently issued accounting pronouncements.

 

Recent Developments

 

During October 2020, we entered into a 24-month financing agreement for lab equipment. The aggregate cost of this financing agreement will be $467,691.

 

During November 2020, the Company entered into a 24-month financing agreement for lab equipment. The aggregate cost of this financing agreement will be $215,192.

 

On October 6, 2020, the Board of Directors approved the issuance of an aggregate of 40,000 stock options as compensation for the members of the Board of Directors under the Company’s 2017 Equity Incentive Plan. The options are subject to certain vesting provisions.

 

On November 2, 2020 the Compensation Committee approved the issuance of an aggregate of 883,000 stock options under the 2017 Equity Incentive Plan.

  

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

We are is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined in Rule 229.10(f)(1).

 

Item 4. Controls and Procedures.

 

Disclosure Controls and Procedures

 

In accordance with Rules 13a-15(b) and 15d-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were (a) designed to ensure that the information we are required to disclose in our reports under the Exchange Act is recorded, processed, and reported in an accurate manner and on a timely basis and the information that we are required to disclose in our Exchange Act reports is accumulated and communicated to management to permit timely decisions with respect to required disclosure and (b) operating in an effective manner.

 

Change in Internal Control Over Financial Reporting

 

No change occurred in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended September 30, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

-22-

 

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.

 

The Company, Amro Albanna, our President and Chief Executive Officer, and Dr. Shahrokh Shabahang, our Chief Innovation Officer, have been named as cross-defendants in a counterclaim filed by Christopher Sechrist in an action entitled Shahrokh Shabahang v. Christopher Sechrist, San Bernardino County Superior Court Case No. CIVDS1831323. In a cross-complaint, Mr. Sechrist contends that he was a partner in a dental practice with Dr. Shabahang, and that disputes arose as between those partners. Neither the Company nor Mr. Albanna were partners in, or otherwise have an interest in, the dental practice. Notwithstanding the foregoing, and seemingly based solely on the fact that Dr. Shabahang became the Chief Innovation Officer for the Company, Mr. Sechrist brought claims against the Company and Mr. Albanna. On May 26, 2020, Mr. Sechrist filed a request for dismissal as to the Company and Mr. Albanna with the Superior Court of California, County of San Bernardino, San Bernardino District. The clerk of the court entered the dismissal with prejudice on May 26, 2020.

 

Mr. Albanna is also a party to litigation matters unrelated to the Company or any of its properties. Such litigations relate to Innovation Economy Corporation (IEC), a company in which Mr. Albanna served as the CEO and a Director from 2010 until 2017, and its wholly-owned subsidiaries (Innovation Economy Corporation d/b/a ieCrowd).  The first litigation (ieCrowd v. Kim, et. al, Superior Court, Riverside County) was originally commenced by IEC and its subsidiary after Mr. Albanna was no longer affiliated with IEC, against certain third-party defendants based upon claims related to their misconduct and mismanagement. Such defendants subsequently brought a countersuit against IEC and its subsidiary, in which they named Mr. Albanna and others as defendants, alleging that they were misled to invest in IEC and its subsidiary based upon misrepresentations by, among others, Mr. Albanna. The cases have now been consolidated. Mr. Albanna believes that the counteraction commenced by the third parties against him is without merit and intends to defend himself.  The second matter (Calabria v. ieCrowd) was commenced by Calabria Ventures (the “Calabria Action”) more than 2 years after Mr. Albanna was no longer affiliated with IEC, related to uncollected rent. Mr. Albanna believes that the action commenced against him is without merit and intends to defend himself.  IEC (either directly or through its Director and officer insurance policy) has covered all related legal costs to date. On August 5, 2020, the plaintiff in the Calabria Action filed a request for dismissal as to Mr. Albanna with the Superior Court of California, County of Riverside. The clerk of the court entered the dismissal without prejudice on August 5, 2020.

 

Item 1A. Risk Factors

 

Our business, financial condition, results of operations, and cash flows may be impacted by a number of factors, many of which are beyond our control, including those set forth in our Prospectus and in our other filings with the SEC, the occurrence of any one of which could have a material adverse effect on our actual results. There have been no material changes to the Risk Factors previously disclosed in our Prospectus and our other filings with the SEC.

 

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

 

(a)Sales of Unregistered Securities

 

During the three months ended September 30, 2020, we issued 208,666 shares of common stock to consultants for services.

 

During the three months ended September 30, 2020, we issued 146,818 units to settle outstanding accounts payable balances.

 

During the three months ended September 30, 2020, we issued 62,500 units consisting of one share of common stock, one Series A warrant, and one Series B warrant for conversion of outstanding notes payable balances.

 

-23-

 

 

(b)Use of IPO Proceeds

 

On July 2, 2020, the Company completed its initial public offering (“IPO”). In connection therewith, the Company issued 1,226,668 Units (the “Units”), excluding the underwriters’ option to cover overallotments, at an offering price of $9.00 per Unit, resulting in gross proceeds of approximately $11.0 million. The Units issued in the IPO consisted of one share of common stock, one Series A warrant, and one Series B warrant. The Series A warrants originally had an exercise price of $9.00 and a term of 5 years. In addition, the Company issued a Unit Purchase Option at an exercise price of $11.25 per unit to the underwriters to purchase up to 67,466 units, with each unit consisting of (i) one share of common stock and (ii) one Series A Warrant. On August 19, 2020 the Company modified the exercise price of the Series A Warrants from $9.00 per share to $4.50 per share. The term of the Series A Warrants was not modified. The Series B warrants have an exercise price of $11.25 per share, a term of 5 years and contain a cashless exercise option upon certain criteria being met. As of September 30, 2020, substantially all of the Series B warrants issued in the IPO have been exercised pursuant to a cashless provision therein.

 

We received net proceeds of $8.5 million in the IPO, after deducting underwriting discounts and commissions and issuance expenses borne by us. No payments were made by us to directors, officers or persons owning ten percent or more of our common stock or to their associates, or to our affiliates, other than payments in the ordinary course of business to officers for salaries and to non-employee directors pursuant to our director compensation policy. Dawson James Securities, Inc. acted as lead book-running manager of the offering and as representative of the underwriters for the offering.

 

There has been no material change in the planned use of proceeds from our IPO from that described in the final prospectus related to the offering, dated June 29, 2020 as filed with the SEC.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

-24-

 

 

Item 6. Exhibits

 

Exhibit   Incorporated by Reference Filed
Number Exhibit Description Form File No. Exhibit Filing Date Herewith
3.1 Amended and Restated Certificate of Incorporation of the Registrant. S-1 333-235933 3.1 June 25, 2020  
             
3.2 Certificate of Amendment, dated June 29, 2020  10-Q  001-39336 3.2 August 13, 2020  
             
3.3 Amended and Restated Bylaws of the Registrant S-1 333-235933 3.3 June 25, 2020  
             
31.1* Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.         X
             
31.2* Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.         X
             
32.1* Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.         X
             
32.2* Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.         X
             
101.INS XBRL Instance Document         X
             
101.SCH XBRL Taxonomy Extension Schema Document         X
             
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document         X
             
101.DEF XBRL Taxonomy Extension Definition Linkbase Document         X
             
101.LAB XBRL Taxonomy Extension Label Linkbase Document         X
             
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document         X

 

+Indicates a management contract or compensatory plan or arrangement.

 

*This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act.

 

-25-

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 Aditx Therapeutics, Inc.
   
Date: November 13, 2020By:/s/ Amro Albanna
  Amro Albanna
  Chief Executive Officer
(Principal Executive Officer)
   
Date: November 13, 2020By:/s/ Corinne Pankovcin
  Corinne Pankovcin
  Chief Financial Officer
(Principal Financial and Accounting Officer)

 

 

 

-26-