UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the Quarterly Period Ended:
| 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:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) | |
| ||
| (Address of principal executive offices, including zip code) | (Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act: None
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12B-2 of the Exchange Act.
| Large accelerated filer | Accelerated filer | Smaller
reporting company |
Emerging growth company | |||||
| ☐ | ☐ | ☒ |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
The registrant had shares of its common stock, $0.0001 par value per share, outstanding as of February 21, 2023.
THERALINK TECHNOLOGIES, INC.
FORM 10-Q
DECEMBER 31, 2022
TABLE OF CONTENTS
| 2 |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains statements reflecting assumptions, expectations, projections, intentions or beliefs about future events that are intended as “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements included or incorporated by reference in this report, other than statements of historical fact, that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements. These statements appear in a number of places, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These statements represent our reasonable judgment about the future based on various factors and using numerous assumptions and are subject to known and unknown risks, uncertainties and other factors that could cause our actual results and financial position to differ materially from those contemplated by the statements. You can identify these statements by the fact that they do not relate strictly to historical or current facts, and use words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “future,” “intend,” “may,” “should,” “plan,” “potential,” “project,” “will,” “would” and other words of similar meaning, or the negatives of such terms or other variations. These include, but are not limited to, statements relating to the following:
| ● | projected operating or financial results, including anticipated cash flows used in operations; |
| ● | expectations regarding capital expenditures, research and development expenses and other payments; |
| ● | our beliefs and assumptions relating to our liquidity position, including our ability to obtain additional financing; and |
| ● | our beliefs, assumptions and expectations about the regulatory approval for our technology including, but not limited to our ability to obtain regulatory approval in a timely manner or at all. |
Any or all of our forward-looking statements may turn out to be wrong. They may be affected by inaccurate assumptions or by known or unknown risks, uncertainties and other factors including, among others:
| ● | our ability to continue as a going concern; |
| ● | our ability to remain current in filing all reports required to be filed by us under Section 13 or 15(d) of the Securities Exchange Act of 1934; |
| ● | our ability to maintain pricing; |
| ● | our ability to employ skilled and qualified workers; |
| ● | the fact that we have incurred significant losses since inception, expect to incur net losses for at least the next several years and may never achieve or sustain profitability; |
| ● | the loss of key management personnel upon whom we depend; |
| ● | our ability to fund our operations; |
| ● | inadequate insurance coverage for certain losses or liabilities; |
| ● | our ability to navigate the regulatory approval process in the U.S. and other countries, and our success in obtaining required regulatory approvals on a timely basis; |
| ● | commercial development of technologies that compete with our technology; |
| ● | the actual and perceived effectiveness of our technology, and how the technology compares to competitive technologies; |
| ● | the rate and degree of market acceptance and clinical utility of our technology; |
| ● | adverse effects of the recent and ongoing COVID-19 pandemic; |
| ● | the strength of our intellectual property protection, and our success in avoiding infringement of the intellectual property rights of others; |
| ● | regulations affecting the health care industry; |
| ● | adverse developments in our research and development activities; |
| ● | potential liability if our technology causes illness, injury or death, or adverse publicity from any such events; |
| ● | our ability to operate our business efficiently, manage capital expenditures and costs (including general and administrative expenses) and obtain financing when required; and |
| ● | our expectations with respect to future licensing, partnering or acquisition activity. |
In addition, there may be other factors that could cause our actual results to be materially different from the results referenced in the forward-looking statements, some of which are included elsewhere in this report, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K filed on December 29, 2022 with the Securities and Exchange Commission (“SEC”), particularly in the ‘Risk Factors” section of such reports, that could cause results or events to differ materially from the forward-looking statements that we make herein. Many of these factors will be important in determining our actual future results. Consequently, no forward-looking statement should be relied upon. Our actual future results may vary materially from those expressed or implied in any forward-looking statements. All forward-looking statements contained in this report are qualified in their entirety by this cautionary statement. Forward-looking statements apply only as of the date they are made, and we disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of this report, except as otherwise required by applicable law.
This Quarterly Report on Form 10-Q includes trademarks for Theralink, which are protected under applicable intellectual property laws and are our property. Solely for convenience, our trademarks and trade names referred to in this Quarterly Report on Form 10-Q may appear without the ® or TM symbols, but such references are not intended to indicate in any way that we will not assert, to the fullest extent under applicable law, our rights to these trademarks and trade names.
| 3 |
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THERALINK TECHNOLOGIES, INC.
BALANCE SHEETS
| December 31, | September 30, | |||||||
| 2022 | 2022 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Marketable securities | ||||||||
| Total Current Assets | ||||||||
| OTHER ASSETS: | ||||||||
| Property and equipment, net | ||||||||
| Finance right-of-use assets, net | ||||||||
| Operating right-of-use asset, net | ||||||||
| Deferred offering costs | ||||||||
| Security deposits | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accounts payable - related parties | ||||||||
| Accrued liabilities | ||||||||
| Accrued liabilities - related parties | ||||||||
| Accrued compensation | ||||||||
| Accrued director compensation | ||||||||
| Contract liabilities | ||||||||
| Convertible notes, net of discount | ||||||||
| Convertible notes - related parties, net of discount | ||||||||
| Notes payable - related party | ||||||||
| Notes payable - current | ||||||||
| Financing lease liability - current | ||||||||
| Operating lease liability - current | ||||||||
| Insurance payable | ||||||||
| Derivative liabilities | ||||||||
| Contingent liabilities | ||||||||
| Total Current Liabilities | ||||||||
| LONG-TERM LIABILITIES: | ||||||||
| Financing lease liability | ||||||||
| Operating lease liability | ||||||||
| Convertible notes - related parties net of discount, net of current portion | ||||||||
| Convertible notes, net of discount | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies (Note 10) | ||||||||
| Series
E preferred stock; $ par value; shares designated; and issued and outstanding at December 31, 2022 and September
30, 2022, respectively; liquidation value of $ |
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F preferred stock; $ par value; shares designated; and issued and outstanding at December 31, 2022 and September
30, 2022; liquidation value of $ |
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| STOCKHOLDERS’ DEFICIT: | ||||||||
| Preferred stock: $ par value; authorized; | ||||||||
| Series A Preferred stock: $ par value; shares designated; issued and outstanding at December 31, 2022 and September 30, 2022 | |
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| Series C-1 Preferred stock: $ par value; shares designated; and issued and outstanding at December 31, 2022 and September 30, 2022, respectively | |
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| Series C-2 Preferred stock: $ par value; shares designated; and issued and outstanding at December 31, 2022 and September 30, 2022, respectively | |
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| Series
D-1 Preferred stock: $ par value; shares designated; issued and outstanding at December 31, 2022 and September 30, 2022 |
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| Series D-2 Preferred stock: $ par value; shares designated; issued and outstanding at December 31, 2022 and September 30, 2022 | |
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| Common stock: $ par value, shares authorized; and issued and outstanding at December 31, 2022 and September 30, 2022, respectively | |
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| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Deficit | ( | ) | ( | ) | ||||
| Total Liabilities and Stockholders’ Deficit | $ | $ | ||||||
See accompanying condensed notes to unaudited financial statements.
| 4 |
THERALINK TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
| For the Three Months Ended | ||||||||
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| REVENUES, NET | $ | $ | ||||||
| COST OF REVENUE | ||||||||
| GROSS PROFIT | ||||||||
| OPERATING EXPENSES: | ||||||||
| Professional fees | ||||||||
| Compensation expense | ||||||||
| Licensing fees | ||||||||
| General and administrative expenses | ||||||||
| Total Operating Expenses | ||||||||
| LOSS FROM OPERATIONS | ( | ) | ( | ) | ||||
| OTHER (EXPENSES) INCOME: | ||||||||
| Interest expense, net | ( | ) | ( | ) | ||||
| Loss on debt extinguishment, net | ( | ) | ||||||
| Unrealized (loss) gain on marketable securities | ( | ) | ||||||
| Settlement expense | ( | ) | ||||||
| Derivative expense | ( | ) | ||||||
| Total Other Expenses, net | ( | ) | ( | ) | ||||
| NET LOSS | ( | ) | ( | ) | ||||
| Series E preferred stock dividend | ( | ) | ( | ) | ||||
| Series F preferred stock dividend | ( | ) | ( | ) | ||||
| NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS | $ | ( | ) | $ | ( | ) | ||
| NET LOSS PER COMMON SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS: | ||||||||
| Basic and Diluted | $ | ( | ) | $ | ( | ) | ||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | ||||||||
| Basic and Diluted | ||||||||
See accompanying condensed notes to unaudited financial statements.
| 5 |
THERALINK TECHNOLOGIES, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
FOR THE THREE MONTHS ENDED DECEMBER 31, 2022 AND 2021
(Unaudited)
| Preferred Stock | Common Stock | |||||||||||||||||||||||||||||||||||
| Series A # of Shares | Series C-1 # of Shares | Series C-2 # of Shares | Amount | # of Shares | Amount | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders’ Deficit | ||||||||||||||||||||||||||||
| Balance on September 30, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||
| Accretion of stock option expense | - | - | - | - | ||||||||||||||||||||||||||||||||
| Exchange of preferred stock to convertible debt | - | ( | ) | ( | ) | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Series E preferred stock dividend | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Series F preferred stock dividend | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Net loss | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Balance on December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||
| Preferred Stock | Common Stock | |||||||||||||||||||||||||||||||||||
| Series A # of Shares | Series C-1 # of Shares | Series C-2 # of Shares | Amount | # of Shares | Amount | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders’ Deficit | ||||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||
| Relative fair value of warrant issued in connection with convertible notes - related party recorded as debt discount | - | - | - | - | ||||||||||||||||||||||||||||||||
| Relative fair value of warrant issued in connection with convertible notes recorded as debt discount | - | - | - | - | ||||||||||||||||||||||||||||||||
| Series E preferred stock dividend | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Series F preferred stock dividend | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Correction for rounding error | - | - | ( | ) | ||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Balance on December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||
See accompanying condensed notes to unaudited financial statements.
| 6 |
THERALINK TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Three Months Ended | ||||||||
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation on property and equipment and finance ROU assets | ||||||||
| Non-cash lease cost | ||||||||
| Accretion of stock option expense | ||||||||
| Amortization of debt discount | ||||||||
| Loss on debt extinguishment | ||||||||
| Unrealized loss (gain) on marketable securities | ( | ) | ||||||
| Non-cash settlement expense | ||||||||
| Derivative expense | ||||||||
| Gain on modification of operating lease | ( | ) | ||||||
| Change in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Laboratory supplies | ||||||||
| Accounts payable | ( | ) | ( | ) | ||||
| Accrued liabilities and other liabilities | ||||||||
| Contract liabilities | ||||||||
| NET CASH USED IN OPERATING ACTIVITIES | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of property and equipment | ( | ) | ||||||
| NET CASH USED IN INVESTING ACTIVITIES | ( | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from convertible debt - related parties, net | ||||||||
| Proceeds from convertible debt, net | ||||||||
| Proceeds of notes payable - related parties | ||||||||
| Repayment of convertible notes payable | ( | ) | ||||||
| Repayment of convertible notes payable - related parties | ( | ) | ||||||
| Repayment of financed lease | ( | ) | ( | ) | ||||
| Payments for preferred stock dividends | ( | ) | ||||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | ||||||||
| NET CHANGE IN CASH | ||||||||
| CASH, beginning of the period | ||||||||
| CASH, end of the period | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | $ | $ | ||||||
| Non-cash investing and financing activities: | ||||||||
| Series E preferred stock dividend | $ | $ | ||||||
| Series F preferred stock dividend | $ | $ | ||||||
| Initial amount of operating ROU asset and related liability | $ | $ | ||||||
| Relative fair value of warrant issued in connection with convertible notes - related party recorded as debt discount | $ | $ | ||||||
| Relative fair value of warrant issued in connection with convertible notes recorded as debt discount | $ | $ | ||||||
| Initial fair value of derivative liabilities recorded as debt discount - related parties | $ | $ | ||||||
| Initial fair value of derivative liabilities recorded as debt discount | $ | $ | ||||||
| Initial amount of financing lease payables | $ | $ | ||||||
| Exchange of preferred stock and accrued dividends for convertible debt - related parties | $ | $ | ||||||
| Exchange of preferred stock for convertible debt | $ | $ | ||||||
| Exchange of accrued interest payable for convertible debt - related parties | $ | $ | ||||||
| Exchange of accrued interest payable for convertible debt | $ | $ | ||||||
See accompanying condensed notes to unaudited financial statements.
| 7 |
THERALINK TECHNOLOGIES, INC.
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(UNAUDITED)
NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS
Theralink Technologies, Inc., formerly OncBioMune Pharmaceuticals, Inc. (the “Company”), was a clinical-stage biopharmaceutical company engaged in the development of novel cancer immunotherapy products, with a proprietary vaccine technology. On June 5, 2020, the Company acquired the assets (the “Asset Sale Transaction”) of Avant Diagnostics, Inc., a Nevada corporation established in 2009 (“Avant”) pursuant to the Asset Purchase Agreement dated May 12, 2020, between the Company and Avant (the “Asset Purchase Agreement”). Avant is a commercial-stage precision medicine and molecular data-generating company that focuses on the development and commercialization of a series of patented, proprietary data-generating assays that may provide important actionable information for physicians and patients, as well as biopharmaceutical companies, in the area of oncology.
Pursuant
to the Asset Purchase Agreement, the Company acquired substantially all of the assets of Avant and assumed certain of its liabilities.
Upon the terms and subject to the conditions of the Asset Purchase Agreement, Avant sold to the Company, all of Avant’s title and
interest in all the assets, properties and rights of every kind and nature, whether real, personal or mixed, tangible or intangible (including
goodwill), wherever located and whether existing or hereafter acquired, except for the specific excluded assets, which relate to, or
are used or held for use in connection with, Avant’s business. The Company also hired Avant’s employees upon consummation
of the Asset Sale Transaction. As consideration for the Asset Sale Transaction, the Company issued to Avant shares of a newly created
Series D-1 Preferred Stock which held
On July 11, 2021, the Company’s wholly-owned subsidiary, OncBioMune, LLC, was administratively dissolved by the Louisiana Secretary of State for failing to meet its filing requirements and pay the associated fees.
In
connection with the Asset Sale Transaction, the Company entered into an Exchange Agreement, effective June 5, 2020, by and among OncBioMune
Pharmaceuticals, Inc. and the investors named therein, whereby the Company agreed to exchange certain convertible promissory notes and
warrants outstanding for shares of Series C-1 Convertible Preferred Stock of the Company and options to purchase shares of the Company’s
wholly-owned subsidiary, OncBioMune Sub Inc. OncBioMune Sub Inc. holds the patents used in the prior business of OncBioMune Pharmaceuticals,
Inc. In July 2021, certain of those investors exercised their options to purchase the shares of OncBioMune Sub Inc. On July 26, 2021,
the Company transferred all shares of OncBioMune Sub Inc. held by the Company to the various investors for gross proceeds of $
On February 25, 2022, FINRA recognized the Company’s name change to Theralink Technologies, Inc. and the related ticker symbol change from “OBMP” to “THER” went into effect.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying interim unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial information, which present the unaudited financial statements of the Company as of December 31, 2022. The interim unaudited financial statements do not include all the information and notes necessary for a comprehensive presentation of financial position and results of operations and should be read in conjunction with the September 30, 2022 audited financial statements on Form 10-K filed on December 29, 2022. It is management’s opinion that all material adjustments (consisting of normal recurring adjustments and non-recurring adjustments) have been made for the fair presentation of the unaudited financial statements. The results for the interim period are not necessarily indicative of the results to be expected for the year ending September 30, 2023.
| 8 |
THERALINK TECHNOLOGIES, INC.
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(UNAUDITED)
Going Concern
These
unaudited financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of business. As reflected in the accompanying unaudited financial statements, the
Company had net loss and net cash used in operations of $
The Company cannot provide assurance that it will ultimately achieve profitable operations or become cash flow positive or raise additional debt or equity capital. Additionally, the current capital resources are not adequate to continue operating and maintaining the business strategy for a period of twelve months from the issuance date of this report. The Company will seek to raise capital through additional debt and equity financings to fund its operations in the future.
Although the Company has historically raised capital from sales of equity and the issuance of promissory notes, convertible notes and convertible debentures, there is no assurance that it will be able to continue to do so. If the Company is unable to raise additional capital or secure additional lending in the near future, management expects that the Company will need to curtail or cease operations. These financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make judgments, assumptions, and estimates that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Management bases its estimates and assumptions on current facts, historical experience, and various other factors that it believes are reasonable under the circumstances, to determine the carrying values of assets and liabilities that are not readily apparent from other sources. Significant estimates during the periods ended December 31, 2022 and 2021 include, but are not necessarily limited to, estimates of contingent liabilities, valuation of marketable securities, useful life of property and equipment, valuation of right-of-use ROU assets and lease liabilities, assumptions used in assessing impairment of long-lived assets, allowances for accounts receivable, estimates of current and deferred income taxes and deferred tax valuation allowances, the fair value of derivative liabilities, and the fair value of non-cash equity transactions.
Fair Value of Financial Instruments and Fair Value Measurements
FASB ASC 820 - Fair Value Measurements and Disclosures, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC 820 requires disclosures about the fair value of all financial instruments, whether or not recognized, for financial statement purposes. Disclosures about the fair value of financial instruments are based on pertinent information available to the Company on December 31, 2022. Accordingly, the estimates presented in these financial statements are not necessarily indicative of the amounts that could be realized on the disposition of the financial instruments. FASB ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are 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 carrying amounts reported in the balance sheets for cash, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued liabilities, contract liabilities, and accrued compensation approximate their fair market value based on the short-term maturity of these instruments.
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THERALINK TECHNOLOGIES, INC.
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(UNAUDITED)
Assets or liabilities measured at fair value or a recurring basis included embedded conversion options in convertible debt (see Note 6) and were as follows on December 31, 2022 and September 30, 2022:
| December 31, 2022 | September 30, 2022 | |||||||||||||||||||||||
| Description | Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||
| Derivative liabilities | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
A roll forward of the level 3 valuation financial instruments is as follows:
For the Three Months Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Balance at beginning of period | $ | $ | ||||||
| Initial valuation of derivative liabilities included in debt discount | ||||||||
| Initial valuation of derivative liabilities included in derivative expense | ||||||||
| Change in fair value included in derivative expense | ||||||||
| Balance at end of period | $ | $ | ||||||
ASC 825-10 “Financial Instruments” allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding equity instruments.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. The Company’s investment policy is to preserve principal and maintain liquidity. The Company periodically monitors its positions with, and the credit quality of, the financial institutions with which it invests.
Prepaid Assets
Prepaid assets are carried at amortized cost. Significant prepaid assets as of December 31, 2022 and September 30, 2022 include, but are not necessarily limited to, prepaid insurance, prepaid consulting fees, prepaid equipment maintenance fees and retainers for professional services.
Laboratory Supplies
Laboratory supplies are normally consumed within a year from purchase and any unused laboratory supplies are classified as current assets and reflected in the accompanying balance sheets as laboratory supplies.
Property and Equipment
Fixed
assets are stated at cost and depreciated using the straight-line method over their estimated useful lives, which range from to
Impairment of Long-Lived Assets
In accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value.
| 10 |
THERALINK TECHNOLOGIES, INC.
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(UNAUDITED)
Stock-based compensation is accounted for based on the requirements of ASC 718 – “Compensation –Stock Compensation”, which requires recognition in the financial statements of the cost of employee, director, and non-employee services received in exchange for an award of equity instruments over the period the employee, director, or non-employee is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee, director, and non-employee services received in exchange for an award be based on the grant-date fair value of the award. The Company has elected to recognize forfeitures as they occur as permitted under the FASB’s Accounting Standards Update (“ASU”) 2016-09 Improvements to Employee Share-Based Payment.
Revenue Recognition and Contract Assets and Liabilities
In accordance with ASU Topic 606 - Revenue from Contracts with Customers, the Company recognizes revenue in accordance with that core principle by applying the following steps:
Step 1: Identify the contract(s) with a customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
The Company provides research and development support to biopharmaceutical companies to assist their drug development programs. In January 2021, the Company began performing tumor profiling to support clinical patient therapeutic intervention. The services provided by the Company are performance obligations under services contracts. These contracts are completed over time and may lead to deferred revenue for services not completed at the end of a period which is reflected as contract liabilities on the accompanying balance sheet. The Company may include, in accounts receivable, amounts billed to customers in advance of services being initiated or completed. If the Company has a right to such consideration that is unconditional such as for contractually allowed billings under non-cancellable contracts, such amounts billed in advance would be offset by a contract liability. Management reviews the completion status of all jobs monthly to determine the appropriate amount of revenue to recognize. The Company offers these services to biopharmaceutical companies and to private individuals. The Company uses various output methods to recognize revenues. The revenue recognized from services provided to private individuals during the three months ended December 31, 2022 and 2021 were minimal and therefore were not disaggregated for disclosure purposes.
Contract Liabilities
Contract liabilities are cash deposits received from customers and advance billing included in accounts receivable on uncompleted contracts for which revenues have not been recognized as of the balance sheet date.
For the three months ended December 31, 2022 and 2021, contract liabilities activity is as follows:
December 31, 2022 | December 31, 2021 | |||||||
| Contract liabilities beginning balance | $ | $ | ||||||
| Billings and cash receipts on uncompleted contracts | ||||||||
| Less: revenues recognized during the period | ( | ) | ( | ) | ||||
| Total contract liabilities | $ | $ | ||||||
During
the three months ended December 31, 2022, the Company recognized $
Cost of Revenue
The cost of revenue consists of the cost of labor, supplies and materials.
| 11 |
THERALINK TECHNOLOGIES, INC.
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(UNAUDITED)
Accounts Receivable and Allowance for Doubtful Accounts
Trade receivables are carried at their estimated collectible amounts. Trade credit is generally extended on a short-term basis and does not bear interest. Trade accounts receivable are periodically evaluated for collectability based on past credit history with customers and their current financial condition.
Any charges to the allowance for doubtful accounts on accounts receivable are charged to operations in amounts sufficient to maintain the allowance for uncollectible accounts at a level management believes is adequate to cover any probable losses. Management determines the adequacy of the allowance based on historical write-off percentages and the current status of accounts receivable. Accounts receivable are charged off against the allowance when collectability is determined to be permanently impaired.
Research and Development
In
fiscal 2022, the Company joined and made an investment in an investigator-initiated study. As part of that investment, the Company obtained
rights/access to various retrospective biobank clinical samples for research and product development purposes. In addition, the Company
received active patient clinical samples for the following disease sites: ovarian, endometrial, and head & neck cancers. These samples
were tested to provide RUO (Research Use Only) results reports for research and product validation efforts.
Derivative Liabilities
The Company has certain financial instruments that are embedded derivatives associated with capital raises. The Company evaluates all its financial instruments to determine if those contracts or any potential embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with ASC 815-10 - Derivative and Hedging - Contract in Entity’s Own Equity. This accounting treatment requires that the carrying amount of any derivatives be recorded at fair value at issuance and marked-to-market at each balance sheet date. In the event that the fair value is recorded as a liability, as is the case with the Company, the change in the fair value during the period is recorded as either other income or expense. Upon conversion, exercise or repayment, the respective derivative liability is marked to fair value at the conversion, repayment, or exercise date and then the related fair value amount is reclassified to other income or expense as part of gain or loss on debt extinguishment.
Concentrations
Concentration of Credit Risk
The
Company maintains its cash in banks and financial institutions that at times may exceed the federally insured limit of $
Concentration of Revenues
For
the three months ended December 31, 2022, the Company generated total revenue of $
Concentration of Accounts Receivable
As
of December 31, 2022, the Company had net accounts receivable of $
Concentration of Contract Liabilities
As
of December 31, 2022, the Company had deferred revenue reflected as contract liabilities of $
| 12 |
THERALINK TECHNOLOGIES, INC.
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(UNAUDITED)
Concentration of Vendors
Historically, the Company relied on one vendor to perform the Company’s patient reporting and contract research (formerly called sample analysis) which is an integral part of the Company’s operation and revenue stream. Any disruption in this service could have a material adverse effect on the Company’s business, financial condition and results of operations. The Company discontinued using this vendor in June 2022 as the patient reporting function has been moved in-house.
During
the three months ended December 31, 2022 and 2021, the Company incurred $
Pursuant to ASC 260-10-45, basic loss per common share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding for the periods presented. Diluted loss per share is computed by dividing the net loss by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period. Potentially dilutive common shares consist of common stock issuable for stock options and warrants (using the treasury stock method), convertible notes, conversion of preferred stock, and common stock issuable. These common stock equivalents may be dilutive in the future. The following potentially dilutive equity securities outstanding as of December 31, 2022 and 2021 were not included in the computation of dilutive loss per common share because the effect would have been anti-dilutive:
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Stock warrants | ||||||||
| Stock options | ||||||||
| Series C-1 preferred stock | ||||||||
| Series C-2 preferred stock | ||||||||
| Series E preferred stock | ||||||||
| Series F preferred stock | ||||||||
| Convertible notes | ||||||||
Income Taxes
The Company accounts for income tax using the liability method prescribed by ASC 740 - Income Taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the year in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.
The
Company follows the accounting guidance for uncertainty in income taxes using the provisions of ASC 740 “Income Taxes”.
Using that guidance, tax positions initially need to be recognized in the financial statements when it is more likely than not the position
will be sustained upon examination by the tax authorities. As of December 31, 2022 and 2021, the Company had
Related Parties
Parties are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal with if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests.
| 13 |
THERALINK TECHNOLOGIES, INC.
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(UNAUDITED)
Leases
The Company accounts for its leases using the method prescribed by ASC 842 – Lease Accounting. The Company assess whether a contract is, or contains, a lease at the inception of the contract which is based on (i) whether the contract involves the use of a distinct identified asset, (ii) whether the Company obtains the right to substantially all the economic benefit from the use of the asset throughout the period, and (iii) whether the Company has the right to direct the use of the asset. The Company allocates the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments. The Company has elected not to recognize ROU assets and lease liabilities for short-term leases that have a term of 12 months or less.
Operating and financing lease ROU assets represent the right to use the leased asset for the lease term. Operating and financing lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. As most leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at the adoption date in determining the present value of future payments. Lease expense for minimum lease payments is amortized on a straight-line basis over the lease term and is included in general and administrative expenses in the unaudited statements of operations.
Recent Accounting Pronouncements
Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the Company’s financial statements.
NOTE 3 – MARKETABLE SECURITIES
During
the fiscal year ended 2017, the Company acquired shares of common stock of Amarantus BioScience Holdings, Inc. (“AMBS”)
with a fair value of $
NOTE 4 – ACCOUNTS RECEIVABLE
On December 31, 2022 and September 30, 2022, accounts receivable consisted of the following:
December 31, 2022 | September 30, 2022 | |||||||
| Accounts receivable | $ | $ | ||||||
| Less: allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Accounts receivable, net | $ | $ | ||||||
For the three months ended December 31, 2022 and 2021, bad debt expense amounted to $.
NOTE 5 – PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Once placed in service, they are depreciated on the straight-line method over their estimated useful lives. Leasehold improvements are accreted over the shorter of the estimated economic life or related lease terms. Property and equipment consist of the following:
Estimated Useful Life in Years | December 31, 2022 | September 30, 2022 | ||||||||||
| Laboratory equipment | $ | $ | ||||||||||
| Furniture | ||||||||||||
| Leasehold improvements | ||||||||||||
| Computer equipment | ||||||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||||||
| Property and equipment, net | $ | $ | ||||||||||
| 14 |
THERALINK TECHNOLOGIES, INC.
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(UNAUDITED)
For
the three months ended December 31, 2022 and 2021, depreciation expense related to property and equipment amounted to $
Leased equipment was not included in the table above as it was accounted for in accordance with ASU 842 – Leases. These leases are discussed in Note 7 under financing lease right-of-use (“ROU”) assets and financing lease liabilities.
NOTE 6 – DEBT
On December 31, 2022 and September 30, 2022, convertible notes payable (third parties and related parties) consisted of the following:
December 31, 2022 | September 30, 2022 | |||||||
| Principal amount | $ | $ | ||||||
| Less: debt discount | ( | ) | ( | ) | ||||
| Convertible notes payable, net | ||||||||
| Less: current portion of convertible notes payable - related parties | ( | ) | ||||||
| Convertible notes payable, net – long-term | $ | $ | ||||||
| Principal amount – related parties | $ | $ | ||||||
| Less: debt discount – related parties | ( | ) | ( | ) | ||||
| Convertible notes payable - related parties, net | ||||||||
| Less: current portion of convertible notes payable - related parties | ( | ) | ( | ) | ||||
| Convertible notes payable - related parties, net – long-term | $ | $ | ||||||
| Total convertible notes payable, net | $ | $ | ||||||
Convertible Debt – Related Parties
On
May 12, 2021, the Company entered into a Securities Purchase Agreement (“May 2021 SPA”) with a related party, who is an affiliate
stockholder (“May 2021 Investor”) to purchase a convertible note (“May 2021 Note”) and accompanying
| 15 |
THERALINK TECHNOLOGIES, INC.
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(UNAUDITED)
On
November 1, 2021, the Company entered into a Securities Purchase Agreement (“First November 2021 SPA”) with a related party,
who is an affiliate stockholder (“First November 2021 Investor”), to purchase three convertible notes (collectively as “First
November 2021 Notes”) and three accompanying warrants (collectively as “First November 2021 Warrants”), for an aggregate
investment amount of $
On
April 5, 2022, the Company entered into a Securities Purchase Agreement (“First April 2022 SPA”) with a related party, Matthew
Schwartz, who is a member of the board of directors (“Investor”), to purchase a convertible note with a principal balance
of $
| 16 |
THERALINK TECHNOLOGIES, INC.
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(UNAUDITED)
On
May 9, 2022, the Company entered into a Securities Purchase Agreement (“May 2022 SPA”) with a related party, who is an affiliate
stockholder (“May 2022 Investor”), to purchase four convertible notes for an aggregate investment amount of $
On
June 15, 2022, the Company entered into a Securities Purchase Agreement (“June 2022 SPA”) with a related party, Danica Holley,
who is a member of the board of directors (“Investor”), to purchase a convertible note with principal of $
On
July 29, 2022, the Company entered into a Demand Promissory Note Agreement with Jeffrey Busch who serves as a member of the Board of
Directors and a related party, for a principal balance of $
On
August 11, 2022, the Company entered into a Demand Promissory Note Agreement with a related party, who is an affiliate stockholder, for
a principal balance of $
| 17 |
THERALINK TECHNOLOGIES, INC.
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(UNAUDITED)
On
September 2, 2022, the Company entered into a Demand Promissory Note Agreement with a related party, who is an affiliate stockholder,
for a principal balance of $
On
November 1, 2022, the Company entered into a Demand Promissory Note Agreements with two related parties, who are affiliate stockholders,
for a principal balance of $
On
November 29, 2022, in connection with the Share Exchange Agreements and New Convertible Debt discussed below, the May 2021 Warrants,
First November 2021 Warrants, First April 2022 Warrants, May 2022 Warrants, and June 2022 Warrants, aggregating
Share Exchange Agreements and New Related Party Convertible Debentures and Warrants dated November 29, 2022
On
November 29, 2022, the Company consummated the initial closing (the “Initial Closing”) of a private placement offering
(the “Offering”) pursuant to the terms and conditions of that certain Securities Purchase Agreement, dated as of
November 29, 2022 (the “Purchase Agreement”), by and among the Company, certain related party accredited investors (the
“Related Party Purchasers”) and Cavalry Fund I Management LLC, a Delaware limited liability company, in its capacity as
collateral agent (the “Collateral Agent”). At the Initial Closing, the Company sold the related party Purchasers (i)
On
November 29, 2022, the Company entered into Securities Exchange Agreements with the above
related party investors, whereby the May 2021 Note, the First November 2021 Notes, the First April 2022 Note, the May 2022 Notes,
the June 2022 Note, the Busch Notes, the August 11, 2022 Demand Promissory Note, and the September 2, 2022 Demand Promissory Note
with an aggregate principal amount of $
On
November 29, 2022, the Company entered into Securities Exchange Agreements with related party preferred stockholders, whereby related party holders of shares of Series E preferred
stock with a stated value of $
| 18 |
THERALINK TECHNOLOGIES, INC.
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(UNAUDITED)
The
November 29, 2022 New Related Party Debentures mature on
The Company’s obligations under the New Related Party Debentures are secured by a first priority lien on all of the assets of the Company pursuant to that certain Security Agreement, dated November 29, 2022 (the “Security Agreement”) by and among the Company, the Debenture holders and the Collateral Agent.
The Purchase Agreement contains customary representations, warranties, and covenants of the Company, including, among other things and subject to certain exceptions, covenants that restrict the ability of the Company without the prior written consent of the Debenture holders, to incur additional indebtedness, and repay outstanding indebtedness, create or permit liens on assets, redeem its Common Stock, settle outstanding litigation, or enter into transactions with affiliates.
If the Company or any Subsidiary shall default
on any of its obligations under any mortgage credit agreement or other facility indenture agreement, factoring agreement or other instrument
under which there may be issued, or by which there may be secured or evidenced, any indebtedness for borrowed money or money due under
any long term leasing or factoring arrangement that (a) involves an obligation greater than $
In
connection with the Securities Exchange Agreements with related parties for the exchange of the convertible notes and preferred
shares for the New Related Party Debentures discussed above, the Company issued an aggregate of
As discussed above, on November 29, 2022, in
order to induce the related party investors to exchange their respective convertible notes and preferred stock into the New Related Party
Debentures, the aggregate principal amount and accrued interest payable of the exchanged convertible notes, and the stated value and
accrued dividends of exchanged preferred stock was increased by
| 19 |
THERALINK TECHNOLOGIES, INC.
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(UNAUDITED)
Convertible Debt
On
November 1, 2021, the Company entered into a Securities Purchase Agreement (“Second November 2021 SPA”) with an investor
(“Second November 2021 Investor”) to purchase two convertible notes (collectively as “Second November 2021 Notes”)
and two accompanying warrants (collectively as “Second November 2021 Warrants”), for an aggregate investment amount of $
On
November 1, 2021, the Company entered into a Securities Purchase Agreement (“Third November 2021 SPA”) with an investor (“Third
November 2021 Investor”) to purchase two convertible notes (collectively as “Third November 2021 Notes”) and two accompanying
warrants (collectively as “Third November 2021 Warrants”), for an aggregate investment amount of $
| 20 |
THERALINK TECHNOLOGIES, INC.
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(UNAUDITED)
On
January 27, 2022, the Company entered into a Securities Purchase Agreement (“First January 2022 SPA”) with an investor (“First
January 2022 Investor”) to purchase a convertible note with a principal balance of $
On
January 31, 2022, the Company entered into a Securities Purchase Agreement (“Second January 2022 SPA”) with an investor (“Second
January 2022 Investor”) to purchase a convertible note with principal balance of $
During
April 2022, the Company entered into a Securities Purchase Agreement (“Second April 2022 SPA”) with various investors
(“Investors”), to purchase convertible notes for an aggregate investment amount of $
| 21 |
THERALINK TECHNOLOGIES, INC.
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(UNAUDITED)
On
July 1, 2022, the Company entered into a Securities Purchase Agreement with an investor (“July 2022 Investor”), to purchase
a convertible note for a principal amount of $
On
October 22, 2022, the Company issued a new convertible note for $
On
November 29, 2022, in connection with the Share Exchange Agreements and New Convertible Debentures discussed below, the Second November
2021 Warrants, Third November 2021 Warrants, January 2022 Warrants, Second January 2022 Warrants, Second April 2022 Warrants, and the
July 2022 Warrants, aggregating warrants, were amended to reduce the exercise price to $
Share Exchange Agreements and New Convertible Debentures and Warrants dated November 29, 2022
On
November 29, 2022, the Company consummated the Initial Closing of the Offering pursuant to the terms and conditions of the Purchase
Agreement, by and among the Company, certain accredited investors (the “Purchasers”) and Cavalry Fund I Management LLC,
a Delaware limited liability company, in its capacity as collateral agent (the “Collateral Agent”). At the Initial
Closing, the Company sold the Purchasers (i)
The Purchase Agreement contains customary representations, warranties, and covenants of the Company, including, among other things and subject to certain exceptions, covenants that restrict the ability of the Company without the prior written consent of the Debenture holders, to incur additional indebtedness, and repay outstanding indebtedness, create or permit liens on assets, redeem its Common Stock, settle outstanding litigation, or enter into transactions with affiliates.
On
November 29, 2022, the Company entered into Securities Exchange Agreements with the above investors, whereby the Second November 2021 Notes, the Third November 2021 Notes, the First January
2022 Note, the Second January 2022 Note, the Second April 2022 Notes, the July 2022 Note, and the Settlement Note, with an aggregate
principal amount of $
| 22 |
THERALINK TECHNOLOGIES, INC.
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(UNAUDITED)
On
November 29, 2022, the Company entered into Securities Exchange Agreements with preferred stockholders, whereby holders of
shares of Series C-1 preferred stock with a stated value of $
The
New Debentures mature on
The Company’s obligations under the New Debentures are secured by a first priority lien on all of the assets of the Company pursuant to that certain Security Agreement, dated November 29, 2022 (the “Security Agreement”) by and among the Company, the Purchasers and the Collateral Agent.
The
Company had the right to hold one or more subsequent closings at any time prior to December 31, 2022, unless otherwise extended, to sell additional
Underlying Securities in an aggregate principal amount up to $
If the Company or any Subsidiary shall default
on any of its obligations under any mortgage credit agreement or other facility indenture agreement, factoring agreement or other instrument
under which there may be issued, or by which there may be secured or evidenced, any indebtedness for borrowed money or money due under
any long term leasing or factoring arrangement that (a) involves an obligation greater than $
In
connection with the Securities Exchange Agreements with investors for the exchange of the convertible notes and preferred shares for
the New Debentures discussed above, the Company issued an aggregate of
As
discussed above, on November 29, 2022, in order to induce the investors to exchange their respective convertible notes and preferred
stock into the New Debentures, the aggregate principal amount and accrued interest payable of the exchanged convertible notes, and the
stated value of exchanged preferred stock was increased by
| 23 |
THERALINK TECHNOLOGIES, INC.
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(UNAUDITED)
Analysis of Exchange Agreements, Related Party Debenture and New Debentures, and Related Warrants
In
accordance with ASC 470-50, Debt Modifications and Extinguishments, the Company performed an assessment of whether the Exchange Agreement
transactions with related parties and investors was deemed to be new debt, a modification of existing debt, or an extinguishment of existing
debt. The Company evaluated the November 29, 2022 Exchange Agreements for debt modification and concluded that the debt exchanges qualified
for debt extinguishment. The Company determined the transactions were considered a debt extinguishment because the change in debt, the
inducement premiums (related parties and third parties) discussed previously totaling $
Derivative Liabilities Pursuant to Related Party Debentures and New Debentures and Related Warrants
Pursuant to the provisions of ASC 815-40 – Derivatives and Hedging – Contracts in an Entity’s Own Stock, the New Related Party Debentures, the New Debenture, and the New warrants issued in connection with the Exchange Agreements were analyzed and it was determined that the terms of the New Related Party Debentures, New Debentures and the related warrants contained terms that were considered derivatives due to the variable conversion of the Debentures and exercise price of the warrants, and other provisions which includes events not within the control of the Company. In accordance with ASC 815-40, the embedded conversion option contained in the Notes and the Warrants were accounted for as derivative liabilities at the date of issuance and shall be adjusted to fair value through earnings at each reporting date. The fair value of the embedded conversion options and warrants was determined using the Binomial Lattice valuation model. At the end of each period and on the date notes convert or are repaid, the Company revalues the derivative liabilities resulting from the embedded options and warrants.
In
connection with the issuance of the New Related Party Debentures and the New Debentures and related warrants, on November 29, 2022, the
initial measurement date, the aggregate fair values of the embedded conversion option derivatives and warrant derivatives of $
The Company uses the Binomial Valuation Model to determine the fair value of its conversion options and new stock warrants which requires the Company to make several key judgments including:
| ● | the value of the Company’s common stock; | |
| ● | the expected life of issued stock warrants; | |
| ● | the expected volatility of the Company’s stock price; | |
| ● | the expected dividend yield to be realized over the life of the stock warrants; and | |
| ● | the risk-free interest rate over the expected life of the stock warrants. |
| 24 |
THERALINK TECHNOLOGIES, INC.
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(UNAUDITED)
On November 29, 2022 (the Exchange Agreement date) and December 31, 2022, the fair value of the embedded options and stock warrants were estimated at issuance using the Binomial Valuation Model with the following assumptions:
| 2023 | ||||
| Dividend rate | % | |||
| Term (in years) | ||||
| Volatility | % | |||
| Risk—free interest rate | % |
The Company’s computation of the expected life of issued stock warrants was based on the simplified method as the Company does not have adequate exercise experience to determine the expected term. The interest rate was based on the U.S. Treasury yield curve in effect at the time of grant. The computation of volatility was based on the historical volatility of the Company’s common stock.
During
the three months ended December 31, 2022 and 2021, amortization of debt discounts related to the convertible notes payable and Debentures
amounted to $
Notes Payable - Related Party
On
October 21, 2021, the Company entered into a Promissory Note Agreement with Jeffrey Busch who serves as a member of the Board of Directors
and a related party, for a principal amount of $
On
April 26, 2021, the Company entered into a Promissory Note Agreement with Jeffrey Busch who serves as a member of the Board of Directors
and a related party, for a principal amount of $
Note Payable
In
September 2017, the Company entered into a note agreement with a third-party investor. Pursuant to the note, the Company borrowed a principal
amount of $
| 25 |
THERALINK TECHNOLOGIES, INC.
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(UNAUDITED)
NOTE 7 –LEASE LIABILITIES
Financing Lease Right-of-Use (“ROU”) Assets and Financing Lease Liabilities
Effective
November 2018, the Company entered into a financing agreement with the first lessor to finance the purchase of equipment. Pursuant to
the financing agreement, the Company shall make a monthly payment of $
Effective
November 2018, the Company entered into a financing agreement with a second lessor to finance the purchase of equipment. Pursuant to
the financing agreement, the Company shall make a monthly payment of $
Effective
March 2019, the Company entered into a financing agreement with a third lessor to finance the purchase of equipment. Pursuant to the
financing agreement, the Company shall make a monthly payment of $
Effective
August 2019, the Company entered into a financing agreement with a fourth lessor to finance the purchase of equipment. Pursuant to the
financing agreement, the Company shall make a monthly payment of $
Effective
January 2020, the Company entered into a financing agreement with a fifth lessor to finance the purchase of equipment. Pursuant to the
financing agreement, the Company shall make a monthly payment of $
The
significant assumption used to determine the present value of the financing lease payables was the discount rate which ranged from
Financing lease right-of-use assets (“Financing ROU”) is summarized below:
December 31, 2022 | September
30, 2022 | |||||||
| Financing ROU assets | $ | $ | ||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||
| Balance of Financing ROU assets | $ | $ | ||||||
For
the three months ended December 31, 2022 and 2021, depreciation expense related to Financing ROU assets amounted to $
Financing lease liability related to the Financing ROU assets is summarized below:
December 31, 2022 | September
30, 2022 | |||||||
| Financing lease payables for equipment | $ | $ | ||||||
| Total financing lease payables | ||||||||
| Payments of financing lease liabilities | ( | ) | ( | ) | ||||
| Total | ||||||||
| Less: short term portion | ( | ) | ( | ) | ||||
| Long term portion | $ | $ | ||||||
| 26 |
THERALINK TECHNOLOGIES, INC.
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(UNAUDITED)
Future minimum lease payments under the financing lease agreements on December 31, 2022 are as follows:
| Years ending December 31, | Amount | |||
| 2023 | $ | |||
| 2024 | ||||
| Total minimum financing lease payments | ||||
| Less: discount to fair value | ( | ) | ||
| Total financing lease payable on December 31, 2022 | $ | |||
Operating Lease Right-of-Use (“ROU”) Asset and Operating Lease Liabilities
In
December 2019, the Company entered into a lease agreement for its corporate and laboratory facility in Golden, Colorado.
In
February 2020, pursuant to ASC 842 – Leases, the Company calculated the present value of the total lease payments using
a discount rate of
On
June 10, 2021, the Company entered into an amendment to its existing Warehouse Lease (the “Lease Amendment”), effective October
3, 2021, for its laboratory facility in Golden, CO (see Note 10). The Lease Amendment provided for: (i) an extension to the term of the
original lease to five years following the completion of the Company’s improvements to the Expansion Premises (defined below);
(ii) an expansion of the premises to include the premises located at Unit 404, Building F, 15000 West 6th Avenue, Golden, Colorado 80401,
consisting of approximately
Pursuant
to the Lease Amendment,
In
October 2021, pursuant to ASC 842 – Leases, the Company wrote off the balances of the operating asset of $
For
the three months ended December 31, 2022, lease costs related to operating lease ROU asset and operating lease liabilities amounted to
$
Operating Right-of-use asset (“ROU”) is summarized below:
December 31, 2022 | September 30, 2022 | |||||||
| Operating office lease | $ | $ | ||||||
| Less accumulated reduction | ( | ) | ( | ) | ||||
| Balance of Operating ROU asset | $ | $ | ||||||
| 27 |
THERALINK TECHNOLOGIES, INC.
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(UNAUDITED)
Operating lease liability related to the ROU asset is summarized below:
December 31, 2022 | September
30, 2022 | |||||||
| Operating office lease | $ | $ | ||||||
| Total operating lease liability | ||||||||
| Reduction of operating lease liability | ( | ) | ( | ) | ||||
| Total | ||||||||
| Less: short term portion | ( | ) | ( | ) | ||||
| Long term portion | $ | $ | ||||||
Future base lease payments under the non-cancellable operating lease on December 31, 2022 are as follows:
| Years ending December 31, | Amount | |||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 and thereafter | ||||
| Total minimum non-cancellable operating lease payments | ||||
| Less: discount to fair value | ( | ) | ||
| Total operating lease liability on December 31, 2022 | $ | |||
NOTE 8 – RELATED-PARTY TRANSACTIONS
Effective
January 1, 2021, the Company entered into a consulting agreement with Mr. Kucharchuk, a member of the Board of Directors, to serve as
a strategic advisor. The agreement was effective for a period of twelve months, commencing on January 1, 2021 and shall renew on a month-to
month basis, subject to the right of the Company and Mr. Kucharchuk to terminate the agreement in accordance with the agreement. Pursuant
to the agreement, Mr. Kucharchuk shall be paid $
On
April 26, 2021, the Company entered into a Promissory Note Agreement with Jeffrey Busch who serves as a member of the Board of
Directors, for a principal amount of $
On
May 12, 2021, the Company and the May 2021 Investor entered into a May 2021 SPA to purchase a convertible May 2021 Note and with principal
value of $
| 28 |
THERALINK TECHNOLOGIES, INC.
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(UNAUDITED)
On
October 21, 2021, the Company entered into a Promissory Note Agreement with Jeffrey Busch who serves as a member of the Board of Directors
and a related party, for a principal balance of $
On
November 1, 2021, pursuant to the First November 2021 SPA the First November 2021 Investor purchased three notes with aggregate principal
of $
On
January 26, 2022, a notice and request for consent regarding a change in offering terms was sent by the Company to the First November
2021 Investor. Upon the approval of the First November 2021 Investor,
On
April 5, 2022, pursuant to the First April 2022 SPA, Matthew Schwartz, a member of the Board of Directors and a related party, purchased
a convertible note with principal amount of $
On
May 9, 2022, pursuant to the May 2022 SPA the May 2022 Investor purchased four convertible notes for an aggregate investment amount of
$
On
June 15, 2022, pursuant to the June 2022 SPA, Danica Holley, a member of the Board of Directors and a related party, purchased a convertible
note with principal of $
On
July 29, 2022, the Company entered into a Demand Promissory Note Agreement with Jeffrey Busch who serves as a member of the Board of
Directors and a related party, for a principal balance of $
On
August 11, 2022, the Company entered into a Demand Promissory Note Agreement with a related party, who is an affiliate stockholder, for
a principal balance of $
On
September 2, 2022, the Company entered into a Demand Promissory Note Agreement with a related party, who is an affiliate stockholder,
for a principal balance of $
| 29 |
THERALINK TECHNOLOGIES, INC.
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(UNAUDITED)
During
the year ended September 30, 2022, the Company advanced a total of $ to a related party, which is an affiliate entity and a majority
shareholder of the Company. During the year ended September 30, 2022, the Company recorded bad debt expense of $ related to the
write off of related party advances. As of December 31, 2022 and September 30, 2022, the Company had related party receivable balances
of $
On
November 1, 2022, the Company entered into a Demand Promissory Note Agreements with two related parties, who are affiliate stockholders,
for a principal balance of $
On
November 29, 2022, in connection with the Share Exchange Agreements and New Related Party Convertible Debentures discussed in Note 6,
the May 2021 Warrants, First November 2021 Warrants, First April 2022 Warrants, May 2022 Warrants, and June 2022 Warrants, aggregating
On
November 29, 2022, the Company consummated the Initial Closing of the Offering pursuant to the terms and conditions of the
Purchase Agreement, by and among the Company the Related Party Purchasers and the Collateral Agent. At the Initial Closing, the
Company sold the related party Purchasers (i) the New Related Party Debentures in an aggregate principal amount of $
On
November 29, 2022, the Company entered into Securities Exchange Agreements with the Exchanged Related Party Notes and accrued
interest payable of $
On
November 29, 2022, the Company entered into Securities Exchange Agreements with related party preferred stock holders, whereby related party holders of shares of Series E preferred
stock with a stated value of $
As
of December 31, 2022 and September 30, 2022, the Company owed several executives and directors for expense reimbursements and consulting
fees in the aggregate amount of $
| 30 |
THERALINK TECHNOLOGIES, INC.
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(UNAUDITED)
On December 31, 2022 and September 30, 2022, net amount due to related parties consisted of the following:
December 31, 2022 | September 30, 2022 | |||||||
| Convertible notes principal – related parties | $ | $ | ||||||
| Discount on convertible notes - related parties | ( | ) | ( | ) | ||||
| Note payable principal – related parties | ||||||||
| Accrued liabilities - related parties | ||||||||
| Accounts payable – related parties | ||||||||
| Total | $ | $ | ||||||
NOTE 9 – STOCKHOLDERS’ DEFICIT
Shares Authorized
On September 22, 2020, the Company filed with the Nevada Secretary of State, an amendment to its Articles of Incorporation to change its name from “OncBioMune Pharmaceutical, Inc.” to “Theralink Technologies, Inc.” and increase its authorized shares of common stock from shares of common stock at $ per share par value to shares of common stock at $ per share par value, effective September 24, 2020.
On July 1, 2022, the Company filed with the Nevada Secretary of State, an amendment to its Articles of Incorporation to increase its authorized shares of common stock from shares to shares of common stock at $ per share par value.
Series A Preferred Stock
On
August 20, 2015, the Company filed the Certificate of Designation with the Nevada Secretary of State, designating
As of December 31, 2022 and September 30, 2022, there were shares of the Company’s Series A Preferred Stock issued and outstanding held by a former member of the Board of Directors.
Series C-1 Preferred Stock
On
May 18, 2020, the Company filed a certificate of designation, preferences and rights of Series C-1 Preferred Stock (the “Series
C-1 Certificate of Designation”), as amended on June 9, 2021, with the Nevada Secretary of State to designate
On June 9, 2021, the Company filed an Amendment (the “CoD Amendment”) to the Series C-1 Certificate of Designation with the Nevada Secretary of State. The filing of the CoD Amendment was approved by the Board on June 8, 2021, and by the holders of the majority of the outstanding shares of Series C-1 Preferred Stock on June 8, 2021.
The
CoD Amendment sets the triggering price for the anti-dilution price protection at $
| ● | Holders of shares of Series C-1 Preferred Stock are entitled to dividends or distributions on each share on an “as converted” into common stock basis, if, as and when declared from time to time by the Board of Directors. |
| 31 |
THERALINK TECHNOLOGIES, INC.
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(UNAUDITED)
| ● | Each
share of Series C-1 Preferred Stock is convertible into shares of common stock any time after
the Initial Issuance Date at a conversion price of $ | |
| ● | In
the event the Company issues or sells any securities including options or convertible securities, except for any Exempt Issuance
(as defined in the Series C-1 Certificate of Designation), at a price of or with an exercise price or conversion price of less than
$ | |
| ● | In the event of the voluntary or involuntary liquidation, dissolution, distribution of assets or winding-up of the Company, the holders of the Series C-1 Preferred Stock shall be entitled to receive, in cash out of the assets of the Company, whether from capital or from earnings available for distribution to its stockholders (“Liquidation Funds”) before any amount shall be paid to the holders of any shares of Junior Stock, but pari passu with any Parity Stock (as defined in the Series C-1 Certificate of Designation) then outstanding, an amount per shares of the Series C-1 Preferred Stock equal to the greater of (A) the conversion amount thereof on the date of such payment or (B) the amount per share such holder of Series C-1 Preferred Stock would receive if such holder converted such Series C-1 into common stock immediately prior to the date of the payment, provided that if the Liquidation Funds are insufficient to pay the full amount due to the holders of Series C-1 Preferred Stock and holders of the shares of Parity Stock, then each holder of Series C-1 Preferred Stock and each holder of Parity Stock shall receive a percentage of the Liquidation Funds equal to the full amount of the Liquidation Funds payable to such holder of Series C-1 Preferred Stock and such holder of the Parity Stock as a liquidation preference, in accordance with their respective certificate of designation (or equivalent), as a percentage of the full amount of Liquidation Funds payable to all holders of Series C-1 Preferred Stock and all holders of Parity Stock. |
During the year ended September 30, 2022, various holders of the Series C-1 Preferred Stock converted an aggregate of shares of Series C-1 Preferred Stock into shares of the Company’s common stock (see below – Common Stock Issued Upon Conversion of Series C-1 Preferred Stock).
On
November 29, 2022, the Company entered into Securities Exchange Agreements with preferred stockholders, whereby holders of shares of Series C-1 preferred stock with a stated value of
$
As of December 31, 2022 and September 30, 2022, the Company had and shares of Series C-1 Preferred Stock issued and outstanding, respectively.
Series C-2 Preferred Stock
On
May 18, 2020, the Company filed a certificate of designation, preferences and rights of Series C-2 Preferred Stock (the “Series
C-2 Certificate of Designation”) with the Nevada Secretary of State to designate
| ● | Holders of shares of Series C-2 Preferred Stock are entitled to dividends or distributions on each share on an “as converted” into common stock basis, if, as and when declared from time to time by the Board of Directors. |
| 32 |
THERALINK TECHNOLOGIES, INC.
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(UNAUDITED)
| ● | Each
share of Series C-2 Preferred Stock is convertible into shares of common stock any time after the initial issuance date at a conversion
price of $ | |
| ● | In the event the Company issues or sells any securities including options or convertible securities, except for any Exempt Issuance (as defined in the Series C-2 Certificate of Designation), at a price of or with an exercise price or conversion price of less than the conversion price, then upon such issuance or sale, the Series C-2 Preferred Stock conversion price shall be reduced to the sale price, the exercise price or conversion price of the securities sold. In addition, these preferred shareholders have the right to participate in future equity offerings from the company for twenty-four months from the effective date. | |
| ● | In the event of the voluntary or involuntary liquidation, dissolution, distribution of assets or winding-up of the Company, the holders of the Series C-2 Preferred Stock shall be entitled to receive, in cash out of the Liquidation Funds before any amount shall be paid to the holders of any shares of Junior Stock, but pari passu with any Parity Stock (as defined in the Series C-2 Certificate of Designation) then outstanding, an amount per shares of the Series C-2 Preferred Stock equal to the greater of (A) the conversion amount thereof on the date of such payment or (B) the amount per share such holder would receive if such holder converted such Series C-2 into common stock immediately prior to the date of the payment, provided that if the Liquidation Funds are insufficient to pay the full amount due to the holders of Series C-2 Preferred Stock and holders of the shares of Parity Stock, then each holder of Series C-2 Preferred Stock and each holder of Parity Stock shall receive a percentage of the Liquidation Funds equal to the full amount of the Liquidation Funds payable to such holder of Series C-2 Preferred Stock and such holder of the Parity Stock as a liquidation preference, in accordance with their respective certificate of designation (or equivalent), as a percentage of the full amount of Liquidation Funds payable to all holders of Series C-2 Preferred Stock and all holders of Parity Stock. |
During the year ended September 30, 2022, a holder of the Series C-2 Preferred Stock converted shares of Series C-1 Preferred Stock into shares of the Company’s common stock (see below – Common Stock Issued Upon Conversion of Series C-2 Preferred Stock).
On
November 29, 2022, the Company entered into Securities Exchange Agreements with preferred stockholders, whereby holders of
shares of Series C-2 preferred stock with a stated value of $
As of December 31, 2022 and September 30, 2022, the Company had and shares of Series C-2 Preferred Stock, respectively, issued and outstanding.
Series E Preferred Stock
On September 15, 2020, the Company filed a Certificate of Designation, Preferences and Rights of Series E Preferred Stock (the “Series E Certificate of Designation”) with the Nevada Secretary of the State to designate shares of its previously authorized preferred stock as Series E Preferred Stock, par value $ per share and a stated value of $ per share. The Series E Certificate of Designation and its filing were approved by the Company’s Board of Directors without stockholder approval as provided for in the Company’s Articles of Incorporation and under Nevada law. The holders of shares of Series E Preferred Stock have the following preferences and rights:
| ● | From
the initial issuance date, cumulative dividends on each share of Series E shall accrue, on a quarterly basis in arrears (with any
partial quarter calculated on a pro-rata basis), at the rate of | |
| ● | Holders of shares of Series E Preferred Stock are entitled to dividends or distributions on each share on an “as converted” into common stock basis, if, as and when declared from time to time by the Board of Directors. |
| 33 |
THERALINK TECHNOLOGIES, INC.
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(UNAUDITED)
| ● |
| ● | ||
| ● | In the event the Company issues or sells any securities including options or convertible securities, except for any Exempt Issuance (as defined in the Series E Certificate of Designation), at a price, an exercise price or conversion price of less than the conversion price, then upon such issuance or sale, the Series E Preferred Stock conversion price shall be reduced to the sale price or the exercise price or conversion price of the securities sold. | |
| ● | Holders of Series E Preferred Stock have no voting rights. |
On
September 16, 2020, the Company entered into a Securities Purchase Agreement (the “SPA”) with an affiliated investor, who
is a beneficial shareholder, to purchase an aggregate amount of shares of the newly created Series E Convertible Preferred Stock
of the Company (the “Series E Preferred”) for an aggregate investment amount of $
Pursuant to the Series E Certificate of Designation, Series E Preferred Stock is redeemable at the option of the holder in the event that the Company is prohibited from issuing shares of common stock to a holder upon any conversion due to insufficient shares of common stock available (“Authorized Failure Shares”) and therefore meets the criteria of a contingently redeemable instrument in accordance with ASC 480-10-25-7 – Distinguishing Liabilities from Equity. The Series E Preferred Stock is contingently redeemable upon the occurrence of an event that is outside of the issuer’s control and is classified as temporary equity pursuant to ASC 480-10-S99.
Further the Series E Preferred Stock is an equity host instrument since it has more features that align with an equity instrument than a debt instrument pursuant to ASC 815-15-25-17A – Derivatives and Hedging, which states in part that “the nature of the host contract depends on the economic characteristics and risks of the entire hybrid financial instrument.” All of the contractual and implied terms of the preferred share, such as the existence of a redemption feature or conversion option, should be considered when determining the nature of the host instrument as debt or equity. The Series E Preferred Stock embedded conversion feature (call option) is considered clearly and closely related to the equity host. Accordingly, further analysis under ASC 815-40-15 is not necessary and the embedded conversion feature should not be bifurcated from the host instrument. The Series E Preferred Stock redemption feature (put option) does not meet all the criteria under ASC 815-10-15-83, therefore it does not qualify as a derivative.
To
determine whether the Series E Preferred Stock contains a BCF, we compared the effective conversion price and the Company’s stock
price on the commitment date. The effective conversion price was calculated by dividing the proceeds from Series E Preferred Stock by
the number of common shares issuable upon conversion of the Series E Preferred Stock. The BCF is measured as the difference between the
commitment date stock price and the effective conversion price multiplied by the number of common stock issuable upon conversion of Series
E. The BCF is limited to the total cash proceeds received if the amount of the BCF exceeds the cash proceeds received. In connection
with the issuance of Series E Preferred Stock, during the year ended September 30, 2020, the Company recognized a beneficial conversion
feature in the amount of $
During
the year ended September 30, 2021, the issuance of Series F Preferred Stock triggered the price protection clause in the Series E Preferred
Stock. Thus, the conversion price of the Series E Preferred Stock was reduced from $
On
November 29, 2022, the Company entered into Securities Exchange Agreements with related party preferred stockholders, whereby related party holders of shares of Series E preferred stock
with a stated value of $
| 34 |
THERALINK TECHNOLOGIES, INC.
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(UNAUDITED)
During
the three months ended December 31, 2022 and 2021, the Company incurred $
As of December 31, 2022 and September 30, 2022, the Company had and shares of Series E Preferred Stock issued and outstanding classified as temporary equity in the accompanying unaudited balance sheets, respectively.
Series F Preferred Stock
On July 30, 2021, the Company filed a Certificate of Designation, Preferences and Rights of Series F Preferred Stock (the “Series F Certificate of Designation”), with the Nevada Secretary of State to designate shares of its previously authorized preferred stock as Series F Preferred Stock, par value $ per share and a stated value of $ per share. The Series F Certificate of Designation and its filing were approved by the Company’s Board of Directors without stockholder approval as provided for in the Company’s Articles of Incorporation and under Nevada law. The holders of shares of Series F Preferred Stock have the following preferences and rights:
| ● | From
the Initial Issuance Date, cumulative dividends on each share of Series F shall accrue, on a monthly basis in arrears (with any partial
month being made on a pro-rata basis), at the rate of | |
| ● | Holders of shares of Series F Preferred Stock are entitled to dividends or distributions on each share on an “as converted” into common stock basis, if, as and when declared from time to time by the Board of Directors. | |
| ● | ||
| ● |
| ● | In the event the Company issues or sells any securities including options or convertible securities, except for any Exempt Issuance (as defined in the Series F Certificate of Designation), at a price, an exercise price or conversion price of less than the conversion price, then upon such issuance or sale, the Series F Preferred Stock conversion price shall be reduced to the sale price, or the exercise price or conversion price of the securities sold. | |
| ● | Series F Preferred Stock shall rank pari passu with respect to the preferences as to dividends, distributions and payments upon the liquidation, dissolution and winding up of the Company with the Series C-1 Preferred Stock of the Company, the Series C-2 Preferred Stock of the Company, and the Series E Preferred Stock of the Corporation (the “Parity Stock”), and all other shares of capital stock of the Company shall be junior in rank to all Series F shares with respect to the preferences as to dividends (except for the common stock, which shall be pari passu as provided in the Series F Certificate of Designation), distributions and payments upon the liquidation, dissolution and winding up of the Company (such junior stock is referred to herein collectively as “Junior Stock”). The rights of all such Junior Stock shall be subject to the rights, powers, preferences and privileges of the Series F Preferred Stock. Without limiting any other provision of the Series F Certificate of Designation, without the prior express consent of the Required Holder, the Company shall not hereafter authorize or issue any additional or other shares of capital stock that is (i) of senior rank to the Series F Preferred Stock in respect of the preferences as to dividends, distributions and payments upon the liquidation, dissolution and winding up of the Company (collectively, the “Senior Preferred Stock”), or (ii) Parity Stock. Except as provided for in the Certificate of Designation, in the event of the merger or consolidation of the Company into another corporation, the Series F Preferred Stock shall maintain their relative rights, powers, designations, privileges and preferences provided for in the Certificate of Designation for a period of at least two years following such merger or consolidation and no such merger or consolidation shall cause result inconsistent therewith. |
| 35 |
THERALINK TECHNOLOGIES, INC.
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(UNAUDITED)
On
July 30, 2021, the Company entered into a Securities Purchase Agreement (the “SPA”) with an affiliated investor, who is a
beneficial shareholder, to purchase an aggregate amount of shares of Series F Convertible Preferred Stock (the “Series F Preferred”)
with accompanying warrant for of common stock (the “Warrant”), for total proceeds of $
In
accordance with ASC 470 – Debt, the proceeds of $
Pursuant to the Series F Certificate of Designation, Series F Preferred Stock is redeemable at the option of the holder in the event that the Company is prohibited from issuing shares of common stock to a holder upon any conversion due to insufficient shares of common stock available (“Authorized Failure Shares”) and therefore meets the criteria of a contingently redeemable instrument in accordance with ASC 480-10-25-7 – Distinguishing Liabilities from Equity. The Series F Preferred Stock is contingently redeemable upon the occurrence of an event that is outside of the issuer’s control and should be classified as temporary equity pursuant to ASC 480-10-S99. Further the Series F Preferred Stock is an equity host instrument since it has more features that align with an equity instrument than a debt instrument pursuant to ASC 815-15-25-17A – Derivatives and Hedging, which states in part that “the nature of the host contract depends on the economic characteristics and risks of the entire hybrid financial instrument.” All of the contractual and implied terms of the preferred share, such as the existence of a redemption feature or conversion option, should be considered when determining the nature of the host instrument as debt or equity. The Series F Preferred Stock embedded conversion feature (call option) is considered clearly and closely related to the equity host. Accordingly, further analysis under ASC 815-40-15 is not necessary and the embedded conversion feature should not be bifurcated from the host instrument. The Series F Preferred Stock redemption feature (put option) does not meet all the criteria under ASC 815-10-15-83, therefore it does not qualify as a derivative.
To
determine whether the Series F Preferred Stock contains a BCF, we compared the effective conversion price and the Company’s stock
price on the commitment date. The effective conversion price was calculated by dividing the proceeds from Series F Preferred Stock by
the number of common shares issuable upon conversion of the Series F Preferred Stock. The BCF is measured as the difference between the
commitment date stock price and the effective conversion price multiplied by the number of common stock issuable upon conversion of Series
F. The BCF is limited to the total cash proceeds received if the amount of the BCF exceeds the cash proceeds received. In connection
with the issuance of Series F Preferred Stock, during the year ended September 30, 2021, the Company recognized a BCF in the amount of
$
The
relative fair value of the warrant of $
On
November 29, 2022, the Company entered into Securities Exchange Agreements with related party preferred stockholders, whereby
related party holders of
shares of Series F preferred stock with a stated value of $
| 36 |
THERALINK TECHNOLOGIES, INC.
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(UNAUDITED)
During
the three months ended December 31, 2022 and September 30, 2022, the Company also recorded dividends related to the Series F Preferred
Stock in the amount of $
As of December 31, 2022 and September 30, 2022, the Company had and shares of Series F Preferred Stock issued and outstanding classified as temporary equity in the accompanying unaudited balance sheets, respectively.
Stock Options
On April 28, 2020, the Board approved the 2020 Equity Incentive Plan (“2020 Plan”), as amended on May 29, 2020. On April 18, 2022, the Board terminated the 2020 Plan and any shares reserved thereunder are no longer subject to reservation and the Company had no options issued and outstanding under the 2020 Plan.
On April 18, 2022, the Company’s Board and the shareholders approved the 2022 Equity Incentive Plan (“2022 Plan”) at which time the plan became effective. Upon the effective date of the 2022 Plan, shares of the Company’s common stock were reserved for issuance under the 2022 Plan (“Reserved Share Amount”), subject to the adjustments described in the 2022 Plan, and such Reserved Share Amount, when issued in accordance with the 2022 Plan, shall be validly issued, fully paid, and non-assessable. Pursuant to the 2022 Plan, the option price of each incentive stock option (except those that constitute substitute awards) shall be at least the fair market value of a share on the grant date; provided, however, that in the event that a grantee is a ten percent stockholder as of the grant date, the option price of an incentive stock option shall be not less than % of the fair market value of a share on the grant date, in no case shall the option price of any option be less than the par value of a share.
On May 26, 2022, the Company’s Board of Directors (“Board”) approved the future granting of stock options under the 2022 Equity Incentive Plan, to various employees and consultants. On August 16, 2022, the Company granted stock options to purchase common shares of the Company to various employees and consultants with an exercise price of $ per share. The options expire on August 15, 2032 and vest over varying vesting terms through August 2026. The fair value of these option grants was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: dividend yield of %; expected volatility of %; risk-free interest rate of %; and an estimated holding period of 10 years. The Company valued these stock option at a fair value of $ and will record stock-based compensation expense over the vesting periods.
During the three months ended December 31, 2022, in connection with the accretion of stock-based option expense over the vesting period, the Company recorded stock option expense of $. As of December 31, 2022, there were options outstanding and options vested, subject to the filing of a registration on Form S-8 for the registration of the shares underlying such options. As of December 31, 2022, there was $ of unvested stock-based compensation expense to be recognized through August 2026. The aggregate intrinsic value on December 31, 2022 was $ and was calculated based on the difference between the quoted share price on December 31, 2022 of $ and the exercise price of the underlying options.
| Number
of Options | Weighted Average Exercise Price | Weighted
Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
| Balance Outstanding September 30, 2022 | $ | $ | ||||||||||||||
| Granted | - | |||||||||||||||
| Balance Outstanding December 31, 2022 | $ | $ | ||||||||||||||
| Exercisable, December 31, 2022 | (a) | $ | $ | |||||||||||||
| Balance Non-vested on September 30, 2022 | $ | $ | ||||||||||||||
| Granted | - | - | ||||||||||||||
| Vested during the period | ( | ) | - | - | ||||||||||||
| Balance Non-vested on December 31, 2022 | $ | $ | ||||||||||||||
| (a) |
| 37 |
THERALINK TECHNOLOGIES, INC.
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(UNAUDITED)
Warrants
Legacy Warrants
On
May 12, 2021, in connection with the issuance of a convertible note, the Company issued a Warrant to purchase up to
On
July 30, 2021, the Company, in connection with the issuance of shares of Series F preferred stock, issued a Warrant to purchase up
to
On
November 1, 2021, the Company issued the First November 2021 Warrants to purchase an aggregate of
On
November 1, 2021, the Company issued the Second November 2021 Warrants to purchase an aggregate of
On
November 1, 2021, the Company issued the Third November 2021 Warrants to purchase an aggregate of
On
January 26, 2022, the Company, upon the approval of the First November 2021 Investor, amended the First November 2021 SPA whereby the
Company issued additional cashless-exercisable warrants to purchase
On
January 26, 2022, the Company, upon the approval of the Second November 2021 Investor, amended the Second November 2021 SPA whereby the
Company issued additional cashless-exercisable warrants to purchase
On
January 26, 2022, the Company, upon the approval of the Third November 2021 Investor, amended the Third November 2021 SPA whereby the
Company issued additional cashless-exercisable warrants to purchase
On
January 27, 2022, the Company issued the First January 2022 Warrants to purchase an aggregate of
| 38 |
THERALINK TECHNOLOGIES, INC.
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(UNAUDITED)
On
January 31, 2022, the Company issued the Second January 2022 Warrants to purchase an aggregate of
On
January 31, 2022, the Company issued to two consultants an aggregate of warrants as a placement fee in connection with the
First January 2022 Note and Second January 2022 Note (collectively as “January 2022 Notes”) (see Note 6). These warrants
are exercisable at a price equal to $
On
April 5, 2022, the Company issued the First April 2022 Warrants to purchase
During
April 2022, the Company issued the Second April 2022 Warrants to purchase an aggregate of
On
May 9, 2022, the Company issued the May 2022 Warrants to purchase an aggregate of
On
June 15, 2022, the Company issued the June 2022 Warrants to purchase
On
July 1, 2022, the Company issued the July 2022 Warrants to purchase an aggregate of
On
November 29, 2022, in connection with the Share Exchange Agreements and New Convertible Debt discussed below, the May 2021 Warrants,
First November 2021 Warrants, First April 2022 Warrants, May 2022 Warrants, and June 2022 Warrants, aggregating
On
November 29, 2022, in connection with the Share Exchange Agreements and New Convertible Debentures discussed in Note 6, the Second November
2021 Warrants, Third November 2021 Warrants, January 2022 Warrants, Second January 2022 Warrants, Second April 2022 Warrants, and the
July 2022 Warrants, aggregating
| 39 |
THERALINK TECHNOLOGIES, INC.
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(UNAUDITED)
New Warrants
In
connection with the Securities Exchange Agreements with related parties for the exchange of the convertible notes and preferred shares
for the New Related Party Debentures, as discussed in Note 6, the Company issued an aggregate of warrants. The Warrants
are exercisable for five years and six months from the earlier of the maturity date of the New Related Party Debentures and the closing
of the Qualified Financing, at an exercise price equal to (i)
In
connection with the Securities Exchange Agreements with investors for the exchange of the convertible notes and preferred shares for
the New Debentures, as discussed in Note 6, the Company issued an aggregate of warrants to investors. The Warrants are
exercisable for five years and six months from the earlier of the maturity date of the New Debentures and the closing of the Qualified
Financing, at an exercise price equal to (i)
In
connection with the Initial Closing of the private placement, the Company and Gunnar, entered into the Placement Agency Agreement, pursuant to which Gunnar agreed to act as the Placement Agent. Pursuant to the terms of the Placement Agency Agreement, Gunner received
Warrants activities for the three months ended December 31, 2022 is summarized as follows:
| Weighted | Weighted Average Remaining | |||||||||||||||
| Average | Contractual | Aggregate | ||||||||||||||
| Number of | Exercise | Term | Intrinsic | |||||||||||||
| Warrants | Price | (Years) | Value | |||||||||||||
| Balance Outstanding on September 30, 2022 | $ | $ | ||||||||||||||
| Issued in connection with a New Related Party Debentures (see Note 6) | ||||||||||||||||
| Issued in connection with a New Debentures (see Note 6) | ||||||||||||||||
| Issued to placement agent and consultant in connection with New Related Party and New Debentures (see Note 6) | ||||||||||||||||
| Balance Outstanding on December 31, 2022 | $ | $ | ||||||||||||||
| Exercisable on December 31, 2022 | $ | $ | ||||||||||||||
| 40 |
THERALINK TECHNOLOGIES, INC.
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(UNAUDITED)
NOTE 10 – COMMITMENTS AND CONTINGENCIES
Employment Agreements
Michael Ruxin, M.D.
On June 5, 2020, the Company and Dr. Michael Ruxin entered into an employment agreement (the “Ruxin Employment Agreement”) for Dr. Ruxin to serve as the Company’s Chief Executive Officer, President and a director.
The
Ruxin Employment Agreement provides that Dr. Ruxin will be employed for a five-year term commencing on June 5, 2020. The term will be
automatically extended for one additional year upon the fifth anniversary of the effective date without any affirmative action, unless
either party to the agreement provides at least sixty (60) days’ advance written notice to the other party that the employment
period will not be extended. Dr. Ruxin will be entitled to receive an annual base salary of $
Dr. Ruxin is an “at-will” employee and his employment may be terminated by the Company at any time, with or without cause. In the event Dr. Ruxin’s employment is terminated by the Company without Cause (as defined in the Ruxin Employment Agreement), with Good Reason (as defined in the Ruxin Employment Agreement) or as a result of a non-renewal of the term of employment under the Ruxin Employment Agreement, Dr. Ruxin shall be entitled to receive the sum of (I) the Severance Multiple (as defined below), multiplied by his base salary immediately prior to such termination and (II) a pro-rata portion of his bonus for the year in which such termination occurs equal to (a) his bonus for the most recently completed calendar year (if any), multiplied by (b) a fraction, the numerator of which is the number of days that have elapsed from the beginning of such calendar year through the date of termination and the denominator of which is the total number of days in such calendar year. “Severance Multiple” shall mean 3.0; provided, however, that if the date of termination occurs on or at any time during the twelve (12)-month period following a Change in Control, the Severance Multiple shall mean 4.0. In addition, the Company shall accelerate the vesting of any outstanding, unvested equity awards granted to Dr. Ruxin prior to the date of termination. Dr. Ruxin shall be entitled to reimbursement of any COBRA payment made during the 18-month period following the date of termination.
The Ruxin Employment Agreement also contains covenants (a) restricting the executive from engaging in any activity competitive with our business during the term of the employment agreement and in the event of termination, for a period of one year thereafter, (b) prohibiting the executive from disclosing confidential information regarding the Company, and (c) soliciting employees, customers and prospective customers during the term of the employment agreement and for a period of one year thereafter.
Jeffrey Busch
On June 5, 2020, the Company and Jeffrey Busch entered into an employment agreement (the “Busch Employment Agreement”) for Mr. Busch to serve as the Company’s Chairman of the Company and in such other positions as may be assigned from time to time by the board of directors.
The
Busch Employment Agreement provides that Mr. Busch will be employed for a five-year term commencing on June 5, 2020. The term will be
automatically extended for one additional year upon the fifth anniversary of the effective date without any affirmative action, unless
either party to the agreement provides at least sixty (60) days’ advance written notice to the other party that the employment
period will not be extended. Mr. Busch will be entitled to receive an annual base salary of $
| 41 |
THERALINK TECHNOLOGIES, INC.
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(UNAUDITED)
Mr. Busch is an “at-will” employee and his employment may be terminated by the Company at any time, with or without cause. In the event Mr. Busch’s employment is terminated by the Company without Cause (as defined in the Busch Employment Agreement), with Good Reason (as defined in the Busch Employment Agreement) or as a result of a non-renewal of the term of employment under the Busch Employment Agreement, Mr. Busch shall be entitled to receive the sum of (I) the Severance Multiple (as defined below), multiplied by his base salary immediately prior to such termination and (II) a pro-rata portion of his bonus for the year in which such termination occurs equal to (a) his bonus for the most recently completed calendar year (if any), multiplied by (b) a fraction, the numerator of which is the number of days that have elapsed from the beginning of such calendar year through the date of termination and the denominator of which is the total number of days in such calendar year. “Severance Multiple” shall mean 3.0; provided, however, that if the date of termination occurs on or at any time during the twelve (12)-month period following a Change in Control, the Severance Multiple shall mean 4.0. In addition, the Company shall accelerate the vesting of any outstanding, unvested equity awards granted to Mr. Busch prior to the date of termination.
The Busch Employment Agreement also contains covenants (a) restricting the executive from engaging in any activity competitive with our business during the term of the employment agreement and in the event of termination, for a period of one year thereafter, (b) prohibiting the executive from disclosing confidential information regarding the Company, and (c) soliciting employees, customers and prospective customers during the term of the employment agreement and for a period of one year thereafter.
Thomas E. Chilcott, III
On
September 24, 2020, the Company appointed Thomas E. Chilcott, III, to serve as the Chief Financial Officer. The Company entered into
an offer letter with Mr. Chilcott which provides that his base salary will be $
On
December 31, 2021, the Company’s Board approved an increase in the base salary of Thomas E. Chilcott, III, the Company’s
Chief Financial Officer, from $
Faith Zaslavsky
On
December 5, 2022, the Company appointed Faith Zaslavsky, age 48, as President and Chief Operating Officer of the Company, effective December
5, 2022 (the “Effective Date”). In connection with her appointment, on December 5, 2022, the Company and Ms. Zaslavsky entered
into an offer letter (the “Offer Letter”) which provides that Ms. Zaslavsky’s base salary will be $
Consulting Agreements
On
July 5, 2020, the Company and a consultant entered into a Scientific Advisory Board Service Agreement (“Scientific Advisory Agreement”)
which provides for; (i) $
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THERALINK TECHNOLOGIES, INC.
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(UNAUDITED)
On
July 5, 2020, the Company and a consultant entered into a Pathology Advisory Board Service Agreement (the “Pathology Advisory Agreement”)
which provides for; (i) $
Effective
January 1, 2021, the Company entered into a consulting agreement with Mr. Kucharchuk, a member of the Board of Directors, to serve as
a strategic advisor. The agreement was effective for a period of twelve months, commencing on January 1, 2021 and shall renew on a month-to
month basis, subject to the right of the Company and Mr. Kucharchuk to terminate the agreement pursuant to the agreement. Pursuant to
the agreement, Mr. Kucharchuk shall be paid $
License Agreements
GMU License Agreement
In
September 2006, the Company entered into an exclusive license agreement with George Mason Intellectual Properties (“GMU License
Agreement”), a non-profit corporation formed for the benefit of George Mason University (“GMU”) which: (1) grants an
exclusive worldwide license, with the right to grant sublicenses, under the licensed inventions to make, have made, import, use, market,
offer for sale and sell products designed, manufactured, used and/or marketed for all fields and for all uses, subject to the exclusions
as defined in the GMU License Agreement; (2) grants an exclusive option to license past, existing, or future inventions in the Company’s
field, from inventors that are obligated to assign to GMU and who have signed a memorandum of understanding acknowledging that developed
intellectual property will be offered, subject to the exclusions as defined in the GMU License Agreement; (3) the license and option
granted specifically excludes biomarkers for lung, ovarian, and breast cancers in a diagnostic field of use and GMU inventions developed
using materials obtained from third parties under agreements granting rights to inventions made using said materials and; (4) grants
right to assign or otherwise transfer the license so long as such assignment or transfer is accompanied by a change of control transaction
and GMU is given 14 days’ prior notice. In addition, the Company is required to make an annual payment of $
NIH License Agreement
In
March 2018, the Company entered into two license agreements (“NIH License Agreements”) with the National Institutes of Health
(“NIH”) which grants the Company an exclusive and a nonexclusive United States license for certain patents. Pursuant to the
NIH License Agreements, the Company is required to make an annual payment of $
Lease
On
June 10, 2021, the Company entered into an amendment to its existing Warehouse Lease (“Lease Amendment”), effective October
3, 2021, for its laboratory facility in Golden, CO (see Note 7). The Lease Amendment provided for: (i) an extension to the term of the
original lease to five years following the completion of the Company’s improvements to the Expansion Premises (defined below);
(ii) an expansion of the premises to include the premises located at Unit 404, Building F, 15000 West 6th Avenue, Golden,
Colorado 80401, consisting of approximately
| 43 |
THERALINK TECHNOLOGIES, INC.
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(UNAUDITED)
Pursuant
to the Lease Amendment,
Other Contingencies
Pursuant
to ASC 450-20 – Loss Contingencies, liabilities for contingencies arising from claims, assessments, litigation, fines and
penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can
be reasonably estimated. As of December 31, 2022 and September 30, 2022, the Company has recorded a contingent liability of $
Legal Action
On
December 10, 2021, YPH LLC filed a complaint against the Company in the District Court for the Southern District of New York alleging
that Theralink breached its Certificate of Designation for Series C-1 Convertible Preferred Stock by failing to honor a conversion notice
submitted to it by YPH. Based on these and other allegations, Plaintiff asserted a breach of contract claim claiming that it has damages
in excess of $
On August 16, 2022, Erika Singleton filed a complaint against the Company in the Eighth Judicial District Court, Clark County, Nevada, Case No. A-22-857038-C. Plaintiff alleges that the Company did not provide her with physical stock certificates for shares of common stock Plaintiff purchased for $ in 2017. Based on these and other allegations, Plaintiff asserts claims against the Company for breach of contract, violation of Florida securities law, fraud, and unjust enrichment. The court has set the hearing on our motion to dismiss for March 23, 2022. The Plaintiff has until March 2, 2023 to file her opposition to our motion to dismiss and we will then have until March 16, 2023 to file our reply.
NOTE 11 – SUBSEQUENT EVENTS
On
January 27, 2023, the Company consummated the second closing (the “Second Closing”) of the Offering pursuant to the terms
and conditions of that certain Purchase Agreement, dated as of November 29, 2022, by and among the Company, certain accredited investors
(the “Second Closing Purchasers”) and Cavalry Fund I Management LLC, a Delaware limited liability company, in its capacity
as Collateral Agent. At the Second Closing, the Company sold the Purchasers (i) New Debentures in an aggregate principal amount
of $
The Purchase Agreement contains customary representations, warranties, and covenants of the Company, including, among other things and subject to certain exceptions, covenants that restrict the ability of the Company without the prior written consent of the Debenture holders, to incur additional indebtedness, and repay outstanding indebtedness, create or permit liens on assets, redeem its Common Stock, settle outstanding litigation, or enter into transactions with affiliates.
| 44 |
THERALINK TECHNOLOGIES, INC.
CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(UNAUDITED)
The
New Debentures mature on
The Company’s obligations under the Purchase Agreement and the New Debentures are secured by a first priority lien on all of the assets of the Company pursuant to that certain Security Agreement, dated November 29, 2022 (the “Security Agreement”) by and among the Company, the Purchasers and the Collateral Agent.
In connection with the issuance of the Underlying Securities discussed above, the Company determined that the terms of the Debentures and Warrants contain an embedded conversion option to be accounted for as derivative liabilities due to the holder having the potential to gain value upon conversion and provisions which includes events not within the control of the Company. In accordance with ASC 815-40 -Derivatives and Hedging - Contracts in an Entity’s Own Stock, the embedded conversion option contained in the Debentures and the Warrants shall be accounted for as derivative liabilities at the date of issuance and shall be adjusted to fair value through earnings at each reporting date. The fair value of the embedded conversion options will be determined using the Binomial Lattice valuation model. At the end of each period and on Debenture conversion date or repayment, the Company revalues the derivative liabilities resulting from the embedded option.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with our historical financial statements. The following discussion and analysis contain forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. For additional information regarding these risks and uncertainties, please see Part II, Item 1A of this Quarterly Report on Form 10-Q, “Risk Factors,” and the risk factors included in our September 30, 2022, Annual Report on Form 10-K.
Overview
The Company is a commercial-stage, precision medicine, molecular data-generating company that focuses on the development and commercialization of a series of proprietary data-generating assays that may provide important actionable information for physicians, patients and biopharmaceutical companies, in the area of oncology. The Company’s objective is to commercialize the technology originally developed by Theranostics Health, Inc. This technology is differentiated due to:
| ● | An exclusive license agreement with George Mason University (“GMU”). | |
| ● | A patent portfolio licensed from GMU and the National Institute of Health (“NIH”). | |
| ● | Access to GMU’s well-published subject matter experts and their pioneering work in phosphoproteomic-based biomarker diagnostics. | |
| ● | Expertise in cancer biomarker and data-generating laboratory testing data. | |
| ● | Development of proprietary, cutting-edge assays focused on precision oncology care. | |
| ● | Building revenue streams based on our proprietary technology. |
Theralink is advancing proprietary technology in the field of phosphoproteomic research, a sector which has emerged as one of the most exciting new components in the high-growth field of precision molecular diagnostics. This technology is intended to make it possible to generate an accurate and comprehensive portrait of protein pathway activation in diseased cells from each patient, which may enable providers to identify and match individuals with optimal targeted molecular therapies. This technology enables the quantitative measurement of the active protein(s) in cancer cells and their level of activation. We believe the technology’s measurement sensitivity is many times greater than conventional mass spectrometry and other protein immunoassays. Initially spun-out from GMU in 2006, and subsequently elevated to the federal government’s Center for Medicare & Medicaid Services’ (“CMS”) and Clinical Laboratory Improvement Amendments (“CLIA”) standards, Theralink’s assay may prove highly useful for oncology patient management by improving (i) chemotherapy drug selection; (ii) immunotherapy drug selection; and (iii) optimizing combination therapy selection.
The biomarker and data-generating tests provide biopharmaceutical companies, clinical scientists and physicians with molecular-based guidance as to which patients may benefit from new molecular targeted therapeutics being developed for use in treating various life-threatening oncology diseases. These tests may also provide guidance to physicians on existing treatment standards that are recognized as the standard of care in the oncology treatment community. This addresses the core aspect of precision oncology treatment by identifying which individuals are more likely to respond to specific targeted molecular therapies, thus forming the basis for personalized medicine.
The technology is based upon the pioneering work of three noted scientists, Drs. Lance Liotta, Emanuel Petricoin and Virginia Espina, in proteomic-based precision medicine. Theralink benefits from a portfolio of intellectual property derived from licensing agreements with:
| ● | The US Public Health Service (“PHS”), the federal agency that supervises the National Institutes of Health (“NIH”), which provides the Company with broad protection around its technology platform; and | |
| ● | GMU, which provides access to additional intellectual property around improvements to the technology platform and biomarker signatures that form the basis for future phosphoproteomics products. |
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Theralink is committed to advancing the technology from GMU and the NIH as a platform for the development of new clinical biomarkers. These biomarkers and monitoring products may have the ability to provide biopharmaceutical companies and doctors with critical molecular-based knowledge to potentially make the best therapeutic decisions based on a patient’s unique, individual medical needs.
Our plan of operation over the next 12 months is to:
| ● | Hiring additional lab techs and sales consultants; | |
| ● | Choosing members to sit on our Clinical and Scientific Advisory Boards; |
| ● | Continuing to validate additional Theralink cancer biomarker technology under CAP/CLIA standards for a pan tumor assay to provide personalized medicine regarding treatment options for biopharmaceutical companies, clinical oncologists and their cancer patients; | |
| ● | Continuing to partner with pharmaceutical companies to perform oncology-related data-generating testing services which may generate additional revenues and | |
| ● | Continuing to seek financing to grow the Company. |
Appointment of New Directors and Officers
On April 1, 2022, the Board of Directors (“Board”) of the Company, voted to appoint Danica Holley and Matthew M. Schwartz, M.D. to serve as members of the Board, effective April 4, 2022. Ms. Holley and Dr. Schwartz will serve as members of the Board until the next annual meeting of shareholders of the Company or until his or her resignation or removal and otherwise until his or her successor is elected. The Board determined that Ms. Holley and Dr. Schwartz each meet the independence standards of the NASDAQ Stock Market Rules and the applicable rules of the SEC.
On December 5, 2022, we appointed Faith Zaslavsky as President and Chief Operating Officer of the Company. Prior to joining the Company, Ms. Zaslavsky served as the President of Oncology of Myriad Genetics, Inc. Ms. Zaslavsky served Myriad in several roles for the past 22 years, and prior to serving as Myriad’s President of Oncology, Ms. Zaslavsky served as Myriad’s National Sales Director of Oncology from 2017 to 2019 and a Regional Sales Director of Women’s Health from 2015 to 2017.
Results of Operations
Comparison for the Three Months Ended December 31, 2022 and 2021
Revenue
| ● | During the three months ended December 31, 2022 and 2021, we generated revenues of $55,295 and $78,975, respectively, a decrease of $23,680, or 30%. The decrease was primarily attributable to a decrease in services performed under research and development contracts for pharmaceutical companies. |
Costs of Revenues
| ● | During the three months ended December 31, 2022 and 2021, we incurred cost of revenue of $10,818 and $43,565, respectively, a decrease of $32,747, or 75%. The decrease in the fiscal 2023 period cost of revenue as a percentage of revenue over the fiscal 2022 period was because in the fiscal 2022 period, the Company was required to purchase expensive third-party samples for certain pharmaceutical contracts. This increased cost significantly decreased the gross profit for the fiscal 2022 period. |
Gross Margin
| ● | For the three months ended December 31, 2022 and 2021, gross profit was $44,477 and $35,410, respectively, an increase of $9,067, or 26% which represents a gross margin of 80% in the fiscal 2023 period versus 45% in the fiscal 2022 period. The increase was primarily attributable to the decrease in revenue and decrease in cost of revenue discussed above. |
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Operating Expenses
For the three months ended December 31, 2022 and 2021, operating expenses consisted of the following:
For the Three Months Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Professional fees | $ | 387,438 | $ | 217,823 | ||||
| Compensation expense | 1,752,699 | 625,855 | ||||||
| Licensing fees | 31,637 | 36,092 | ||||||
| General and administrative expenses | 448,493 | 537,656 | ||||||
| Total | $ | 2,620,267 | $ | 1,417,426 | ||||
Professional fees:
| ● | For the three months ended December 31, 2022, professional fees increased by $169,615, or 78%, as compared to the three months ended December 31, 2021. The increase was primarily attributable to an increase in stock-based consulting fees of $64,946 related to accretion of stock option expense from the issuance of stock options to consultants in August 2022, an increase in legal fees of $31,073, an increase in accounting fees of $10,162, an increase in consulting fees of $54,129, and an increase in other professional fees of $9,305. |
Compensation expense:
| ● | For the three months ended December 31, 2022, compensation expense increased by $1,126,844, or 180%, as compared to the three months ended December 31, 2021. The increase was primarily attributable to an increase in stock-based compensation of $547,227 related to accretion of stock option expense from the issuance of stock options to employees in August 2022, and an increase in administrative compensation and related employee benefits and expenses resulting from additional employees being hired and a bonus paid to our CFO. |
Licensing fees:
| ● | For the three months ended December 31, 2022, licensing fees decreased by $4,455, or 12%, as compared to the three months ended December 31, 2021. Licensing fees are mainly for the lab software, the GMU license and state licenses. During 2022, the Company obtained licenses from numerous states to conduct business as a certified lab. The expanded national footprint is the driving force behind the fluctuations in licensing fees. |
General and administrative expenses:
| ● | For the three months ended December 31, 2022, general and administrative expenses decreased by $89,163, or 17%, as compared to the three months ended December 31, 2021. The decrease was primarily due to a decrease in laboratory and biological supplies expense of approximately $20,900 due to a decrease in breast cancer research and development, and a decrease in sample analysis services expense of approximately $113,295 due to the termination of our relationship with our service provider and bringing this function in-house. These decreases were offset by an increase in samples expense of $25,000 for research and development, an increase in travel expense of $13,979, and increases in other general and administrative expenses. |
Loss from Operations
For the three months ended December 31, 2022, loss from operations amounted to $2,575,790 as compared to $1,382,016 for the three months ended December 31, 2021, an increase of $1,193,774, or 86%. The increase was primarily a result of the increase in operating expenses discussed above.
Other Income (Expenses), net
For the three months ended December 31, 2022 and 2021, total other expenses, net amounted to $33,880,557 and $130,251, respectively, an increase of $33,750,306. The change was primarily due to an increase in interest expense of $1,713,534 resulting from additional debt incurred in 2023 and an increase in amortization of debt discount, an increase in unrealized loss on market securities of $7,400, an increase in loss on debt extinguishment of $5,434,447 resulting from the exchange of convertible notes and preferred stock to new debentures on November 29, 2022, an increase in settlement expense of $200,000, and an increase in derivative expense of $26,397,075 resulting from the treatment of the new debentures and warrants as derivative liabilities.
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Preferred Stock Dividend and Deemed Dividend
For the three months ended December 31, 2022, we recorded dividends for the Series E Preferred stock and Series F Preferred stock in the amount of $26,301 and $13,151, respectively, for a total of $39,452 of preferred stock dividends.
For the three months ended December 31, 2021, we recorded dividends for the Series E Preferred stock and Series F Preferred stock in the amount of $40,329 and $20,164, respectively, for a total of $60,493 of preferred stock dividends.
Net Loss Attributed to Common Stockholders
For the three months ended December 31, 2022, net loss attributed to common stockholders amounted to $36,495,799, or $(0.01) per share (basic and diluted) compared to net loss attributed to common stockholders of to $1,572,760, or $(0.00) per share (basic and diluted), for the three months ended December 31, 2021, an increase of $34,923,039. The increase was a result of the changes in operating expenses and other expenses, net discussed above.
Liquidity and Capital Resources
Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash requirements. We had a working capital deficit of $44,998,742 and $1,130,902 in cash as of December 31, 2022 and a working capital deficit of $2,808,736 and $393,460 in cash as of September 30, 2022.
December 31, 2022 | September 30, 2022 | Net Change | Percentage Change | |||||||||||||
| Working capital (deficit): | ||||||||||||||||
| Total current assets | $ | 1,378,620 | $ | 646,984 | $ | 731,636 | 113 | % | ||||||||
| Total current liabilities | (46,377,362 | ) | (3,455,720 | ) | (42,921,642 | ) | 1,242 | % | ||||||||
| Working capital (deficit): | $ | (44,998,742 | ) | $ | (2,808,736 | ) | $ | (42,190,006 | ) | 1,502 | % | |||||
The decrease in working capital deficit was primarily attributable to the increase in current liabilities of $42,921,642 primarily related to an increase in derivative liabilities (non-cash) offset by an increase in current assets of $731,636.
Cash Flows
The following table sets forth a summary of changes in cash flows for the three months ended December 31 2022 and 2021:
Three Months Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash used in operating activities | $ | (1,776,349 | ) | $ | (1,494,792 | ) | ||
| Cash used in investing activities | (7,980 | ) | - | |||||
| Cash provided by financing activities | 2,521,771 | 1,595,623 | ||||||
| Net change in cash | $ | 737,442 | $ | 100,831 | ||||
Net Cash Used in Operating Activities:
Net cash used in operating activities was $1,776,349 for the three months ended December 31, 2022 as compared to $1,494,792 for the three months ended December 31, 2021, an increase of $281,557, or 19%.
| ● | Net cash used in operating activities for the three months ended December 31, 2022 primarily reflected our net loss of $36,456,347 adjusted for the add-back of non-cash items such as depreciation expense of $50,479, non-cash lease cost of $6,514, accretion of stock options expense of $612,173, amortization of debt discount of $1,602,646, loss on debt extinguishment of $5,434,447, non-cash settlement expense of $200,000, and derivative expense of $26,397,075, and changes in operating assets and liabilities consisting primarily of an increase in accounts receivable of $16,170, a decrease in prepaid expenses and other current assets of $19,976, a decrease in accounts payable of $65,788, an increase in accrued liabilities and other liabilities of $416,146, and an increase in contract liabilities of $20,500. | |
| ● | Net cash used in operating activities for the three months ended December 31, 2021 primarily reflected our net loss of $1,512,267 adjusted for the add-back of non-cash items such as depreciation expense of $47,557, non-cash lease cost of $7,379, amortization of debt discount of $92,019, gain on operating lease modification of $8,229, unrealized gain on marketable securities of $5,400 and changes in operating asset and liabilities consisting primarily of an increase in accounts receivable of $49,725, an increase in prepaid expenses and other current assets of $25,318, an increase in accrued liabilities and other liabilities of $28,484, and an increase in deferred revenue of $20,750 offset by a decrease in laboratory supplies of $49,356 and a decrease in accounts payable of $139,398. |
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Net Cash Used in Investing Activities
Net cash used in investing activities was $7,980 for the three months ended December 31, 2022 as compared to net cash used in investing activities of $0 for the three months ended December 31, 2021, an increase of $7,980, or 100%.
| ● | Net cash used in investing activities for the three months ended December 31, 2022, resulted from the purchase of property and equipment of $7,980. |
Cash Provided by Financing Activities:
Net cash provided by financing activities was $2,521,771 for the three months ended December 31, 2022 as compared to $1,595,623 for the three months ended December 31, 2021, an increase of $926,148, or 58%.
| ● | Net cash provided by financing activities for the three months ended December 31, 2022 consisted of $416,562 of net proceeds from related party debentures, $2,118,088 of net proceeds from debentures, offset by repayment of $12,879 of financed leases. | |
| ● | Net cash provided by financing activities for the three months ended December 31, 2021 consisted of proceeds from convertible debt – related party of $667,000 and convertible debt of $1,000,000 offset by payments of accrued dividends payable of $59,988 and repayment of financed lease of $11,389. |
Cash Requirements
Our management does not believe that our current capital resources will be adequate to continue operating our Company and maintaining our business strategy for more than 12 months from the date of this report. Accordingly, we will have to raise additional capital in the near future to meet our working capital requirements. There can be no assurance that additional financing will be available to us when needed or, if available, that it can be obtained on commercially reasonable terms. If we are not able to obtain the additional financing on a timely basis, if and when it is needed, we will be forced to scale down or perhaps even cease the operation of our business.
Going Concern
These financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying unaudited financial statements, the Company had net loss and net cash used in operations of $36,456,347 and $1,776,349, respectively, for the three months ended December 31, 2022. Additionally, the Company had an accumulated deficit, stockholders’ deficit and working capital deficit of $99,303,616, $44,302,919 and $44,998,742 on December 31, 2022. Management believes that these matters raise substantial doubt about the Company’s ability to continue as a going concern for twelve months from the issuance date of this report.
The Company cannot provide assurance that it will ultimately achieve profitable operations or become cash flow positive or raise additional debt or equity capital. Additionally, the current capital resources are not adequate to continue operating and maintaining the business strategy for a period of twelve months from the issuance date of this report. The Company will seek to raise capital through additional debt and equity financings to fund its operations in the future.
Although the Company has historically raised capital from sales of equity and from the issuance of promissory notes, convertible notes and convertible debentures, there is no assurance that it will be able to continue to do so. If the Company is unable to raise additional capital or secure additional lending in the near future, management expects that the Company will need to curtail or cease operations. These financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Recent Financings
Convertible Debt – Related Parties
On November 1, 2021, the Company entered into the First November 2021 SPA with the First November 2021 Investor, an affiliate stockholder, to purchase the First November 2021 Notes and the First November 2021 Warrants, for an aggregate investment amount of $1,000,000. The Company received $1,000,000 in aggregate proceeds from the First November 2021 Notes. As of September 30, 2022, the First November 2021 Notes had an outstanding principal of $1,000,000 and accrued interest of $20,164. On November 29, 2022, the First November 2021 Notes were exchanged for a new convertible debenture (see below).
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On April 5, 2022, pursuant to the First April 2022 SPA, Matthew Schwartz, a member of the Board of Directors and a related party, purchased a convertible note with principal of $100,000 with accompanying First April 2022 Warrants to purchase 4,201,681 shares of common stock. The Company received net proceeds of $100,000 on March 24, 2022. As of September 30, 2022, the First April 2022 Note had an outstanding principal balance of $100,000 and accrued interest of $3,901. On November 29, 2022, the First April 2022 Note was exchanged for a new convertible debenture (see below).
On May 9, 2022, the Company entered into the May 2022 SPA with the May 2022 Investor, an affiliate stockholder, to purchase the May 2022 Notes and the May 2022 Warrants. The Company received $1,000,000 in aggregate proceeds from the May 2022 Notes. As of September 30, 2022, the May 2022 Notes had an aggregate outstanding principal balance of $1,000,000 and accrued interest of $20,110. On November 29, 2022, the May 2022 Note was exchanged for a new convertible debenture (see below).
On June 15, 2022, pursuant to the June 2022 SPA, Danica Holley, a member of the Board of Directors and a related party, purchased the June 2022 Note with a principal balance of $50,000 and accompanying June 2022 Warrants to purchase 2,100,840 shares of common stock. The Company received net proceeds of $50,000 on June 15, 2022. As of September 30, 2022, the June 2022 Note had an outstanding principal balance of $50,000 and accrued interest of $1,173. On November 29, 2022, the June 2022 Note was exchanged for a new convertible debenture (see below).
On July 29, 2022, the Company entered into a Demand Promissory Note Agreement with Jeffrey Busch who serves as a member of the Board of Directors and a related party, for a principal balance of $125,000, and on September 2, 2022, the Company entered into a second Demand Promissory Note Agreement with Jeffrey Busch for a principal balance of $150,000 (collectively referred to as called the “Busch Notes”). As of September 30, 2022, the Busch Notes had an outstanding principal balance of $275,000 and accrued interest of $2,683 and are included in the accompanying balance sheet as a short-term convertible note payable – related party. On November 29, 2022, the Busch Notes were exchanged for a new convertible debenture (see below).
On August 11, 2022, the Company entered into a Demand Promissory Note Agreement with a related party, who is an affiliate stockholder, for a principal balance of $375,000. As of September 30, 2022, this note had an outstanding principal balance of $375,000 and accrued interest of $4,110 and is included in the accompanying balance sheet as a short-term convertible note payable – related party. On November 29, 2022, this note was exchanged for a new convertible debenture (see below).
On September 2, 2022, the Company entered into a Demand Promissory Note Agreement with a related party, who is an affiliate stockholder, for a principal balance of $350,000. As of September 30, 2022, this note had an outstanding principal balance of $350,000 and accrued interest of $2,148 and is included in the accompanying balance sheet as a short-term convertible note payable – related party. On November 29, 2022, this note was exchanged for a new convertible debenture (see below).
On November 29, 2022, the Company consummated the Initial Closing of the Offering pursuant to the terms and conditions of the Purchase Agreement, by and among, the Company, the , by and among the Company, the Related Party Purchasers and the Collateral Agent. At the Initial Closing, the Company sold the related party Purchasers (i) the New Related Party Debentures and (ii) the New Related Party Warrants to purchase up to 157,142,857 shares of Common Stock, subject to adjustments provided by the Warrants, which represents 100% warrant coverage. The Company received a total of $412,092 in net proceeds at the Initial Offering from the Related Party Purchasers, net of the Original Issue Discount of $50,000, commissions of $58,200 and other offering costs of $29,708.
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On November 29, 2022, the Company entered into Securities Exchange Agreements, with the above related party investors, whereby the Exchanged Related Party Notes and accrued interest payable of $120,750 were exchanged for New Related Party Debentures. Additionally, on November 29, 2022, in order to induce the related party investors to exchange the respective convertible notes into the Related Party Debentures, the aggregate principal amount of the Exchanged Related Party Notes and accrued interest payable was increased by 15% (10% for the August 11, 2022 and September 2, 2022 Demand Promissory Notes), or $589,505, for new Related Party Debentures with an aggregate principal amount of $4,860,255.
On November 29, 2022, the Company entered into Securities Exchange Agreements, with related party preferred stockholders, whereby related party holders of 1,000 shares of Series E preferred stock with a stated value of $2,000,000 and accrued dividends payable of $66,630, and related party holders of 500 shares of Series F preferred stock with a stated value of $1,000,000 and accrued dividends payable of $33,315 were exchanged for the New Related Party Debentures. Additionally, on November 29, 2022, in order to induce the related party preferred stockholders to exchange their respective preferred shares into the New Related Party Debentures, the aggregate stated value and accrued dividends payable were increased by 15%, or $464,992, for new Related Party Debentures with an aggregate principal amount of $3,564,937.
The November 29, 2022 New Related Party Debentures mature on November 29, 2023, subject to a three-month extension at the sole discretion of the Company. The Related Party Debentures bear interest at 10% per annum payable upon conversion or maturity. The New Related Party Debentures are convertible into shares of the Company’s common stock at any time after the maturity date and prior to Mandatory Conversion (as defined below) at the conversion price equal to the lesser of: (i) $0.003 per share and (ii) 70% of the average of the VWAP (as defined in the Debentures) (or 50% of the average of such VWAP if an event of default has occurred and has not been cured) of the Common Stock during the ten Trading Day (as defined in the Debentures) period immediately prior to the applicable conversion date. The New Related Party Debentures are subject to Mandatory Conversion in the event the Company closes a Qualified Offering. The conversion price per share of Common Stock in the case of a Mandatory Conversion shall be the Qualified Offering Price. Alternatively, upon a Mandatory Conversion, the holders of the Debentures may elect to exchange their Debentures for newly issued convertible preferred securities at a price per share equal to the Qualified Offering Price or the five-day VWAP of the Common Stock prior to the date that is 181 days after the closing of the Qualified Offering.
Notwithstanding the preceding, holders of New Related Party Debentures shall have the right to require satisfaction of up to 40% of all amounts outstanding under the Debentures, in cash, at the time of a Qualified Financing. The New Related Party Debentures also contain certain price protection provisions providing for adjustment of the number of shares of Common Stock issuable upon conversion of the Debentures in case of certain future dilutive events or stock-splits and dividends.
The Company’s obligations under the New Related Party Debentures are secured by a first priority lien on all of the assets of the Company pursuant to the Security Agreement.
The Purchase Agreement contains customary representations, warranties, and covenants of the Company, including, among other things and subject to certain exceptions, covenants that restrict the ability of the Company without the prior written consent of the Debenture holders, to incur additional indebtedness, and repay outstanding indebtedness, create or permit liens on assets, redeem its Common Stock, settle outstanding litigation, or enter into transactions with affiliates.
If the Company or any Subsidiary shall default on any of its obligations under any mortgage credit agreement or other facility indenture agreement, factoring agreement or other instrument under which there may be issued, or by which there may be secured or evidenced, any indebtedness for borrowed money or money due under any long term leasing or factoring arrangement that (a) involves an obligation greater than $250,000, whether such indebtedness now exists or shall hereafter be created, and (b) results in such indebtedness becoming or being declared due and payable prior to the date on which it would otherwise become due and payable, the New Related Party Debenture shall be deemed in default and the default provisions shall apply.
Convertible Debt
On January 27, 2022, the Company entered into the First January 2022 SPA with the First January 2022 Investor to purchase the First January 2022 Note in the principal amount of $500,000 with the Company receiving $500,000 in proceeds and First January 2022 Warrants to purchase up to 136,612,022 shares of common stock. As of September 30, 2022, the First January 2022 Note had an outstanding principal balance of $500,000 and accrued interest of $26,959. On November 29, 2022, the First January 2022 Note was exchanged for a new convertible debenture (see below).
On January 31, 2022, the Company entered into the Second January 2022 SPA with the Second January 2022 Investor to purchase the Second January 2022 Note with principal balance of $500,000 with the Company receiving $500,000 in proceeds and the Second January 2022 Warrants to purchase up to 136,612,022 shares of common stock. As of September 30, 2022, the Second January 2022 Note had an outstanding principal balance of $500,000 and accrued interest of $26,520. On November 29, 2022, the Second January 2022 Note was exchanged for a new convertible debenture (see below).
During April 2022, pursuant to the Second April 2022 SPA various investors purchased convertible notes for an aggregate investment amount of $425,000 with the Company receiving $425,000 of proceeds with accompanying Second April 2022 Warrants to purchase up to an aggregate of 17,857,144 shares of common stock. As of September 30, 2022, the Second April 2022 Notes had an aggregate outstanding principal balance of $425,000 and accrued interest of $15,710. On November 29, 2022, the Second April 2022 Notes were exchanged for a new convertible debenture (see below).
On July 1, 2022, the Company entered into a Securities Purchase Agreement with the July 2022 Investor, to purchase the July 2022 Note for a principal amount of $50,000 with the Company receiving $50,000 of proceeds and the July 2022 Warrants to purchase 2,100,840 shares of common stock. As of September 30, 2022, the July 2022 Note had an outstanding principal balance of $50,000 and accrued interest of $953. On November 29, 2022, the July 2022 Note was exchanged for a new convertible debenture (see below).
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On October 22, 2022, the Company issued the “Settlement Note. In connection with issuance of the Settlement Note, the Company recorded settlement expense of $200,000. On November 29, 2022, the Settlement Note was exchanged for a new convertible debenture (see below).
On November 29, 2022, the Company consummated the Initial Closing of the Offering pursuant to the terms and conditions of the Purchase Agreement, by and among the Company, the Purchasers and the Collateral Agent. At the Initial Closing, the Company sold the Purchasers the Underlying Securities. The Company received a total of $2,095,288 in net proceeds at the Initial Offering, net of the Original Issue Discount of $255,000, commissions of $296,800 and other offering costs of $157,912.
The Purchase Agreement contains customary representations, warranties, and covenants of the Company, including, among other things and subject to certain exceptions, covenants that restrict the ability of the Company without the prior written consent of the Debenture holders, to incur additional indebtedness, and repay outstanding indebtedness, create or permit liens on assets, redeem its Common Stock, settle outstanding litigation, or enter into transactions with affiliates.
On November 29, 2022, the Company entered into Securities Exchange Agreements with the above investors, whereby the Exchanged Convertible Notes with an aggregate principal amount of $2,675,000 and accrued interest payable of $173,375 were exchanged for New Debentures. Additionally, on November 29, 2022, in order to induce the investors to exchange their respective convertible notes into the New Debentures, the aggregate principal amount and accrued interest payable was increased by 15%, or $427,256, for the New Debentures with an aggregate principal amount of $3,275,631.
On November 29, 2022, the Company entered into Securities Exchange Agreements with preferred stockholders, whereby holders of 902 shares of Series C-1 preferred stock with a stated value of $372,303, and holders of 3,037 shares of Series C-2 preferred stock with a stated value of $1,245,935 were exchanged for the New Debentures. Additionally, on November 29, 2022, in order to induce the preferred stockholders to exchange their respective preferred shares into the New Debentures, the aggregate stated value of the preferred shares was increased by 15%, or $242,736, for New Debentures with an aggregate principal amount of $1,860,974.
The New Debentures mature on November 29, 2023, subject to a three-month extension at the sole discretion of the Company. The New Debentures bear interest at 10% per annum payable upon conversion or maturity. The New Debentures are convertible into shares of Common Stock at any time after the maturity date and prior to Mandatory Conversion (as defined below) at the conversion price equal to the lesser of: (i) $0.003 per share and (ii) 70% of the average of the VWAP (as defined in the Debentures) (or 50% of the average of such VWAP if an event of default has occurred and has not been cured) of the Common Stock during the ten Trading Day (as defined in the Debentures) period immediately prior to the applicable conversion date. The New Debentures are subject to Mandatory Conversion in the event the Company closes a Qualified Offering. The conversion price per share of Common Stock in the case of a Mandatory Conversion shall be the Qualified Offering Price. Alternatively, upon a Mandatory Conversion, the holders of the New Debentures may elect to exchange their Debentures for newly issued convertible preferred securities at a price per share equal to the Qualified Offering Price or the five-day VWAP of the Common Stock prior to the date that is 181 days after the closing of the Qualified Offering.
Notwithstanding the preceding, holders of New Debentures shall have the right to require satisfaction of up to 40% of all amounts outstanding under the Debentures, in cash, at the time of a Qualified Financing. The New Debentures also contain certain price protection provisions providing for adjustment of the number of shares of Common Stock issuable upon conversion of the New Debentures in case of certain future dilutive events or stock-splits and dividends.
The Company’s obligations under the New Debentures are secured by a first priority lien on all of the assets of the Company pursuant to the Security Agreement.
If the Company or any Subsidiary shall default on any of its obligations under any mortgage credit agreement or other facility indenture agreement, factoring agreement or other instrument under which there may be issued, or by which there may be secured or evidenced, any indebtedness for borrowed money or money due under any long term leasing or factoring arrangement that (a) involves an obligation greater than $250,000, whether such indebtedness now exists or shall hereafter be created, and (b) results in such indebtedness becoming or being declared due and payable prior to the date on which it would otherwise become due and payable, the New Debenture shall be deemed in default and the default provisions shall apply.
The Company may hold one or more subsequent closings at any time prior to December 31, 2022, unless otherwise extended, to sell additional Underlying Securities in an aggregate principal amount up to $6,600,000, which may be adjusted upward to mean an aggregate principal amount of $8,000,000 upon written consent of the Company and the Placement Agent. The subsequent closing deadline was extended, and a subsequent raise was consummated on January 27, 2023 (See Note 11 in unaudited notes to financial statements).
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Note Payable - Related Party
On May 5, 2022, the Company and Jeffrey Busch amended the Original Note pursuant to which the principal amount was increased to $350,000 (“New Note”) with the Company receiving additional $250,000 of proceeds and added a conversion feature. The New Note bears an annual interest rate of 1% (which shall increase to 2% in an event of a default) and matures on May 5, 2024. The New Note may not be prepaid and is only convertible upon an occurrence of a public offering. The Conversion Amount of the New Note is convertible into shares of common stock at the price for which the common stock was sold in the public offering. Pursuant to ASC 470-50 - Debt Modifications and Exchanges; the amendment was accounted for as a debt extinguishment because the contingent conversion feature added to the New Note resulted in a substantial modification of the Original Note. No gain or loss was recognized in connection with the debt extinguishment. As of December 31, 2022, the New Note had an outstanding principal balance of $350,000, reflected as notes payable – related party in the accompanying unaudited balance sheet since the conditions for its contingent conversion has not yet been met, and accrued interest of $3,356.
Future Financings
We will require additional financing to fund our planned operations. We currently do not have committed sources of additional financing and may not be able to obtain additional financing particularly, if the volatile conditions of the stock and financial markets, and more particularly the market for early development stage company stocks persist.
There can be no assurance that additional financing will be available to us when needed or, if available, that it can be obtained on commercially reasonable terms. If we are not able to obtain the additional financing on a timely basis, if and when it is needed, we will be forced to further delay or further scale down some or all of our activities or perhaps even cease the operations of the business.
Since inception we have funded our operations primarily through equity and debt financings and we expect that we will continue to fund our operations through equity and debt financing, either alone or through strategic alliances. If we are able to raise additional financing by issuing equity securities, our existing stockholders’ ownership will be diluted. Obtaining commercial or other loans, assuming those loans would be available, will increase our liabilities and future cash commitments.
Critical Accounting Policies
We have identified the following policies as critical to our business and results of operations. Our reported results are impacted by the application of the following accounting policies, certain of which require management to make subjective or complex judgments. These judgments involve making estimates about the effect of matters that are inherently uncertain and may significantly impact quarterly or annual results of operations. For all of these policies, management cautions that future events rarely develop exactly as expected, and the best estimates routinely require adjustment. Specific risks associated with these critical accounting policies are described in the following paragraphs.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make judgments, assumptions, and estimates that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Management bases its estimates and assumptions on current facts, historical experience, and various other factors that it believes are reasonable under the circumstances, to determine the carrying values of assets and liabilities that are not readily apparent from other sources. Significant estimates during the periods ended December 31, 2022 and 2021 include, but are not necessarily limited to, estimates of contingent liabilities, valuation of marketable securities, useful life of property and equipment, valuation of ROU assets and lease liabilities, assumptions used in assessing impairment of long-lived assets, allowances for accounts receivable, estimates of current and deferred income taxes and deferred tax valuation allowances, the fair value of derivatives and the fair value of non-cash equity transactions.
Additionally, the full impact of COVID-19 is unknown and cannot be reasonably estimated. However, the Company has made appropriate accounting estimates based on the facts and circumstances available as of the reporting date. To the extent there are material differences between the Company’s estimates and the actual results, the Company’s future results of operation will be affected.
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Fair Value of Financial Instruments and Fair Value Measurements
FASB ASC 820 - Fair Value Measurements and Disclosures, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC 820 requires disclosures about the fair value of all financial instruments, whether or not recognized, for financial statement purposes. Disclosures about the fair value of financial instruments are based on pertinent information available to the Company on December 31, 2022. Accordingly, the estimates presented in these financial statements are not necessarily indicative of the amounts that could be realized on disposition of the financial instruments. FASB ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are 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. |
Stock-Based Compensation
Stock-based compensation is accounted for based on the requirements of ASC 718 – “Compensation –Stock Compensation”, which requires recognition in the financial statements of the cost of employee, director, and non-employee services received in exchange for an award of equity instruments over the period the employee, director, or non-employee is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee, director, and non-employee services received in exchange for an award based on the grant-date fair value of the award. The Company has elected to recognize forfeitures as they occur as permitted under the FASB’s Accounting Standards Update (“ASU”) 2016-09 Improvements to Employee Share-Based Payment.
Revenue Recognition
In accordance with ASU Topic 606 - Revenue from Contracts with Customers, the Company recognizes revenue in accordance with that core principle by applying the following steps:
Step 1: Identify the contract(s) with a customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
The Company provides research and development support to biopharmaceutical companies to assist their drug development programs. In January 2021, the Company began performing tumor profiling to support clinical patient therapeutic intervention. The services provided by the Company are performance obligations under services contracts. These contracts are completed over time and may lead to deferred revenue for services not completed at the end of a period which is reflected as contract liabilities on the accompanying balance sheet. The Company may include, in accounts receivable, amounts billed to customers in advance of services being initiated or completed. If the Company has a right to such consideration that is unconditional such as for contractually allowed billings under non-cancellable contracts, such amounts billed in advance would be offset by a contract liability. Management reviews the completion status of all jobs monthly to determine the appropriate amount of revenue to recognize. The Company offers these services to biopharmaceutical companies and to private individuals. The Company uses various output methods to recognize revenues. The revenue recognized from services provided to private individuals during the three months ended December 31, 2022 and 2021 were minimal and therefore was not disaggregated for disclosure purposes.
Contract Liabilities
Contract liabilities are cash deposits received from customers and advance billing included in accounts receivable on uncompleted contracts for which revenues have not been recognized as of the balance sheet date.
Leases
The Company accounts for its leases using the method prescribed by ASC 842 – Lease Accounting. The Company assess whether the contract is, or contains, a lease at the inception of a contract which is based on (i) whether the contract involves the use of a distinct identified asset, (ii) whether the Company obtains the right to substantially all the economic benefit from the use of the asset throughout the period, and (iii) whether the Company has the right to direct the use of the asset. The Company allocates the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments. The Company has elected not to recognize ROU assets and lease liabilities for short-term leases that have a term of 12 months or less.
Operating and financing lease ROU assets represents the right to use the leased asset for the lease term. Operating and financing lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. As most leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at the adoption date in determining the present value of future payments. Lease expense for minimum lease payments is amortized on a straight-line basis over the lease term and is included in general and administrative expenses in the statements of operations.
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Derivative Liabilities
The Company has certain financial instruments that are embedded derivatives associated with capital raises. The Company evaluates all its financial instruments to determine if those contracts or any potential embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with ASC 815-10 - Derivative and Hedging - Contract in Entity’s Own Equity. This accounting treatment requires that the carrying amount of any derivatives be recorded at fair value at issuance and marked-to-market at each balance sheet date. In the event that the fair value is recorded as a liability, as is the case with the Company, the change in the fair value during the period is recorded as either other income or expense. Upon conversion, exercise or repayment, the respective derivative liability is marked to fair value at the conversion, repayment, or exercise date and then the related fair value amount is reclassified to other income or expense as part of gain or loss on debt extinguishment.
Recent Accounting Pronouncements
Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the Company’s financial statements.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our stockholders.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as that term is defined in Rule 13a-15(e), promulgated by the SEC pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer to allow timely decisions regarding required disclosure. Our management, with the participation of our principal executive officer and principal financial officer, evaluated our disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q. Based on this evaluation, our principal executive officer and principal financial officer concluded that as of December 31, 2022, our disclosure controls and procedures were not effective due to our material weaknesses in internal control over financial reporting discussed below.
Our management, including our principal executive officer and principal financial officer, is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our internal control over financial reporting as of December 31, 2022. Our management’s evaluation of our internal control over financial reporting was based on the Internal Control-Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that as of December 31, 2022, our internal control over financial reporting was not effective.
The ineffectiveness of our internal control over financial reporting was due to the following material weaknesses which we identified in our internal controls over financial reporting:
| (1) | The lack of multiple levels of management review on complex accounting and financial reporting issues, and business transactions, | |
| (2) | a lack of adequate segregation of duties and necessary corporate accounting resources in our financial reporting processing and accounting functions as a result of our limited financial resources to support the hiring of the necessary personnel and the implementation of more robust accounting systems, |
A material weakness is a deficiency or a combination of control deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
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Management’s Remediation Plan
We plan to take steps to enhance and improve the design of our internal control over financial reporting. During the period covered by this quarterly report on Form 10-Q, we have not been able to remediate the material weaknesses identified above. To remediate such weaknesses, we plan to implement the following changes in the future:
| (i) | appoint additional qualified personnel to address inadequate segregation of duties and ineffective risk management; and | |
| (ii) | adopt sufficient written policies and procedures for accounting and financial reporting. |
The remediation efforts set out in (i) are largely dependent upon our company securing additional financing to cover the costs of implementing the changes required. If we are unsuccessful in securing such funds, remediation efforts may be adversely affected in a material manner. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes.
Management believes that despite our material weaknesses set forth above, our unaudited financial statements for the quarter ended December 31, 2022 are fairly stated, in all material respects, in accordance with US GAAP.
Changes in Internal Control over Financial Reporting
There was no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934) during the quarter ended December 31, 2022 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On December 10, 2021, YPH LLC filed a complaint against the Company in the District Court for the Southern District of New York alleging that Theralink breached its Certificate of Designation for Series C-1 Convertible Preferred Stock by failing to honor a conversion notice submitted to it by YPH. Based on these and other allegations, Plaintiff asserted a breach of contract claim claiming that it has damages in excess of $100 million. The case continues to be in the pleadings stage with Theralink filing its last response on March 30, 2022. The Company believes these claims are without merit and intends to defend plaintiffs’ lawsuits vigorously. The Company currently believes the likelihood of a loss contingency related to these matters is remote and, therefore, no provision for a loss contingency is required.
On August 16, 2022, Erika Singleton filed a complaint against the Company in the Eighth Judicial District Court, Clark County, Nevada, Case No. A-22-857038-C. Plaintiff alleges that the Company did not provide her with physical stock certificates for 200,000 shares of common stock Plaintiff purchased for $2,000 in 2017. Based on these and other allegations, Plaintiff asserts claims against the Company for breach of contract, violation of Florida securities law, fraud, and unjust enrichment. The court has set the hearing on our motion to dismiss for March 23, 2022. The Plaintiff has until March 2, 2023 to file her opposition to our motion to dismiss and we will then have until March 16, 2023 to file our reply.
ITEM 1A. RISK FACTORS
Risk factors that may affect our business and financial results are discussed in “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2022. There have been no material changes to the disclosures relating to this item from those set forth in our 2022 Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
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ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| THERALINK TECHNOLOGIES, INC. | ||
| Date: February 21, 2023 | By: | /s/ Mick Ruxin, MD |
| Mick Ruxin, MD | ||
| Chief Executive Officer | ||
| Date: February 21, 2023 | By: | /s/ Thomas E. Chilcott, III |
| Thomas E. Chilcott, III | ||
| Chief Financial Officer, Treasurer and Secretary | ||
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