Notes to Condensed Consolidated Financial Statements
February 28, 2023 (Unaudited)
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
Innovation1 Biotech Inc. (the “Company”) was formed under the laws of the state of Nevada in 2014, under the name of My Cloudz, Inc. Gridiron BioNutrients completed a reverse merger with My Cloudz, Inc. in October 2017 and the Company then changed its name to Gridiron BioNutrients, Inc. Effective March 31, 2022, as approved by the shareholders, the name of the Company was changed from Gridiron BioNutrients, Inc. (trading symbol GMVP) to Innovation1 Biotech Inc. (trading symbol IVBT).
The Company has a portfolio of products using five proprietary preclinical prodrugs, all fully synthetic without connection to botanical sourcing: a mushroom-derived psychedelic molecule for treatment post-traumatic stress disorder and depression, a novel cannabinoid and tree bark derived psychedelic for treatment of addiction and three additional novel cannabinoid prodrugs addressing clinical indications of refractory pediatric epilepsy, hypertrophic scarring and ocular inflammation.
The Company has elected an August 31st year end.
Change in Control
On November 9, 2021, the Company completed the asset acquisition of ST Biosciences, Ltd., consisting substantially of intellectual property assets, relating to Mioxal® as discussed in Note 3 – Asset Acquisition. The closing of the acquisition resulted in a change of control of the Company. As part of the acquisition, Mr. Orr stepped down as the Company’s Chief Executive Officer and assumed the role of the Company’s Chief Financial Officer. Mr. Orr has since resigned from his position and as a director. Pursuant to the terms of the Asset Purchase Agreement, Jeffrey J. Kraws was appointed as the Company’s Chief Executive Officer and a director of the Company. On December 6, 2022, Mr. Kraws stepped down as the Company’s Chief Executive Officer and has since resigned as a director. In addition, the Company agreed to appoint Jason Frankovich as a director of the Company subject to the Company’s compliance with Rule 14F-1 of the Exchange Act. Mr. Frankovich has since resigned as a director. On December 6, 2022, Frederick E. Pierce was appointed as the Interim Acting Chief Executive Officer, President and Chairman of the Board.
Going Concern
The Company’s financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company had no revenue and a net loss of $1,235,055 for the six months ended February 28, 2023. The Company has working capital deficit of $2,192,978 and an accumulated deficit of $53,427,910 as of February 28, 2023. These conditions raise substantial doubt about the Company’s ability to continue as a going concern within one year of the issuance of these financial statements. The unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The ability of the Company to fully commence its operations is dependent upon, among other things, obtaining additional financing to continue operations and execution of its business plan. In response to these concerns, management plans to fund operations through additional debt and equity financing. Debt instruments may be convertible or non-convertible and will vary based on the Company’s needs and financing options available at such times. There can be no assurance that management’s plan will be successful.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
This summary of accounting policies for Innovation1 is presented to assist in understanding the Company’s financial statements. The Company uses the accrual basis of accounting and accounting principles generally accepted in the United States of America (“US GAAP”), which have been consistently applied in the preparation of the financial statements.
The accompanying unaudited financial information as of and for the three and six months ended February 28, 2023 and 2022 has been prepared in accordance with US GAAP for interim financial information and with the instructions to Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, such financial information includes all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of our financial position at such date and the operating results and cash flows for such periods. Operating results for the three and six months ended February 28, 2023 are not necessarily indicative of the results that may be expected for the entire year or for any other subsequent interim period.
INNOVATION1 BIOTECH INC.
Notes to Condensed Consolidated Financial Statements
February 28, 2023 (Unaudited)
Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to the rules of the U.S. Securities and Exchange Commission, or the SEC. These unaudited condensed consolidated financial statements and related notes should be read in conjunction with our audited financial statements for the year ended August 31, 2022 included in the Company’s Annual Report on Form 10-K filed with the SEC on December 15, 2022.
The consolidated balance sheet at August 31, 2022 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles in the U.S. for complete financial statements.
Cash and cash equivalents
The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents to the extent the funds are not being held for investment purposes. The Company did not have any cash equivalents as of February 28, 2023 and August 31, 2022.
Fair Value of Financial Instruments
Fair value of certain of the Company’s financial instruments including cash, prepaid expenses, accounts payable, accrued expenses, notes payable, and other accrued liabilities approximate cost because of their short maturities. The Company measures and reports fair value in accordance with ASC 820, “Fair Value Measurements and Disclosure” defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value investments.
Fair value, as defined in ASC 820, is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of an asset should reflect its highest and best use by market participants, principal (or most advantageous) markets, and an in-use or an in-exchange valuation premise. The fair value of a liability should reflect the risk of nonperformance, which includes, among other things, the Company’s credit risk.
Valuation techniques are generally classified into three categories: the market approach; the income approach; and the cost approach. The selection and application of one or more of the techniques may require significant judgment and are primarily dependent upon the characteristics of the asset or liability, and the quality and availability of inputs. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. ASC 820 also provides fair value hierarchy for inputs and resulting measurement as follows:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities.
Level 2: Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3: Unobservable inputs for the asset or liability that are supported by little or no market activity, and that are significant to the fair values.
Fair value measurements are required to be disclosed by the Level within the fair value hierarchy in which the fair value measurements in their entirety fall. Fair value measurements using significant unobservable inputs (in Level 3 measurements) are subject to expanded disclosure requirements including a reconciliation of the beginning and ending balances, separately presenting changes during the period attributable to the following: (i) total gains or losses for the period (realized and unrealized), segregating those gains or losses included in earnings, and a description of where those gains or losses included in earning are reported in the statement of income.
The Company did not have any Level 1 or Level 2 assets and liabilities at February 28, 2023 and August 31, 2022. The Company had Level 3 liabilities related to outstanding warrants at February 28, 2023. All financial assets and liabilities approximate fair value.
Other Receivable
During the year ended August 31, 2022, the Company discovered duplicate withdrawals from its payroll processing company and has recorded a receivable on its unaudited condensed consolidated balance sheet at February 28, 2023. At the close of the February 28, 2023 quarter, these funds have not yet been reimbursed. There was $56,421 outstanding receivable as of February 28, 2023 and August 31, 2022.
INNOVATION1 BIOTECH INC.
Notes to Condensed Consolidated Financial Statements
February 28, 2023 (Unaudited)
Property and Equipment
Property and equipment are carried at cost. Expenditures for maintenance and repairs are expensed in the period incurred. Renewals and betterments that materially extend the life of the assets are capitalized. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in income for the period.
Depreciation is computed for financial statement purposes on a straight-line basis over estimated useful lives of the related assets and the modified accelerated cost recovery system for federal income tax purposes. The estimated useful lives of depreciable computers and other equipment are three years.
With the asset acquisition as discussed in Note 3 – Asset Acquisition the Company wrote off the remaining property and equipment as impaired in the accompanying statement of operations during the year ended August 31, 2022. Depreciation expense was $261 and $0 for the three months ended February 28, 2023 and 2022, respectively. Depreciation expense was $523 and $0 for the six months ended February 28, 2023 and 2022, respectively.
Basic and Diluted Income (Loss) Per Share
Basic income (loss) per share is calculated by dividing the Company’s net loss applicable to common shareholders by the weighted average number of common shares during the period. Diluted earnings per share is calculated by dividing the Company’s net income available to common shareholders by the diluted weighted average number of shares outstanding during the year.
The Series B and Series B1 convertible preferred shares would convert to 39,120,691 and 8,083,542 shares of the Company’s common at February 28, 2023 and 2022, respectively. The Company would calculate diluted earnings per share by dividing the Company’s net income available to common shareholders less preferred dividends by the diluted weighted average number of shares outstanding during the period. For the three and six month periods ended February 28, 2023 and 2022, potentially dilutive convertible preferred stock were excluded from the computation of diluted loss per share because they were anti-dilutive due to net losses in those periods.
Recently Issued Accounting Standards
As of February 28, 2023, there were several new accounting pronouncements issued by the Financial Accounting Standards Board. Each of these pronouncements, as applicable, has been or will be adopted by the Company. Management does not believe the adoption of any of these accounting pronouncements has had or will have a material impact on the Company’s consolidated financial statements.
NOTE 3 – ASSET ACQUISITION
On October 27, 2021, the Company entered into an asset acquisition agreement with ST Biosciences, Ltd., a company organized under the laws of England and Wales (“STB”), of certain Transferred Assets, consisting substantially of their intellectual property relating to Mioxal®, a nutraceutical complex composed of essential amino acids, natural coenzymes and minerals. The Company acquired certain intellectual property, and patent rights, and no tangible assets and assumed certain liabilities of STB, as discussed below. The acquisition was completed pursuant to the terms of the Amended and Restated Asset Purchase Agreement dated November 9, 2021. As consideration for the acquisition, the Company paid $350,000 in cash to Ingenius, paid cash of $500,000 to STB and issued 19,831,623 shares of Common Stock to STB valued at $40,654,827 or $2.05 per share based on the closing market price on November 5, 2021, which at the closing of the acquisition represented approximately 70% of the Company’s outstanding shares of Common Stock on a fully diluted basis, for an aggregate purchase price of $41,504,827, resulting in a change in control of the Company. The shares were issued in December 2021.
At acquisition the assets and liabilities assumed have been recorded at the fair values as follows:
Mioxal® | | $ | 81,249,827 | |
Other intangible assets | | | 178,000 | |
Less liabilities assumed: | | | | |
Mioxal® liability assumed | | | (39,500,000 | ) |
Other liabilities assumed | | | (423,000 | ) |
Net value acquired in asset acquisition | | $ | 41,504,827 | |
INNOVATION1 BIOTECH INC.
Notes to Condensed Consolidated Financial Statements
February 28, 2023 (Unaudited)
During the year ended August 31, 2022, additional intangibles of $28,773 were added related to the asset acquisition for payments made subsequent to the acquisition date.
The Mioxal® intellectual property, including the patent rights, was acquired by STB from Ingenius Biotech S.L, a Spanish corporation (“Ingenius”) on September 10, 2021. The Ingenius milestone and stock payments set forth in the Purchase Agreement between Ingenius and STB, were assumed by the Company in aggregate of $39,500,000 and are recorded in current and long-term liabilities in the accompanying condensed consolidated balance sheets. The first installment of $1,500,000 was due on January 15, 2022, the second installment of $1,500,000 on April 15, 2022 and a $3,500,000 payment was due within thirty business days following the occurrence of the milestone event. The milestone, a signed sales agreement with a third party to distribute Mioxal throughout Europe, was not reached and therefore the requirement for the milestone payment was forfeited and will never be owed. In addition, $15,000,000 was to be paid through the issuance of the Company’s common stock in three tranches beginning twelve months from execution of agreement with STB on September 10, 2021; 1) on September 10, 2022 - $4,000,000, 2) on September 10, 2023 - $5,000,000, and 3) on September 10, 2024 - $6,000,000.
The remaining balance was to be paid on an earn-out basis whereunder Ingenius would earn an 8% royalty on all sales generated by Mioxal® until the balance was satisfied.
On January 13, 2022, the Company entered into Amendment No. 1 to Purchase Agreement with Ingenius Biotech S.L. to modify the terms of the agreement dated September 10, 2021. Under the amended agreement, the first installment of $1,500,000 was due on June 30, 2022, with an additional extension of the due date to August 30, 2022 (not paid), and the second installment was due on December 31, 2022. See Sale of Mioxal Intangible Assets below for additional details.
The Mioxal® asset had a 24-year life and was to be tested for impairment on an annual basis. During the three and twelve months ended August 31, 2022, amortization of $846,494 and $2,539,483 was expensed. The other intangible assets for $178,000 have a 21-year life. During the three and twelve months ended August 31, 2022, amortization of $2,119 and $6,357 was expensed. During the twelve months ended August 31, 2022, additional intangibles were added related to the asset acquisition in the amount of $38,638.
Impairment of Intangible Assets
At August 31, 2022, an asset impairment evaluation resulted in the Company recording $35,762,550 in impairment expense in the fourth quarter of the fiscal year ended August 31, 2022, and a carrying value of $42,980,076 for the intangible assets. The Company had recorded impairment expenses of $17,598 in previous quarters, to total $35,780,148 for the fiscal year ended August 31, 2022. The calculation of the carrying value of the Mioxal net assets was informed by the terms of the sale of those assets on November 7, 2022, as calculated below:
Valuation at the sale of Mioxal: | | | |
Cash to be received by the Company | | $ | 100,000 | |
FV of 350,000 shares transferred to Buyer from third parties ($0.13 per share) | | | (45,500 | ) |
Debt assumed/forgiven by Buyer | | | 39,500,000 | |
NPV of estimated future royalty cash stream | | | 3,425,576 | |
Total estimated value of intangible assets at August 31, 2022 | | | 42,980,076 | |
Carrying value of intangible assets at August 31, 2022 | | $ | 78,742,626 | |
Impairment expense at August 31, 2022 on intangible assets | | $ | (35,762,550 | ) |
The assumptions used for estimated future royalty cash stream included 1) 5% royalty on gross margin for a five-year period of estimated sales in the United States, with a two-year introductory delay in taking the product to market, 2) a similar royalty on international sales, with an additional two-year introductory delay and an increased cost of 15% for additive distribution costs, 3) an estimate of approximately 200,000 units sold in year 1 of the projected royalty stream for a total sales estimate of approximately $7,500,000, and 4) sales growth rates of 100% for each of the years 2 through 4, decreasing to 60% in year 5. Growth rate in any subsequent year would be expected to drop off significantly or to 0%, however, those possible future years are not included in the project revenues, costs or gross merging. The projections of foundational sales volumes, revenues and costs were performed by industry experts in January 2022 as part of an independent product evaluation. As with all projections, Management cannot assure that the estimated amounts will be actualized.
INNOVATION1 BIOTECH INC.
Notes to Condensed Consolidated Financial Statements
February 28, 2023 (Unaudited)
Sale of the Mioxal Intangible Assets:
On November 7, 2022, the Company completed the disposition of all the assets, including intellectual property assets, and obligations relating to Mioxal® to Ingenius Biotech S.L., a corporation organized under the laws of Spain (“Ingenius”). As part of the disposition, certain shareholders of the Company transferred an aggregate of 350,000 shares of the Company’s currently outstanding common stock, to Ingenius and Ingenius agreed to pay the Company (i) $100,000 upon the first to occur of Ingenius’ first sale or commercialization of the Mioxal product or Ingenius’ sale, license, transfer or other disposition of the Mioxal product to a third party, and (ii) a 5% royalty on worldwide net sales of the Mioxal product by Ingenius or a third party commencing on the date of the first sale of Mioxal products and ending on the 18-month anniversary of the last to expire of any patent covering the Mioxal products. Additionally, Ingenius agreed to release the Company from all of its liabilities and obligations relating to the Mioxal products and indemnify the Company from all claims relating to the Mioxal product following the date of the disposition. After the disposition of the assets and liabilities related to Mioxal, the Company recognized a $3,380,076 royalty asset, recorded as an intangible asset on the condensed consolidated balance sheet. The $100,000 of cash yet to be received is recorded as a long-term receivable.
NOTE 4 – NOTES PAYABLE
Short-Term Notes Payable
On September 14, 2017, the Company issued a $10,000 promissory note to a limited liability company. The loan bears interest at 5% and had a maturity date of September 15, 2018. The unpaid balance including accrued interest was $12,730 and $12,482 at February 28, 2023 and August 31, 2022, respectively. The Company is in default with the repayment terms of the note. Interest of $123 and $123 was expensed during the three months ended February 28, 2023 and 2022, respectively. Interest of $248 and $248 was expensed during the six months ended February 28, 2023 and 2022, respectively.
Convertible Notes Payable
The Company has entered into a private placement to receive net cash proceeds up to $300,000, after the original issue discount, from secured convertible promissory notes with attached $0.08 warrants to purchase up to 4,411,764 shares of common stock. Each note is discounted 15% with a maturity date of 18 months from original issuance. The notes bear interest of 8% per annum to be paid monthly and a conversion price of $0.08 per share. The warrants are exercisable for a period of seven years at an exercise price of $0.08 per share. During the three and six months ended February 28, 2023, the Company received convertible notes of $352,938 less a discount of $52,938, for cash proceeds of $300,000. The Company issued 4,411,764 warrants and recorded a fair value of $191,691 for the warrants.
The total fair value of the warrants was estimated using the following weighted average assumptions:
| | November 29, 2022 | | | February 13, 2023 | |
Market price of common stock on date of issuance | | $ | 0.095 | | | $ | 0.225 | |
Risk-free interest rate | | | 3.63 | % | | | 3.84 | % |
Expected dividend yield | | | 0 | | | | 0 | |
Expected term (in years) | | | 7 | | | | 7 | |
Expected volatility | | | 202.5 | % | | | 242.8 | % |
Additionally, a beneficial conversion feature of $108,309 was determined to exist, which represented the lesser of the conversion price of the convertible instrument or the per share fair value of the underlying stock into which it is convertible. The fair value of the warrants and the beneficial conversion feature, which together consumed the value of the net proceeds, were charged to additional paid in capital at the date of issuance.
At February 28, 2023, the Company had outstanding convertible notes payable of $352,938, less remaining unamortized discounts of $330,576 for a net liability of $22,362. The Company recognized a total of $44,642 and $47,362 of discount amortization to interest expense during the three and six months ended February 28, 2023, respectively.
NOTE 5 – RELATED PARTY TRANSACTIONS
The Company has a contract with two consulting and pharmaceutical firms owned by the former Chief Science Officer, Salzman Group LLC and Herring Creek Pharmaceuticals, under which research and development activities are performed on behalf of the Company. During the fiscal year 2022, the Company paid $150,000 for a security deposit, $131,500 for research and development fees and assumed $67,000 in a liability from ST Biosciences at the acquisition of the assets described in Note 3 - Asset Acquisition. The $67,000 liability was released during the period and was credited to the Mioxal intangible asset. As of February 28, 2023 and August 31, 2022, the Company owed $-0- and $2,665 to these two firms and owed salary of $30,769 and $4,615 to Dr. Salzman.
INNOVATION1 BIOTECH INC.
Notes to Condensed Consolidated Financial Statements
February 28, 2023 (Unaudited)
As of February 28, 2023 and August 31, 2022, the Company owed Jeffrey Kraws, the Company’s former Chief Executive Officer, $32,500 and $17,308 in unpaid salary and $10,165 and $83,516 in unpaid bonuses, respectively.
As of February 28, 2023 and August 31, 2022, the Company owed salary of $76,154 and $11,538, respectively, to Jason Frankovich, a former director
.
During the six months ended February 28, 2023, the Company entered into an agreement with a former director for a payment of $80,000 and 100,000 common shares in exchange for a release of unpaid services. Resulting in a gain of $151,621 at February 28, 2023.
NOTE 6 – LEASE LIABILITY
On January 1, 2022, we adopted ASC Topic 842 – Leases. Under this new guidance, lessees are required to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases. Upon adoption, we recognized operating lease right-of-use (“ROU”) assets and corresponding lease liabilities of $619,825.
Lessee accounting
We determine if an arrangement is or contains a lease at inception. Our assessment is based on (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefit from the use of the asset throughout the period and (3) whether we have the right to direct the use of the asset. Leases are classified as either finance leases or operating leases. A lease is classified as a finance lease if any one of the following criteria are met: the lease transfers ownership of the asset by the end of the lease term, the lease contains an option to purchase the asset that is reasonably certain to be exercised, the lease term is for the majority of the remaining useful life of the asset or the present value of the lease payments equals or exceeds substantially all of the fair value of the asset. A lease is classified as an operating lease if it does not meet any one of these criteria. The lease classification affects the expense recognition in the income statement. Operating lease costs are recorded entirely in operating expenses. Finance lease costs are split, where amortization of the ROU asset is recorded in operating expenses and an implied interest component is recorded in interest expense.
Under the guidance of ASC 842, operating leases are included in right-of-use assets, current lease liabilities, and noncurrent lease liabilities on our balance sheets. ROU assets and lease liabilities are recognized at commencement date based on the present value of the future minimum lease payments over the lease term. As most of our leases do not provide an implicit interest rate, we use our incremental borrowing rate based on the information available at transition date in determining the present value of future payments. The ROU asset includes any lease payments made but excludes lease incentives and initial direct costs incurred, if any. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
Lease extensions
Many leases have options to either extend or terminate the lease. In determining the lease term, we considered all available contract extensions that are reasonably certain of occurring.
Operating leases
On January 1, 2022, the Company entered into an operating lease for office space. The lease is effective for 3 years from the commencement date with automatic renewal at the expiration date. The lease agreement may be terminated earlier upon ninety days’ prior written notice by either party. The lease requires adjustment upon renewal with an increase to the monthly rent by 10% of the monthly rent due for the month preceding such renewal date or market rate, whichever is the greater amount.
The following table summarizes balance sheet data related to leases at February 28, 2023 and August 31, 2022:
| | February 28, 2023 | | | August 31, 2022 | |
Assets | | | | | | |
Operating lease right of use assets | | $ | - | | | $ | 619,825 | |
Less accumulated depreciation | | | - | | | | (137,739 | ) |
Total operating lease right of use assets | | $ | - | | | $ | 482,086 | |
| | | | | | | | |
Liabilities | | | | | | | | |
Operating lease liability, current | | $ | - | | | $ | 199,203 | |
Operating lease liability, noncurrent | | | - | | | | 298,423 | |
Total lease liabilities | | $ | - | | | $ | 497,626 | |
INNOVATION1 BIOTECH INC.
Notes to Condensed Consolidated Financial Statements
February 28, 2023 (Unaudited)
Operating lease liability is presented net of lease payments. The Company is required to make monthly payments of $20,000. During the three months ended February 28, 2023 and 2022, the Company paid $-0- and $29,793, respectively, towards the lease liability, $-0- and $10,207, respectively, in interest expense and recorded $-0- and $34,435, respectively, in amortization expense of the ROU asset. During the six months ended February 28, 2023, the Company paid $47,957 and $29,793, respectively, towards the lease liability, $12,043 and $10,207, respectively, in interest expense and recorded $51,652 and $34,435, respectively, in amortization expense of the ROU asset.
The Company was unable to pay its December 2022 lease payment and the owner has sought legal action. The Company was served with a summons in December 2022. The summons seeks judgment of $480,000 plus interest at 5%. The lease was terminated as of December 1, 2022 and a gain on termination of $19,236 was recorded during the six months ended February 28, 2023. At February 28, 2023, the Company has accrued $484,668, which includes $4,668 for interest, for the legal claim sought by the owner. The legal action is ongoing and the full amount the Company is required to pay may vary from what is accrued.
NOTE 7 – STOCKHOLDERS’ EQUITY
Dividends
During the year ended August 31, 2018, the Company issued Series A Convertible Preferred Stock, which accrues dividends at a rate of 5% annually. The Company exchanged the Series A Convertible Preferred for Series B Preferred Stock. As a result of the Exchange agreement, the dividends on the Series A Convertible Preferred Stock was reduced to $0 in the accompanying condensed consolidated balance sheets. The Series B and Series B-1 Convertible Preferred Stock accrues dividends at a rate of 10% annually. There was $1,299,308 and $837,798 of dividends payable at February 28, 2023 and August 31, 2022, respectively. The dividends have not been declared and are accrued in the accompanying unaudited condensed consolidated balance sheets as a result of a contractual obligation in the Company’s Series B and Series B-1 Preferred Stock offering.
Preferred Stock
There were no shares of Series A Convertible Preferred Stock issued and outstanding as of February 28, 2023 and August 31, 2022.
There were 2,695,514 shares of Series B Convertible Preferred Stock issued and outstanding as of February 28, 2023 and August 31, 2022, respectively. There were 5,389,028 shares of Series B-1 Convertible Preferred Stock issued and outstanding as of February 28, 2023 and August 31, 2022, respectively.
Deemed Dividend related to Series B and B-1 Convertible Preferred Stock Down Round Provision
The Series B and Series B-1 Convertible Preferred Stock issued contain a down round provision. During the three months ended February 28, 2023, the Company entered into an agreement to issue common shares at $0.225 per share. Pursuant to the down round provision, the conversion price of the Series B and Series B-1 Convertible Preferred Stock was reduced to $0.225 per share at February 28, 2023. In addition, the Company recognized a deemed dividend (i.e., a reduction to retained earnings, or in absence of retained earnings, additional paid-in capital) of $7,180,301 at February 28, 2023. The deemed dividend represents the value attributed to the increase in shares of common stock that preferred shareholders will receive as a result of the issuance of common shares in February 2023, which was deemed to be a down round and triggered the anti-dilution provisions associated with our convertible preferred stock.
Common Stock to be Issued
At February 28, 2023, there was $22,500 in common stock to be issued. This represents 100,000 common shares to be issued to a former Director of the Company.
INNOVATION1 BIOTECH INC.
Notes to Condensed Consolidated Financial Statements
February 28, 2023 (Unaudited)
Common Stock
The Company is authorized to issue up to 200,000,000 shares of $0.001 par value common stock.
As discussed in Note 3 – Asset Acquisition, on November 9, 2021, the Company completed the acquisition of all of the assets, including intellectual property assets, relating to Mioxal®, a nutraceutical complex composed of essential amino acids, natural coenzymes and minerals, and assumed certain liabilities held by ST Biosciences, Ltd., a company organized under the laws of England and Wales (“STB”). As part consideration for the acquisition, STB was issued 19,831,623 shares of common stock valued at $40,654,827 or $2.05 per share. With the disposition of the Mioxal® asset, certain shareholders of the Company transferred 350,000 common shares to Ingenius.
There were 20,020,239 common shares issued and outstanding as of February 28, 2023 and August 31, 2022.
Warrants
During the six months ended February 28, 2023, the Company issued 4,411,764 warrants as part of the convertible notes financing, see Note 4 – Notes Payable. At February 28, 2023, the warrants had an intrinsic value of $750,000
At February 28, 2023 and 2022, the following warrants were outstanding:
| | Number of warrants | | | Weighted average exercise price | | | Weighted average term remaining (years) | |
Balance, August 31, 2022 | | | - | | | $ | - | | | | - | |
Issued | | | 4,411,764 | | | | 0.08 | | | | 7 | |
Balance, February 28, 2023 | | | 4,411,764 | | | $ | 0.08 | | | | 7 | |
| | | | | | | | | | | | |
Balance, August 31, 2021 | | | - | | | $ | - | | | | - | |
Balance, February 28, 2022 | | | - | | | $ | - | | | | - | |
NOTE 8 – COMMITMENTS AND CONTINGENCIES
On September 30, 2022, a party identified as New You Inc. filed a complaint with the District Court of Clark County, Nevada against Innovation 1 Biotech, Inc, ST Biosciences LTD, Jeffrey Kraws and Jason Frankovich. The complaint alleges that during Mr. Frankovich’s service to New You Inc. as Chairman of the Board of Directors, concurrent with Mr. Frankovich’s and Mr. Kraws’s services as executives of ST Biosciences LTD, Mr. Frankovich converted funds away from New You Inc. to satisfy obligations of ST Biosciences LTD and/or Innovation1 and/or to enrich Frankovich and Kraws. The amount of the claim is a total of $249,020 plus damages in excess of $30,000 and includes a claim for legal fees. The Company’s legal firm has evaluated the claims of the complaint and together with Innovation1 management believes the claims to be without merit. The Company intends to defend against the complaint and believes any potential liability to be $0.
On December 19, 2022, a party identified as 40 Wall Street Suites LLC, filed a complaint with the Supreme Court of New York County, New York against Innovation1 Biotech, Inc. The complaint alleges that Innovation1 failed to pay the December lease payment and therefore is responsible for payment of the remaining lease plus interest. The Company intends to defend against the complaint; however, has accrued the potential liability as stated in the claim of $484,668 at February 28, 2023.
On April 21, 2023, a party identified as Greenfingers LLC A/A/O Simon D. Roffe, entered into a judgement in the Supreme Court of New York County, New York against Innovation1 Biotech Inc. in the amount of $264,617.26 plus post-judgement interest from the date of entry for failure to turn over shares of Jason Frankovich, a former director of the Company. The Company intends to defend against the complaint and believes any potential liability to be $0.
NOTE 9 – SUBSEQUENT EVENTS
The Company evaluates events that have occurred after the balance sheet date of February 28, 2023, through the date which the unaudited condensed consolidated financial statements were filed. Based upon the review, other than described below, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the unaudited condensed consolidated financial statements.
Subsequent to February 28, 2023, the Company entered into a private placement to receive net cash proceeds up to $280,000, after the original issue discount, from secured convertible promissory notes with attached $0.08 warrants to purchase up to 4,117,647 shares of common stock. Each note is discounted 15% with a maturity date of 18 months from original issuance. The notes bear interest of 8% per annum to be paid monthly and a conversion price of $0.08 per share. The warrants are exercisable for a period of seven years at an exercise price of $0.08 per share. The Company received convertible notes of $219,606 less a discount of $32,939, for cash proceeds of $186,667, and issued 2,745,098 warrants.
Subsequent to February 28, 2023, the Company issued 350,000 shares of common stock to three individuals who issued personal shares of stock to assist with the Mioxal disposition, See Note 3 – Asset Acquisition.
Subsequent to February 28, 2023, the Company issued 100,000 shares of common stock to a former Director of the Company at $0.225 per share.
On April 21, 2023, Mr. Kraws resigned as a member of the Board.