Inspyr Therapeutics : NOTE 2 - MANAGEMENT'S PLANS TO CONTINUE AS A GOING CONCERN

May 17, 2021 at 05:17 pm EDT

Basis of Presentation


We have prepared our unaudited condensed consolidated financial statements on
the basis that we will continue as a going concern, which contemplates the
realization of assets and satisfaction of liabilities in the normal course of
business. We have incurred losses from operations since inception, we have a
working capital deficit of $29.3 million and we have an accumulated deficit of
$87.6 million as of March 31, 2021. We anticipate incurring additional losses
for the foreseeable future until such time, if ever, that we can generate
significant sales from our therapeutic product candidates which are currently in
development or we enter into cash flow positive business development
transactions.

To date, we have generated no sales or revenues, have incurred significant losses and expect to incur significant additional losses as we advance our product candidates through development. Consequently, our operations are subject to all the risks inherent in the establishment of a pre-revenue business enterprise as well as those risks associated with a company engaged in the research and development of pharmaceutical compounds.





Our cash balances at March 31, 2021 were approximately $758,000, representing
100% of our total assets. We had curtailed substantially all operations in
February 2018. Based on our current expected level of operating expenditures,
and including approximately $250,000 that we raised in March 2020, $500,000 that
we raised in October 2020 and $500,000 that we raised in January 2021, pursuant
to the sale of our senior convertible debentures, we expect to be able to fund
our operations into the second quarter of 2022. We will require additional cash
to fund and continue our operations beyond that point. This period could be
shortened if there are any unanticipated increases in planned spending on
development programs or other unforeseen events. We anticipate raising
additional funds through collaborative arrangements, licensing agreements,
public or private sales of debt or equity securities, or some combination
thereof. There is no assurance that any such arrangement will be entered into or
that financing will be available when needed in order to allow us to continue
our operations, or if available, on terms favorable or acceptable to us.



In the event additional financing is not obtained, we may pursue cost cutting
measures as well as explore the sale of assets to generate additional funds. If
we are required to significantly reduce operating expenses and delay, reduce the
scope of, or eliminate any of our development programs or clinical trials, these
events could have a material adverse effect on our business, results of
operations, and financial condition. These factors raise substantial doubt about
our ability to continue as a going concern. The consolidated financial
statements do not include any adjustments relating to recoverability and
classification of recorded asset amounts or the amounts and classification of
liabilities that might be necessary should we be unable to continue as a going
concern.



Our current cash level raises substantial doubt about our ability to continue as
a going concern past the second quarter of 2022. If we do not obtain additional
funds by such time, we may no longer be able to continue as a going concern and
will cease operation which means that our shareholders will lose their entire
investment.



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NOTE 3 - SUMMARY OF CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES





Basis of Presentation


The accompanying condensed consolidated financial statements are unaudited. The
unaudited interim consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
("GAAP") and pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC"). Certain information and note disclosures
normally included in annual financial statements prepared in accordance with
GAAP have been condensed or omitted pursuant to those rules and regulations,
although the Company believes that the disclosures made are adequate to make the
information not misleading.



These interim consolidated financial statements as of and for the three months
ended March 31, 2021 and 2020 are unaudited; however, in the opinion of
management, such statements include all adjustments (consisting of normal
recurring accruals) necessary to present fairly the financial position, results
of operations and cash flows of the Company for the periods presented. The
results for the three months ended March 31, 2021 are not necessarily indicative
of the results to be expected for the year ending December 31, 2021 or for any
future period. All references to March 31, 2021 and 2020 in these footnotes


are
unaudited.


These unaudited condensed consolidated financial statements should be read in
conjunction with our audited financial statements and the notes thereto for the
year ended December 31, 2020, included in the Company's annual report on Form
10-K filed with the SEC on March 31, 2021.



The consolidated balance sheet as of December 31, 2020 has been derived from the
audited consolidated financial statements at that date but do not include all
disclosures required by the accounting principles generally accepted in the

United States of America.



Principles of Consolidation

The consolidated financial statements include the accounts of the parent company, Inspyr Therapeutics, Inc., and its wholly-owned subsidiary, Lewis & Clark Pharmaceuticals, Inc. All significant intercompany accounts and transactions have been eliminated.





Use of Estimates



The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying
disclosures. Significant estimates include the fair value of derivative
instruments, stock-based compensation, recognition of clinical trial costs and
other accrued liabilities. Actual results may differ from those estimates.





Research and Development



Research and development costs are charged to expense as incurred. Our research
and development expenses consist primarily of expenditures for toxicology and
other studies, manufacturing, clinical trials, compensation and consulting
costs.

We incurred research and development expenses of $0.02 million and $0.01 million for the three months ended March 31, 2021 and 2020, respectively.





Cash Equivalents


For purposes of the statements of cash flows, we consider all highly liquid debt
instruments purchased with a maturity date of three months or less to be cash
equivalents. We maintain our cash in bank deposit accounts which, at times, may
exceed applicable government mandate insurance limits. We have not experienced
any losses in our accounts. We did not have any cash equivalents at March 31,
2021 or December 31, 2020.

Concentrations of Credit Risk





Financial instruments and related items, which potentially subject the Company
to concentrations of credit risk, consist primarily of cash and cash
equivalents. The Company places its cash and temporary cash investments with
credit quality institutions. At times, such investments may exceed applicable
government mandated insurance limits. Cash was $0.8 million and $0.4 million at
March 31, 2021 and December 31, 2020, respectively. As of March 31, 2021 and
December 31, 2020, there was no cash over the federally insured limit.



Loss per Share



Basic loss per share is calculated by dividing net loss and net loss
attributable to common shareholders by the weighted average number of common
shares outstanding for the period. Basic and diluted loss per share are the
same, in that any potential common stock equivalents would have the effect of
being anti-dilutive in the computation of net loss per share.



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The following potentially dilutive securities have been excluded from the computations of weighted average shares outstanding as of March 31, 2021 and 2020, as they would be anti-dilutive:





                                                                     Three Months Ended
                                                                          March 31,
                                                                    2021              2020


Shares underlying options outstanding                                      176             227
Shares underlying warrants outstanding                                   2,493           3,229
Shares underlying convertible notes outstanding                     74,162,058       3,634,542
Shares underlying convertible preferred stock outstanding        2,024,302,832         263,728
                                                                 2,098,467,559       3,901,726




Derivative Liability



The Company has financial instruments that are considered derivatives or contain
embedded features subject to derivative accounting. Embedded derivatives are
valued separately from the host instrument and are recognized as derivative
liabilities in the Company's balance sheet. The Company measures these
instruments at their estimated fair value and recognizes changes in their
estimated fair value in results of operations during the period of change. The
Company values its derivative liabilities using the Black-Scholes option
valuation model. The resulting liability is valued at each reporting date and
the change in the liability is reflected as change in derivative liability


in
the statement of operations.

Fair Value of Financial Instruments


Our short-term financial instruments, including cash, accounts payable and other
liabilities, consist primarily of instruments with maturities of one year or
less when acquired. We believe that the fair values of our current assets and
current liabilities approximate their reported carrying amounts.



The derivative liabilities consist of our convertible notes and Series F
preferred stock with variable conversion features. The Company uses the
Black-Scholes option-pricing model to value its derivative liabilities which
incorporate the Company's stock price, volatility, U.S. risk-free interest rate,
dividend rate, and estimated life.



Fair Value Measurements



The U.S. GAAP Valuation Hierarchy establishes a valuation hierarchy for
disclosure of the inputs to valuation used to measure fair value. This hierarchy
prioritizes the inputs into three broad levels as follows. Level 1 inputs are
quoted prices (unadjusted) in active markets for identical assets or
liabilities. Level 2 inputs are quoted prices for similar assets and liabilities
in active markets or inputs that are observable for the asset or liability,
either directly or indirectly through market corroboration, for substantially
the full term of the financial instrument. Level 3 inputs are unobservable
inputs based on our own assumptions used to measure assets and liabilities at
fair value. A financial asset or liability's classification within the hierarchy
is determined based on the lowest level input that is significant to the fair
value measurement.



The Company has recorded a derivative liability for its convertible notes and
preferred stock with variable conversion features as of March 31, 2021 and 2020.
The tables below summarize the fair values of our financial liabilities as of
March 31, 2021 and December 31, 2020 (in thousands):



                                             Fair Value at
                                               March 31,

Fair Value Measurement Using


                                                 2021              Level 1            Level 2              Level 3

Convertible notes                          $             875                -                  -       $           875
Preferred stock                                       24,954                -                  -                24,954
Derivative liability                       $          25,829     $          -       $          -       $        25,829




                                             Fair Value at
                                             December 31,

Fair Value Measurement Using


                                                 2020              Level 1            Level 2             Level 3

Convertible notes                          $           2,705                -                  -       $       2,705
Preferred stock                                        4,123                -                  -               4,123
Derivative liability                       $           6,828     $          -       $          -       $       6,828




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The reconciliation of the derivative liability measured at fair value on a
recurring basis using unobservable inputs (Level 3) is as follows (in
thousands):



                                                         Three Months ended
                                                              March 31,
                                                          2021          2020

Balance at beginning of year                           $     6,828     $ 1,785


Additions to derivative instruments                            710

167


Reclassification on conversion                              (2,903 )      (436 )
Loss on change in fair value of derivative liability        21,194


727
Balance at end of year                                 $    25,829     $ 2,243

Recent Accounting Pronouncements

There have not been any recent changes in accounting pronouncements and Accounting Standards Update (ASU) issued by the Financial Accounting Standards Board (FASB) during the three months ended March 31, 2021 that are of significance or potential significance to the Company.

NOTE 4 - SUPPLEMENTAL CASH FLOW INFORMATION





The following table contains additional information for the periods reported (in
thousands).



                                                                   Three Months Ended
                                                                        March 31,
                                                                  2021             2020

Non-cash financial activities: Common stock issued on conversion of notes payable and derivative liability

$     3,463       $     729
Debentures converted to common stock                                 1,965             452
Derivative liability extinguished upon conversion of notes
payable                                                              2,903             436
Derivative liability issued                                            710             167
Accrued directors fees forgiven and credited to paid in
capital                                                                336               -

There was no cash paid for interest and income taxes for the three months ended March 31, 2021 and 2020.





NOTE 5 - ACCRUED EXPENSES

Accrued expenses consist of the following (in thousands):

March 31,      December 31,
                                       2021             2020

Accrued compensation and benefits $ 1,326 $ 1,326 Accrued research and development

            233               233
Accrued other                               398               381
Total accrued expenses              $     1,957     $       1,940




NOTE 6 - DERIVATIVE LIABILITY


We account for equity-linked financial instruments, such as our convertible
preferred stock, convertible debentures and our common stock warrants as either
equity instruments or derivative liabilities depending on the specific terms of
the respective agreement. Equity-linked financial instruments are accounted for
as derivative liabilities, in accordance with ASC Topic 815 - Derivatives and
Hedging, if the instrument allows for cash settlement or issuance of a variable
number of shares. We classify derivative liabilities on the balance sheet at
fair value, and changes in fair value during the periods presented in the
statement of operations, which is revalued at each balance sheet date subsequent
to the initial issuance of the stock warrant.



We have issued convertible debentures and preferred stock which contain variable
conversion features, anti-dilution protection and other conversion price
adjustment provisions. As a result, the Company assessed its outstanding
equity-linked financial instruments and concluded that the convertible notes and
preferred stock are subject to derivative accounting. The fair value of the
conversion feature is classified as a liability in the consolidated financial
statements, with the change in fair value during the periods presented recorded
in the consolidated statement of losses.



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During the three months ended March 31, 2021 and 2020, we recorded loss of
approximately $21.2 million and $0.7 million, respectively, related to the
change in fair value of the derivative liabilities during the periods. For
purpose of determining the fair market value of the derivative liability, the
Company used Black Scholes option valuation model. The significant assumptions
used in the Black Scholes valuations of the derivatives at March 31, 2021 are as
follows:



Volatility                     272% - 412 %
Expected term (years)       3 - 12 months
Risk-free interest rate      0.06% - 0.11 %
Dividend yield                       None




As of March 31, 2021 and December 31, 2020, the derivative liability recognized
in the financial statements was approximately $25.8 million and $6.8 million,
respectively.

NOTE 7 - COMMITMENTS AND CONTINGENCIES





Operating Leases

Inspyr currently does not have any ongoing leases for office space. It has availability to office space on an as needed basis. Its employees work on a remote basis.

There was no rent expense for the three months ended March 31, 2021 and 2020.





Legal Matters



The Company is subject at times to legal proceedings and claims, which arise in
the ordinary course of its business. Although occasional adverse decisions or
settlements may occur, the Company believes that the final disposition of such
matters should not have a material adverse effect on its financial position,
results of operations or liquidity.

NOTE 8 - CAPITAL STOCK AND STOCKHOLDERS' EQUITY





Preferred Stock



As of March 31, 2021, there were outstanding 133.8 shares of Series A Preferred
Stock, 71 shares of Series B Preferred Stock, 290.4 shares of Series C Preferred
Stock, 5,000 shares of Series D Preferred Stock, 5,000 shares of Series E
Preferred Stock and 8,000 shares of Series F Preferred Stock.



On October 6, 2020, the Company has filed a certificate of designation ("COD")
with the Secretary of State of the State of Delaware that contains the rights,
preferences, and privileges of the Series F Preferred Stock. Pursuant to the
COD, each share of Series F Preferred Stock has a stated value of $10.00 per
share and is convertible into Common Stock at any time at the election of the
holder. We issued all 8,000 shares of the Series F stock to Ridgeway
Therapeutics, Inc. in connection with the Termination Agreement described in
Note 1. In the aggregate, all of the Series F Preferred Stock issued to Ridgeway
is convertible into such number of shares of Common Stock equal to eighty
percent (80%) of the issued and outstanding shares of Common Stock,
post-conversion, on the conversion date (taking into effect any forward or
reverse stock splits or consolidations). The Series F Preferred Stock votes on
an as if converted to common stock basis. Additionally, upon the Company's
outstanding Convertible Debentures (as such term is defined in the COD) being
terminated, converted, or otherwise extinguished, the Series F Preferred Stock
will automatically convert into Common Stock.



As a result of past equity financings and conversions of debentures, the
conversion prices of (i) our Series A Preferred Stock has been reduced to
$397.50 per share at March 31, 2021, (ii) our Series B Preferred Stock has been
reduced to $0.01 per share at March 31, 2021, (iii) 200 shares of our Series C
preferred stock has been reduced to $15.00 per share at March 31, 2021, (iv)
90.43418 shares of our Series C Preferred Stock has been reduced to $7.50 per
share at March 31, 2021.



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Common Stock



During the three months ended March 31, 2021, we issued a total of 318,664,776
shares of common stock, valued at $3,463,757, upon the conversion of $1,964,500
principal amount of our convertible debentures. We recorded gain on conversion
of debt of $1,166,109 during the three months ended March 31, 2021.



During the three months ended March 31, 2021, we entered into settlement and
release agreements with two of our independent directors for the settlement of
past due director fees and the mutual release of all claims. Pursuant to the
agreements, the directors agreed to waive an aggregate of $435,667 in
outstanding director fees in exchange for the following: (i) the aggregate
payment of $100,000 (of which $50,000 was paid in November 2020 and $50,000 in
February 2021) and (ii) immediately prior to the announcement that the Company
has received approval from the FDA to commence its first Phase 1 clinical trial
after March 1, 2021, common stock purchase options with an aggregate Black
Scholes' value of $80,000, having an exercise price equal to the closing price
on the day preceding the announcement, and a term of 10 years. The difference
between the amount waived of $435,667 and the cash paid of $100,000 has been
credited to paid in capital during the three months ended March 31, 2021.



During the three months ended March 31, 2020, we issued a total of 4,378,375
shares of common stock, valued at $729,675, upon the conversion of $451,662
principal amount of our convertible debentures. We recorded gain on conversion
of debt of $157,967 during the three months ended March 31, 2020.

NOTE 9 - CONVERTIBLE DEBENTURES AND NOTES

January 2021 Debenture



On January 12, 2021, we sold a $500,000 senior convertible debenture
("Debenture") for (i) $500,000 for cash to an existing institutional investor
(the "Investor") of the Company. The Debenture (i) is non-interest bearing, (ii)
has a maturity date of January 12, 2022, (iii) is convertible into shares of
common stock ("Common Stock") of the Company at the election of the Investor at
any time, subject to a beneficial ownership limitation of 9.99%, and (iv) has a
conversion price equal to the lesser of $0.33 and 85% of the lowest Volume
Weighted Average Price (VWAP) during the five (5) Trading Days immediately prior
to the conversion date, subject to adjustment, as described therein.



The Debenture also contains provisions providing for an adjustment in the event
of stock splits or dividends, and fundamental transactions. The Investor also
has the right to participate in subsequent rights offerings and pro rata
distributions. Additionally, the Debentures contains anti-dilution protection in
the event of subsequent equity sales at a price that is lower than the then
applicable conversion price until such time that the Debenture is no longer
outstanding. Additionally, the Company has the option to redeem some or all of
the Debenture for cash upon notice of twenty (20) trading days provided certain
conditions are met by the Company as more fully described in the Debenture.



We recorded an initial derivative liability of $709,835 related to the fair
value of the derivative liability associated with the debenture. We recorded
debt discount of $500,000, which will be amortized to interest expense over the
term of the debenture, and we charged $209,835 to interest expense upon issue.
We have amortized $106,849 of discount to interest expense during the three
months ended March 31, 2021. Unamortized discount at March 31, 2021 was
$393,151.



October 2020 Debentures

On October 23, 2020, the Company sold an aggregate of $600,000 of senior convertible debentures ("Debentures") for (i) $500,000 in cash and (ii) $100,000 in cancellation of outstanding indebtedness to existing accredited and institutional investors (the "Investors") of the Company.





The Debentures (i) are non-interest bearing, (ii) have a maturity date of
October 23, 2021, (iii) are convertible into shares of common stock ("Common
Stock") of the Company at the election of the Investors at any time, subject to
a beneficial ownership limitation of 9.99%, and (iv) have a conversion price
equal to the lesser of (i) $0.33 and (ii) 85% of the lowest volume-weighted
average price during the five trading days immediately prior to the date of
conversion.

During the three months ended March 31, 2021, $333,390 of debenture have been converted to common stock and $266,610 remains outstanding at March 31, 2021.


We had recorded debt discount of $600,000 related to the debentures, which will
be amortized to interest expense over the term of the debentures. We have
amortized $99,598 of discount to interest expense during the three months ended
March 31, 2021, and $237,934 has been charged off against gain upon the
conversion of the debentures. Unamortized discount at March 31, 2021 was
$149,968.



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March 2020 Debentures



On March 6, 2020, the Company sold an aggregate of $250,000 of senior
convertible debentures (the "March 2020 Debentures") for cash to existing
accredited institutional investors of the Company (the "March 2020 Offering").
The March 2020 Debentures issued (i) are non-interest bearing, (ii) have a
maturity date of July 16, 2020 and (iii) are convertible into shares of common
stock of the Company at the election of the Investor at any time, subject to a
beneficial ownership limitation of 9.99%. The March Debentures have a conversion
price equal to the lesser of (i) $0.33 and (ii) 85% of the lowest
volume-weighted average price during the five trading days immediately prior to
the date of conversion. The maturity date of the debentures has been extended to
June 30, 2021.