| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of presentation The
consolidated financial statements have been prepared in accordance with U.S. GAAP and include all adjustments necessary for the fair
presentation of the Company’s financial position for the periods presented. The consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated during the
consolidation process. 4D
PHARMA PLC NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (In
thousands, except share and per share amounts) (b) Functional and Reporting Currency The
functional currency of the Company and its subsidiaries (other than the foreign subsidiaries mentioned below) is the Great Britain Pound
Sterling (“GBP”). The operations of the two foreign subsidiaries are conducted in EUROs. Balances
denominated in, or linked to, foreign currencies are stated on the basis of the exchange rates prevailing at the balance sheet date.
For foreign currency transactions included in the consolidated statement of operations and comprehensive loss, the exchange rates applicable
to the relevant transaction dates are used. Transaction gains or losses arising from changes in the exchange rates used in remeasurement
of such balances are carried to financing income or expenses. The
reporting currency for the Company and its subsidiaries is the United States dollar (“USD”), and these consolidated financial
statements are presented in USD. Dollar amounts included herein are in thousands, except per share
data. (c) Use of estimates The
preparation of financial statements in conformity with U. S. GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues
and expenses during the reporting periods. Actual results could differ from those estimates and be based on events different from those
assumptions. As part of these consolidated financial statements, the Company’s significant estimates include (1) goodwill impairment;
(2) the estimated useful lives of intangible assets and property and equipment; (3) revenue recognition, in regards to the deferred revenues;
(4) the inputs used in determining the fair value of equity-based awards; (5) the inputs used in determining the fair value of derivative
liabilities; and (6) valuation allowance relating to the Company’s deferred tax assets. (d) JOBS Act Accounting Election The
Company is an “emerging growth company” or “EGC”, as defined in the Jumpstart Our Business Startups Act of 2012
(the “JOBS Act”). Under the JOBS Act, an EGC can delay adopting new or revised accounting standards issued subsequent to
the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has elected to use the extended
transition period for complying with any new or revised financial accounting standards. (e) Cash and cash equivalents and short-term investments The
Company considers all highly liquid investments that have maturities of three months or less when acquired to be cash equivalents. Cash
equivalents are valued at cost, which approximates their fair value. Short-term investments comprise deposits with maturities of more
than three months, but no greater than twelve months. The Company deposits its cash primarily in checking, money market accounts, as
well as certificates of deposit. The Company does not generally enter into investments for trading or speculative purposes, rather to
preserve its capital for the purpose of funding operations. The Company deposits its cash investments in financial institutions that
it believes have high credit quality and has not experienced any losses on such accounts nor does it believe it is exposed to any unusual
credit risk beyond the normal credit risk associated with commercial banking relationships. At December 31, 2021 and 2020, the Company’s
cash and cash equivalents were held at a number of accredited financial institutions. 4D
PHARMA PLC NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (In
thousands, except share and per share amounts) (f) Concentrations of credit risks Concentrations
of credit risk have been provided for customers and suppliers who individually represent greater than 10% of the applicable measure during
the periods stated The
Company derived 100 The
Company had one supplier that accounted for 15 27 32 45 (g) Deferred Recapitalization Costs Specific
incremental legal, accounting and other fees and costs directly attributable to a proposed or actual offering of securities may properly
be deferred and charged against the gross proceeds of such an offering. As of December 31, 2020, there were $ 2,010 Upon
completion of the merger, these costs were charged against the gross proceeds recorded in stockholders’ equity. See Note 3 for
further information on the recapitalization. (h) Fair value of financial instruments The
Company measures and discloses fair value in accordance with ASC 820, “ Fair Value,” Level
1 - unadjusted quoted prices are available in active markets for identical assets or liabilities that the Company has the ability to
access as of the measurement date. Level
2 - pricing inputs are other than quoted prices in active markets that are directly observable for the asset or liability or indirectly
observable through corroboration with observable market data. Level
3 - pricing inputs are unobservable for the non-financial asset or liability and only used when there is little, if any, market activity
for the non-financial asset or liability at the measurement date. The inputs into the determination of fair value require significant
management judgment or estimation. Fair value is determined using comparable market transactions and other valuation methodologies, adjusted
as appropriate for liquidity, credit, market and/or other risk factors. This
hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining
fair value. The
Company’s financial instruments primarily consist of cash and cash equivalents, trade and other payables with initial maturity
of up to 12 months. The estimated fair values of these financial instruments approximate their carrying values as presented, due to their
short maturities. The fair value of the Company’s debt approximated its recorded value as the rate of interest is readily available
to the Company. 4D
PHARMA PLC NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (In
thousands, except share and per share amounts) The
Company’s recurring fair value measurements at December 31, 2021 are as follows: SCHEDULE OF FAIR VALUE MEASUREMENT ON RECURRING BASIS
Fair Value Quoted Prices in Significant Significant
Liabilities:
Derivative liability (Note 10) $ 6,756 $ 2,305 $ 1,132 $ 3,319 The
Company had no recurring fair value measurements at December 31, 2020. (i) Segment information The
Company manages its operations as a single operating segment for the purposes of assessing performance and making operating decisions.
The Company’s singular focus is development of a disruptive class of drug – Live Biotherapeutic products (LBPs) – leveraging
the profound impact of the gut microbiome on human health and disease. Long-lived assets by geography are as follows as of December 31,
2021: UK $ 8,796 9,328 5,899 1 9,383 10,615 6,004 (j) Property and equipment Property
and equipment are recorded at cost, net of accumulated depreciation and any accumulated impairment losses. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets. The useful lives of property and equipment, including right-of-use
assets, are as follows: Schedule of Estimated Useful Lives of the Assets
Plant
and machinery – straight line over three ten years
● Fixtures,
fitting and office equipment – straight line over four five years
● Land
and buildings – straight line over the shorter of the lease or a five ten Upon
retirement or sale, the cost of disposed assets and their related accumulated depreciation are removed from the balance sheet. Any resulting
net gains or losses on dispositions of property and equipment are included as a component of operating expenses within the Company’s
consolidated statements of operations and comprehensive loss. Repair and maintenance costs that do not significantly add value to the
property and equipment, or prolong its life, are charged to operating expense as incurred. (k) Leases The
Company enters into operating lease arrangements for real estate assets related to office space and finance lease arrangements for vehicles
and other equipment. In following ASC 842, the Company determines if an arrangement contains a lease at its inception by assessing
whether there is an identified asset and whether the arrangement conveys the right to control the use of the identified asset in exchange
for consideration. Lease liabilities are included in current and long-term portions for each of financing and operating leases in our
consolidated balance sheets. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities
represent our obligation to make payments arising from the lease. Lease right-of-use assets and lease liabilities are recognized at the
lease commencement date based on the present value of lease payments over the lease term. Lease payments consist of the fixed payments
under the arrangement. The operating lease liabilities is adjusted for any unpaid lease incentives, such as tenant improvement allowances
and certain other immaterial non-lease components which have been included a practical expedient. Variable costs, such as maintenance
and utilities based on actual usage, are not included in the measurement of right-to-use assets and lease liabilities but are expensed
when the event determining the amount of variable consideration to be paid occurs. As the implicit rate of our leases is not determinable,
we use an incremental borrowing rate (“IBR”) based on the information available at the lease commencement date, including
consideration to the Company’s incremental borrowing rate, in determining the present value of lease payments. 4D
PHARMA PLC NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (In
thousands, except share and per share amounts) The
Company recognizes options to extend or terminate a lease when it is reasonably certain that the Company will exercise any such options.
The operating lease expense is recognized on a straight-line basis over the lease term. We also elected the post-transition practical
expedient to not separate lease components from non-lease components for all existing leases, as well as a policy to not apply the recognition
requirements of ASC 842 for short-term leases with an initial term of 12 months of less. (l) Asset Retirement Obligations An
asset retirement obligation (“ARO”) represents a legal obligation associated with the retirement of a tangible long-lived
asset that is incurred upon the acquisition, construction, development or normal operation of that long-lived asset. Our AROs are associated
with leasehold improvements that, at the end of a lease, we are contractually obligated to remove in order to comply with certain lease
agreements. The ARO balance, included in other liabilities, at December 31, 2021 and 2020 was $ 233 203 Accretion
expense on the liability is recognized over the estimated productive life of the related assets and is included on the consolidated statements
of operations under general and administrative expenses. For the years ended December 31, 2021, 2020 and 2019 accretion expense was $ 33 27 22 (m) Intangible assets Goodwill Goodwill
represents the excess of the consideration transferred over the fair value of net assets of businesses acquired. Goodwill is evaluated
for impairment on at least an annual basis, or more frequently if impairment indicators exist. When
evaluating goodwill for impairment, the Company may first perform an assessment qualitatively whether it is more likely than not that
a reporting unit’s carrying amount exceeds its fair value. Under Accounting Standards Update (“ASU”) 2017-04, “Intangibles
- Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment Patents Acquired
patents are initially recorded at cost (or if initially recognised in a business combination at fair value), assigned an estimated useful
life, and amortized primarily on a straight-line basis over their estimated useful lives of up to 20 years from the date of filing the
patent. The Company periodically evaluates whether current facts or circumstances indicate that the carrying values of its acquired intangibles
may not be recoverable. If such circumstances are determined to exist, an estimate of the undiscounted future cash flows of these assets,
or appropriate asset groupings, is compared to the carrying value to determine whether an impairment exists. If the asset is determined
to be impaired, the loss is measured based on the difference between the carrying value of the intangible asset and its fair value, which
is determined based on the net present value of estimated future cash flows. Acquired
Research and Development (Intellectual Property) Intellectual
property that the Company acquired in conjunction with the acquisition of a business represents the fair value assigned to the research
and development platforms and basis that discoveries will be made from. The amounts are capitalized and are accounted for as indefinite-lived
intangible assets, subject to impairment testing until completion or abandonment of the projects. Intellectual property is evaluated
for impairment on at least an annual basis, or more frequently if impairment indicators exist, by first assessing qualitative factors
to determine whether it is more likely than not that the fair value of is less than carrying amount. If the Company concludes it is more
likely than not that the fair value of a reporting unit is less than its carrying amount, a quantitative fair value test is performed.
If the fair value is less than the carrying amount, an impairment loss is recognized in operating results. 4D
PHARMA PLC NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (In
thousands, except share and per share amounts) Software Software
is recognised initially at cost. After initial recognition, these assets are carried at cost less any accumulated amortization and any
accumulated impairment losses. Cost comprises the aggregate amount paid and the fair value of any other consideration given to acquire
the asset and includes costs directly attributable to making the asset capable of operating as intended. Amortization
is computed by allocating the amortization amount of an asset on a systematic basis over its useful life and is applied separately to
each identifiable component. Amortization is applied to software over three to five years on a straight-line basis. (n) Impairment of Long-Lived Assets and Intangibles Long-lived
assets, such as property and equipment, right-of-use assets and definite-lived intangibles subject to amortization, are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of an asset group to the undiscounted cash flows attributable
to the asset group. If the carrying amount of an asset group exceeds its undiscounted cash flows, an impairment charge is recognized
in the amount by which the carrying amount of the asset group exceeds its fair value. (o) Research and development and expenditures Research
and development expenses include salaries and benefits, materials and supplies, preclinical and clinical trial expenses, stock-based
compensation expense, depreciation of equipment, contract services and other outside expenses. The
Company has entered into various research and development-related contracts with research institutions, contract research organizations,
contract manufacturers and other companies. These agreements are generally cancellable, and related payments are recorded as research
and development expenses as incurred. Costs of certain development activities, such as manufacturing, pre-clinical and clinical trial
expenses, are recognized based on an evaluation of the progress to completion of specific tasks. Payments for these activities are based
on the terms of the individual arrangements, which may differ from the pattern of costs incurred, and are reflected in the consolidated
financial statements as prepaid or accrued research and development costs. Non-refundable advance payments for goods or services to be
received in the future for use in research and development activities are deferred and capitalized. The capitalized amounts are expensed
as the related goods are delivered or the services are performed. Costs incurred in obtaining technology licenses are charged to research
and development expense as acquired in-process research and development if the technology licensed has not reached technological feasibility
and has no alternative future use. (p) Revenue recognition The
Company adopted Accounting Standards Codification, Topic 606, Revenue from Contracts with Customers The Company generates revenue solely through collaboration
arrangements with strategic partners for the development and commercialization of product candidates. The core principle of ASC 606 is
that an entity should recognize revenue to depict the transfer of promised goods and/or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods and/or services. To determine the appropriate
amount of revenue to be recognized for arrangements that the Company determines are within the scope of ASC 606, the Company performs
the following steps: (i) Identify the contract(s) with the customer, (ii) Identify the performance obligations in the contract, (iii)
Determine the transaction price, (iv) Allocate the transaction price to the performance obligations in the contract and (v) Recognize
revenue when (or as) each performance obligation is satisfied. 4D
PHARMA PLC NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (In
thousands, except share and per share amounts) The
Company recognizes collaboration revenue under certain of the Company’s license or collaboration agreements that are within the
scope of ASC 606. The Company’s contracts with customers typically include promises related to licenses to intellectual property
and research and development services. If the license to the Company’s intellectual property is determined to be distinct from
the other performance obligations identified in the arrangement, the Company recognizes revenue from non-refundable, up-front fees allocated
to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses
that are bundled with other promises, the Company utilizes judgement to assess the nature of the combined performance obligation to determine
whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of
measuring progress for purposes of recognizing revenue from non-refundable, up-front fees. Accordingly, the transaction price is generally
comprised of a fixed fee due at contract inception and variable consideration in the form of milestone payments due upon the achievement
of specified events and tiered royalties earned when customers recognize net sales of licensed products. The Company measures the transaction
price based on the amount of consideration to which it expects to be entitled in exchange for transferring the promised goods and/or
services to the customer. The Company utilizes the “most likely amount” method to estimate the amount of variable consideration,
to predict the amount of consideration to which it will be entitled for its one open contract. Amounts of variable consideration are
included in the transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized
will not occur when the uncertainty associated with the variable consideration is subsequently resolved. At the inception of each arrangement
that includes development and regulatory milestone payments, the Company evaluates whether the associated event is considered probable
of achievement and estimates the amount to be included in the transaction price using the most likely amount method. Currently, the Company
has one contract with an option to acquire exclusive licenses for identified targets for development product candidates which it evaluated
and determined that it was not a material right related to the MSD Agreement, as defined in Note 13. (q) Income tax The
Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in the consolidated financial statements or in the Company’s
tax returns. Deferred tax assets and liabilities are determined based on the difference between the consolidated financial statement
and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company assesses the likelihood that
its deferred tax assets will be recovered from future taxable income and, to the extent it believes, based upon the weight of available
evidence, that it is more likely than not that all or a portion of the deferred tax assets will not be realized, a valuation allowance
is established through a charge to income tax expense. Potential for recovery of deferred tax assets is evaluated by estimating the future
taxable profits expected and considering prudent and feasible tax planning strategies. The
Company accounts for uncertainty in income taxes recognized in the consolidated financial statements by applying a two-step process to
determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will
be sustained upon external examination by the taxing authorities. If the tax position is deemed more-likely-than-not to be sustained,
the tax position is then assessed to determine the amount of benefit to recognize in the consolidated financial statements. The amount
of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement.
The provision for income taxes includes the effects of any resulting tax reserves, or unrecognized tax benefits, that are considered
appropriate as well as the related net interest and penalties. (r) Share-based payments Equity
settled share-based payment transactions are measured with reference to the fair value of equity awards at the date of grant and recognized
on a straight-line basis over the vesting period, based on the Company’s estimate of shares that will eventually vest. Fair value
is measured using a suitable option pricing model, which takes into account any market conditions. 4D
PHARMA PLC NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (In
thousands, except share and per share amounts) At
each reporting date before vesting, the cumulative expense is calculated, representing both the extent to which the vesting period has
expired and management’s best estimate of the achievement or otherwise of non-market conditions. This calculation determines the
number of equity instruments that will ultimately vest with the movement in cumulative expense since the previous reporting date recognized
in the Company’s consolidated statements of operations and other comprehensive loss, with a corresponding entry in equity. Where
equity settled share-based payments have lapsed due to a failure to meet the vesting conditions, to the extent that they relate to performance
criteria, the value of the adjustment is recognized in the consolidated statements of operations and comprehensive loss. Where share-based
payments fail to vest as a result of market-based vesting criteria, the fair value of the award is included in the consolidated statements
of operations and comprehensive loss as an expense until the fair value is recognized in full. (s) Earnings (loss) per share Basic
earnings (loss) per share is computed by dividing income (loss) available to common stockholders by the weighted-average number of common
shares outstanding during the period. Diluted loss per common share is computed similar to basic loss per share, except that the denominator
is increased to include the number of additional potential common shares that would have been outstanding if the potential common shares
had been issued and if the additional common shares were dilutive. Potential common shares are excluded from the computation for a period
in which a net loss is reported or if their effect is anti-dilutive. Basic and diluted loss per common share is the same for all periods
presented because all outstanding stock options and warrants are anti-dilutive. At
December 31, 2021, 2020 and 2019, the Company excluded the outstanding securities summarized below (shown as common stock equivalents),
which entitle the holders thereof to acquire shares of common stock, from its calculation of earnings per share, as their effect would
have been anti-dilutive. SCHEDULE OF NET INCOME LOSS PER SHARE
2021 2020 2019
December 31,
2021 2020 2019
Common stock warrants 45,903,056 21,924,307 -
Common stock units 2,892,096 - -
Common stock options 7,760,534 485,056 925,589
Total 56,555,686 22,409,363 925,589 (t) Recent issued accounting pronouncements not yet adopted In
May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50),
Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s
Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments — Credit Losses (Topic 326) (“ASU 2016-13”) and subsequent amendments to the initial guidance
including ASU No. 2018-19, ASU No. 2019-04, and ASU No. 2019-05 (collectively, “Topic 326”). Topic 326 requires entities
to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions,
and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit
losses on financial assets measured at amortized cost. This standard is effective for public business entities, excluding entities eligible
to be smaller reporting companies for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.
For all other entities, this standard is effective for annual and interim periods beginning after December 15, 2022 and early adoption
is permitted for annual and interim periods beginning after December 15, 2018. As a smaller reporting company, the Company expects to
adopt this standard in fiscal year 2023. The Company is currently assessing the impact that the adoption of this ASU will have on the
consolidated financial statements. There are no other recently issued accounting
pronouncements that are expected to have a material effect on the Company’s financial position, results of operations or cash flows. (u) Subsequent Events Management
has evaluated subsequent events that have occurred through the date these financial statements were issued. There were no events that
require adjustment to or disclosure in the Company’s financial statements, except as disclosed. See Note 16 for further information
on subsequent events. 4D
PHARMA PLC NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (In
thousands, except share and per share amounts) |
