MRZM Marizyme Inc (QB)

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion covers the three months ended March 31, 2023 and the subsequent period up to the date of issuance of this Quarterly Report on Form 10-Q. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the unaudited interim financial statements and notes thereto included in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and notes thereto for the year ended December 31, 2022 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”).

FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 under Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements other than statements of historical facts contained in this quarterly report, including statements regarding our future results of operations and financial position, business strategy, research and development plans and costs, the impact of COVID-19, the timing and likelihood of regulatory filings and approvals, commercialization plans, pricing and reimbursement, the potential to develop future product candidates, the timing and likelihood of success of the plans and objectives of management for future operations, and future results of anticipated product development efforts, are forward-looking statements. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “should,” “estimate,” or “continue,” and similar expressions or variations. The forward-looking statements in this quarterly report are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, operating results, business strategy, short-term and long-term business operations and objectives. These forward-looking statements speak only as of the date of this quarterly report and are subject to a number of risks, uncertainties and assumptions, including those described in the Part II, Item 1A under the heading “Risk Factors.” The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

OVERVIEW

Marizyme is a multi-technology biomedical company dedicated to the accelerated development and commercialization of medical device technologies that improve patient health outcomes.

Currently, we are focused on developing three medical technology products – DuraGraft®, MATLOC^TM and Krillase® – each of which is backed by a portfolio of patented or patent-pending assets. DuraGraft is a single-use intraoperative vascular graft treatment that protects against ischemic injury and reduces the incidence and complications of graft failure, therefore maintaining endothelial function and structure while improving clinical outcomes. MATLOC is a point-of-care, lab-on-chip digital screening and diagnostic device platform, initially being developed for quantitative chronic kidney disease, or CKD, assessment. Our Krillase protein enzyme provides a therapeutics opportunity for wound healing, thrombosis, and pet health.

Our three principal medical technologies – DuraGraft®, MATLOC^TM and Krillase® – are expected to serve an unmet significant market need in several areas, including, cardiac surgery, CKD, and pet health. We are currently preparing DuraGraft, our endothelial damage inhibitor, or EDI, for the U.S. Food and Drug Administration, or FDA, De Novo classification process. We filed a pre-submission letter for DuraGraft with the FDA in November 2021 and we submitted the De Novo request for DuraGraft to the FDA in January 2023. Upon receiving FDA approval of DuraGraft, which we anticipate but cannot guarantee, we expect to quickly commercialize the product and build revenue rapidly utilizing multiple strategic partners and revenue channels. With our DuraGraft, MATLOC and Krillase technologies, we have the potential to bring three FDA-approved products to market.

For 2023, our primary business priority is achieving FDA approval of DuraGraft as a medical device for coronary bypass artery graft, or CABG, procedures, through the De Novo classification request process. Following FDA approval of DuraGraft, which we anticipate but cannot guarantee, we expect to begin to distribute and sell DuraGraft in the United States through the efforts of a strategic partner. If we are not able to find an appropriate strategic partner, we will have to build our own marketing and sales capabilities at a significant cost to us and with no guarantee of success. DuraGraft first received its CE marking in August 2014. CE marking signifies that DuraGraft may be sold in the European Economic Area, or EEA, and DuraGraft has therefore been assessed as meeting EEA safety, health, and environmental protection requirements. We will continue marketing efforts in Europe and in other countries that accept CE marking. In addition, we intend to fully develop and market DuraGraft in the U.S. for fat grafting procedures in plastic surgery procedures.

In 2023, we also intend to continue the advancement of our MATLOC CKD point-of-care device, mainly through the development of our lab-on-chip technology under a Sponsored Research Agreement, or SRA. An SRA is an agreement (which may be classified as a grant, contract or cooperative agreement) under which one party (the “Sponsor”) provides funding to a second party to support the performance of a specified research project or related activity. The Sponsor may be a foundation, government agency, for-profit entity, research institute, or another university.

As we achieve FDA approvals, which we anticipate but cannot guarantee, we intend to prioritize the commercialization of our DuraGraft, MATLOC and Krillase platform products through multiple distribution and marketing channels in the U.S. We expect that once we enter the commercialization phase, we will be able to rapidly generate revenue growth. Additionally, in the near term we expect to generate revenue from the sale of DuraGraft through the expansion of our international marketing efforts by our distribution partners.

Key elements of our strategy include:

Our net loss was approximately $2.6 million and $6.1 million for the three months ended March 31, 2023 and 2022, respectively. We expect to incur significant expenses and operating losses over the next several years. Accordingly, we will need additional financing to support our continuing operations. We will seek to fund our operations through public or private equity offerings, debt financings, government or other third-party funding, collaborations and licensing arrangements. Adequate additional financing may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would impact our going concern and would have a negative impact on our financial condition and our ability to pursue our business strategy and continue as a going concern. We will need to generate significant revenues to achieve profitability, and we may never do so  .

Impact of COVID-19 Pandemic

The Company has been impacted by the COVID-19 pandemic and related supply chain shortages and other economic conditions, and some of its earlier plans to further diversify its operations and expand its operating subsidiaries were delayed as a result. During 2021 and the first two quarters of 2022, the impact of COVID-19 on the Company’s supply chain and its ability to produce DuraGraft inventory was a primary reason that we did not generate substantial revenue from sales of DuraGraft during 2021 and 2022. There can be no assurance that future supply chain and other problems due to COVID-19 outbreaks will not adversely impact our revenues.

In addition, the Company is dependent upon certain contract manufacturers and suppliers and their ability to reliably and efficiently fulfill its orders is critical to the Company’s business success. The COVID-19 pandemic has impacted and may continue to impact certain of the Company’s manufacturers and suppliers. As a result, the Company has faced and may continue to face delays or difficulty sourcing certain products, which could negatively affect the Company’s business and financial results.

While it is not possible at this time to estimate the total impact that COVID-19 could have on our business in the future, the continued spread of COVID-19 and variants of the virus, the rate of vaccinations regionally and globally and the measures taken by the government authorities, and any future epidemic disease outbreaks, could: Disrupt the supply chain and the manufacture or shipment of products and supplies for use by us in our research activities and by strategic partners for their distribution and sales activities; delay, limit or prevent us in our research activities and strategic partners in their distribution and sales activities; impede our negotiations with strategic partners; impede testing, monitoring, data collection and analysis and other related activities by us; interrupt or delay the operations of the FDA or other regulatory authorities, which may impact review and approval timelines for initiation of clinical trials or marketing; or impede the launch or commercialization of any approved products; any of which could delay our strategic partnership plans, increase our operating costs, and have a material adverse effect on our business, financial condition and results of operations.

Principal Factors Affecting Our Financial Performance

Our operating results are primarily affected by the following factors:

Smaller Reporting Company

We are a “smaller reporting company” as defined in Rule 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements. We will remain a smaller reporting company until the last day of the fiscal year in which (1) the market value of our shares held by non-affiliates equals or exceeds $250 million as of the prior June 30^th, or (2) our annual revenues equaled or exceeded $100 million during such completed fiscal year and the market value of our shares held by non-affiliates equals or exceeds $700 million as of the prior June 30^th.

KEY HIGHLIGHTS FOR THE THREE MONTHS ENDED MARCH 31, 2023

Financing

February 2023 Unsecured Subordinated Promissory Note

On February 2, 2023, the Company issued an unsecured subordinated promissory note to Walleye Opportunities Master Fund Ltd. (“Walleye”) for the principal amount of $1,000,000 bearing no interest, due on May 7, 2023. Under the terms of the promissory note, if the principal amount was not repaid by the Company by such date, then the principal amount shall be increased to $1,250,000. The Company did not repay the note upon its maturity, and as of date of this report, the principal outstanding under the note had been increased to $1,250,000.

FINANCIAL OPERATIONS REVIEW

Component of Results of Operations

Revenue

Revenue represents gross product sales less service fees and product returns. For our distribution partner channel, we recognize revenue for product sales at the time of delivery of the product to our distribution partner. As our products have an expiration date, if a product expires, we will replace the product at no charge. Currently, all of our revenue is generated from the sale of DuraGraft in European and Asian markets where the product has the required regulatory approvals.

Direct Cost of Revenue

Direct cost of revenue include primarily product costs, which include all costs directly related to the purchase of raw materials, charges from our contract manufacturing organizations, and manufacturing overhead costs, as well as shipping and distribution charges. Direct cost of revenue also include losses from excess, slow-moving or obsolete inventory and inventory purchase commitments, if any.

Professional Fees

Professional fees include legal fees relating to intellectual property development, due diligence and corporate matters, and consulting fees for accounting, finance, and valuation services. Professional fees paid to a certain related party relate to certain consulting services. We anticipate increased expenses related to audit, legal, regulatory, and tax-related services associated with maintaining compliance with Securities and Exchange Commission, or SEC, requirements, and with listing and maintaining compliance with securities exchange requirements.

Salaries and Stock-Based Compensation

Salaries consist of compensation and related personnel costs. Stock-based compensation represents the fair value of equity-settled share awards on stock options granted by the Company to its employees, officers, directors, and consultants. The fair value of awards is calculated using the Black-Scholes option pricing model, which considers the following factors: exercise price, current market price of the underlying shares, expected life, risk-free interest rate, expected volatility, dividend yield, and forfeiture rate.

Research and Development

All research and development costs are expensed in the period incurred and consist primarily of salaries, payroll taxes, and employee benefits, those individuals involved in research and development efforts, external research and development costs incurred under agreements with contract research organizations and consultants to conduct and support the Company’s ongoing clinical trials of DuraGraft, and costs related to manufacturing DuraGraft for clinical trials. The Company has entered into various research and development contracts with various organizations and other companies.

Depreciation and Amortization

Intangible assets are recorded at cost less accumulated amortization and accumulated impairment losses. Intangible assets acquired as a result of an acquisition or in a business combination are measured at fair value at the acquisition date. The useful lives of intangible assets are assessed as either finite or indefinite. Intangible assets with finite lives are amortized over the estimated useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The estimated useful life and amortization method are reviewed at the end of each reporting period, with the effect of any changes in estimates being accounted for on a prospective basis.

Royalty Expenses

As part of the Somahlution Acquisition (as defined in “—Recent Developments – Exercise of Somahlution Warrants with Reduced Exercise Price”), the Company entered into the Somahlution Agreement (as defined in “—Recent Developments – Exercise of Somahlution Warrants with Reduced Exercise Price”), under which the Company became legally obligated to pay royalties on all net sales of certain products. Royalty expenses consists of royalty payable accrued on net sales of DuraGraft product within and outside of the U.S.

Other General and Administrative Expenses

Other general and administrative expenses consist principally of marketing and selling expenses, facility costs, administrative and office expenses, director and officer insurance premiums, and investor relations costs associated with operating a public company.

Other Income (Expenses)

Other income and expenses consist of mark-to-market adjustments on contingent liabilities assumed on the acquisition of the Somahlution Assets (as defined in “—Liquidity and Capital Resources – Recent Developments – Exercise of Somahlution Warrants with Reduced Exercise Price”) and interest and accretion expenses related to our Convertible Notes (as defined in “—Liquidity and Capital Resources – Recent Developments – Adjustment to Conversion Price of Convertible Notes and Exercise Price of Class C Warrants”).

Revenue and Direct Cost of Revenue

We recognized revenue of approximately $0.1 million for the three months ended March 31, 2023 compared to none for the three months ended March 31, 2022. No revenue was generated in the three months ended March 31, 2022 due to the impact of the COVID-19 pandemic on the Company’s supply chain and its ability to produce DuraGraft inventory. The Company’s inventory production of DuraGraft returned to its pre-pandemic level at the end of the second quarter of 2022, but lingering effects of the pandemic continued to depress demand for DuraGraft and cause revenues from DuraGraft during the first quarter of 2023 to be minimal.

Professional Fees

Professional fees decreased by approximately $0.1 million or 29.3% to approximately $0.4 million in the three months ended March 31, 2023 compared to approximately $0.5 million in the three months ended March 31, 2022. The decrease relates to higher professional fees incurred in the prior comparative period due to legal fees incurred in connection with the initial filing of a registration statement on Form S-1 with the SEC for a public offering during the quarter ended March 31, 2022 .

Salary Expenses

Salary expenses in the three months ended March 31, 2023 were approximately $0.3 million, an approximately $0.6 million or 70.8% decrease from the comparative period. The decrease is attributable to reductions in employee salaries as part of efforts to streamline the Company’s operations.

Research and Development

Research and development expenses in the three months ended March 31, 2023 were approximately $0.6 million, approximately a $0.6 million or 50.3% decrease from the comparative period. The decrease in research and development expenses can be mainly attributed to the Company’s reduction of expenses in the later period and primary focus on progressing its De Novo FDA submission for DuraGraft approval, compared to higher expenses incurred in the quarter ended March 31, 2022 due to the simultaneous development and advancement of several projects, including the commercialization of DuraGraft, Krillase, and MATLOC 1.

Stock-Based Compensation

Stock-based compensation decreased to approximately $0.2 million for the three quarters ended March 31, 2023 from approximately $0.7 million in the comparative quarter ended March 31, 2022, which represents 70.6% decrease period over period. The decrease in stock-based compensation was due to the relative absence in the first quarter of 2023 of expense recognition of restricted stock award compensation in comparison to $0.3 million of such expense recognized for the three months ended March 31, 2022.

Depreciation and Amortization

Depreciation and amortization remained consistent at $0.2 million in the current and comparative period. The Company did not acquire any new tangible or intangible capital assets in any of the periods indicated.

Royalty Expense

During the three months ended March 31, 2023, the Company accrued $0.04 million in royalties payable incurred on sales of DuraGraft outside of the U.S. No royalties were accrued in the comparative period as no sales of DuraGraft occurred in the three months ended March 31, 2022.

Other General and Administrative Expenses

Other general and administrative expenses increased approximately $0.1 million or 29.9% to approximately $0.5 million in the three months ended March 31, 2023. The majority of the increased expenses in the three months ended March 31, 2023 were due to the Company’s non-legal professional fees incurred in connection with amendments to a registration statement on Form S-1 that were filed with the SEC for a public offering.  

Other Income (Expenses)

In the three months ended March 31, 2023, the Company incurred approximately $1.7 million of interest and accretion costs associated with convertible notes issued at discount as part of its Units Private Placement (as defined in “—Liquidity and Capital Resources – Recent Developments – Adjustment to Conversion Price of Convertible Notes and Exercise Price of Class C Warrants”) compared  to $0.3 million, a $1.4 million or 466.7% increase in the comparative quarter ended March 31, 2022.

Additionally, the Company recognized $1.3 million of fair value gain from mark-to-market adjustments on the contingent liabilities assumed on the acquisition of the Somahlution Assets due to the change of the fair value of the contingent consideration compared to $1.8 million of fair value loss, an increase of $3.1 million  from mark-to-market adjustment on the contingent liability in the comparative quarter ended March 31, 2022.

LIQUIDITY AND CAPITAL RESOURCES

To date, we have incurred significant net losses and negative cash flows from operations. As of March 31, 2023, we had available cash of approximately $0.3 million and accumulated deficit of approximately $88.5 million. We have funded our operations primarily from capital raises.

Recent Developments

Exercise of Somahlution Warrants with Reduced Exercise Price

As previously reported in Current Reports on Form 8-K filed by the Company on December 19, 2019 and August 5, 2020, on December 15, 2019, the Company entered into an asset purchase agreement (the “Somahlution Agreement”), as amended on March 31, 2020, May 29, 2020, and July 30, 2020, with Somahlution. Pursuant to the terms of the Somahlution Agreement, as amended, the Company agreed to purchase (the “Somahlution Acquisition”) all of the assets and none of the liabilities of Somahlution, provided that the Company agreed to acquire the outstanding capital stock of Somahlution, Inc., held by Somahlution, LLC, rather than the assets of Somahlution, Inc. (the “Somahlution Assets”). On August 4, 2020, the Somahlution Acquisition closed. As consideration for the Somahlution Acquisition, the Company issued to certain designees of Somahlution (the “Warrant Holders”) a total of 10,000,000 restricted shares of common stock and five-year warrants to purchase an additional 2,999,955 shares of common stock with an exercise price of $5.00 per share (the “Somahlution Warrants”).

On April 13, 2023, the Company delivered offer letter agreements (the “Somahlution Warrant Offer Letter Agreements”) to the Warrant Holders, which offered to allow the Warrant Holders to exercise the Somahlution Warrants to purchase the number of restricted shares of common stock issuable under their Somahlution Warrants at an exercise price reduced by the Company from $5.00 per share to $0.10 per share, on or prior to April 21, 2023, for maximum total cash proceeds of $299,995.50. As of the conclusion of this offer period, four of the Warrant Holders had entered into Somahlution Warrant Offer Letter Agreements and had exercised their Somahlution Warrants to purchase a total of 2,652,159 shares of common stock for gross proceeds of approximately $265,216 (the “Warrant Exercise”). Univest Securities, LLC (“Univest”), as the Company’s placement agent, which facilitated the Warrant Exercise, waived any fees or reimbursable expenses that would otherwise have been payable with respect to the Warrant Exercise pursuant to the Placement Agency Agreement, dated as of December 21, 2021, between Univest and the Company.

The foregoing description of the Somahlution Warrant Offer Letter Agreements is qualified in its entirety by reference to the form of such documents which is filed as Exhibit 10.1 to the Current Report on Form 8-K filed on April 20, 2023.

Adjustment to Conversion Price of Convertible Notes and Exercise Price of Class C Warrants

As previously reported in a Current Report on Form 8-K filed by the Company on January 17, 2023 (the “January 2023 Form 8-K”), from May 2021 to August 2022, the Company conducted a private placement of units (the “Units Private Placement”) consisting of 10% secured convertible promissory notes (the “Convertible Notes”) and accompanying warrants (the “Class C Warrants”), as were modified or amended from time to time, with Univest, the terms of which were described in detail in the January 2023 Form 8-K. As reported in the January 2023 Form 8-K, among their other terms, the Convertible Notes and Class C Warrants provide that a lower price per share, or more favorable terms, respectively, under subsequent equity issuances, not including qualified financings and certain other exempt issuances, will be applicable to the conversion or exercise rights under the Convertible Notes and Class C Warrants, respectively. In addition, as reported in the January 2023 Form 8-K, under a Letter Agreement between the Company and Univest as placement agent for the investors in the Units Private Placement, dated January 12, 2023 (the “Univest Letter Agreement”), the parties agreed that simultaneously with any adjustment to the exercise price under the Class C Warrants as a result of any equity issuances, not including qualified financings and certain other exempt issuances, the number of shares of common stock that may be purchased under the Class C Warrants will be increased such that the aggregate exercise price of such shares will be the same as the same as the aggregate exercise price in effect immediately prior to the adjustment, without regard to any limitations on exercise contained in the Class C Warrants, including the beneficial ownership limitation described above.

At the time of the Warrant Exercise, the Convertible Notes were convertible at a conversion price of $1.75 per share and the Class C Warrants were exercisable at an exercise price of $2.25 per share. Outstanding Convertible Notes have underlying principal of $14,471,177, and outstanding Class C Warrants were exercisable to purchase a total of 16,538,473 shares of common stock. In connection with the transaction contemplated by the Somahlution Warrant Offer Letter Agreements and certain unrelated matters, the Company obtained exercise and conversion rights waivers and amendments from certain holders of the Convertible Notes and Class C Warrants, which reduced the principal underlying Convertible Notes’ with conversion rights to Convertible Notes with a total of $4,471,177 in principal, and reduced outstanding Class C Warrants with exercise rights to Class C Warrants having exercise rights to Class C Warrants exercisable to purchase 5,109,904 shares of common stock. As a result of the Warrant Exercise and pursuant to the adjustment provisions described above, the conversion price of the Convertible Notes and the exercise price of the Class C Warrants adjusted to $0.10 per share. As a result of these adjustment provisions and the conversion and exercise terms of the Convertible Notes and Class C Warrants, the number of shares into which the Convertible Notes may be converted adjusted from 2,554,944 shares of common stock, not including shares convertible from interest under the Convertible Notes, to 44,711,770 shares of common stock, not including shares convertible from interest under the Convertible Notes, subject to rounding adjustments, and the number of shares that the Class C Warrants may be exercised to purchase adjusted from 5,109,904 shares of common stock to 114,972,840 shares, subject to rounding adjustments.

The foregoing description of the Univest Letter Agreement, the Convertible Notes and the Class C Warrants is qualified in its entirety by reference to the description of these and related documents and transactions in “Item 1.01 Entry into a Material Definitive Agreement.” of the January 2023 Form 8-K.

Public Offering

On February 14, 2022, Marizyme filed the initial registration statement on Form S-1 relating to the Company’s proposed public offering to raise up to $17,250,000. On April 21, 2023, the Company withdrew the registration statement on Form S-1 as it does not intend to pursue the contemplated public offering at this time  .

Promissory Note Repayment Default

On February 2, 2023, the Company issued an unsecured promissory note to Walleye for $1,000,000 with a maturity date of May 7, 2023. The note has no interest and the principal amount shall be paid in full on the maturity date. In the event that the principal amount is not repaid in full on maturity date, the principal amount shall be increased to $1,250,000. The Company did not repay the note upon its maturity, and as of the date of this report, the principal outstanding under the note had been increased to $1,250,000.

Funding Requirements and Other Liquidity Matters

Marizyme expects to continue to incur expenses and operating losses for the foreseeable future. We anticipate that our expenses will increase as a result of the following operational and business development efforts:

Until such time, if ever, as we can generate substantial product revenues to support our cost structure, the Company will continue to have to raise funds beyond its current working capital balance in order to finance future development of products, potential acquisitions, and meet its debt obligations until such time as future profitable revenues are achieved.

We expect to finance our cash needs through a combination of private and public equity offerings, debt financings, government or other third-party funding, and collaborations arrangements. To the extent that we raise additional capital through the sale of common stock, convertible securities or other equity securities, the ownership interest of our stockholders may be materially diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the interests of our common stockholders. Debt financing and preferred equity financing, if available, would result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting our stockholders’ ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, that could adversely impact our ability to conduct our business. Securing additional financing could require a substantial amount of time and attention from our management and may divert a disproportionate amount of their attention away from day-to-day activities, which may adversely affect our management’s ability to oversee the development or acquisition of our products.

If we raise additional funds through collaborations, strategic alliances or marketing, distribution, or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

Operating Activities

Net cash used in operating activities was approximately $1.1 million and $4.3 million for the three months ended March 31, 2023 and 2022, respectively. The net cash used in operating activities for the three months ended March 31, 2023 was due to approximately $0.6 million spent on research and development, approximately $0.3 million spent on salaries and related compensation expenses, $0.5 million in other general and administrative expenses and approximately $0.4 million spent on professional fees. The net cash used in operating activities for the three months ended March 31, 2022 was due to approximately $1.2 million spent on research and development, approximately $0.5 million spent on professional fees and $0.9 million spent on salaries and related compensation expenses. The decrease in net cash used in operating activities in the three months ended March 31, 2023 compared to the three months ended March 31, 2022 was primarily due to the decrease in the Company’s research and development expenses, salaries and other compensation, and professional fees.

Financing Activities

Net cash provided by financing activities for the three months ended March 31, 2023 was due to $1.0 million of funds raised from the issuance of an unsecured promissory note to Walleye. During the three months ended March 31, 2023 the Company also repaid approximately $0.1 million in notes payable. Net cash provided by financing activities for the three months ended March 31, 2022 was due to $3.7 million of funds raised from the issuance of convertible promissory notes in connection with the Units Private Placement. The Company also settled an aggregate of $0.3 million in notes payable as part of the Units Private Placement during the three months ended March 31, 2022.

Contractual Obligations and Commitments

Other than disclosed below, there were no material changes outside the ordinary course of our business during the three months ended March 31, 2023 to the information regarding our contractual obligations that was disclosed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Contractual Obligations and Commitments” contained in the 2022 Form 10-K.

Royalties and Other Commitments

On December 15, 2019, the Company entered into the Somahlution Agreement to acquire the Somahlution Assets, including DuraGraft®. The Somahlution Agreement was amended on March 31, 2020 and May 29, 2020 to extend the termination date. On July 30, 2020, the Company and Somahlution entered into Amendment No. 3 to the Somahlution Agreement (“Amendment No. 3”). Pursuant to the terms of this amendment, it was agreed that, as part of the Somahlution Acquisition, the Company would acquire the outstanding capital stock of Somahlution, Inc., held by Somahlution, LLC, rather than the assets of Somahlution, Inc., in addition to the Somahlution Assets. This change to the Somahlution Agreement was made to accommodate the European Union (“EU”) requirements with respect to the future manufacturing under Somahlution, Inc. of CE marked products for sale in the EU. In Amendment No. 3, the Company agreed to assume certain payables of Somahlution related to clinical and medical expenses. The parties also orally agreed that the payments on the assumed debts would be recorded as a prepaid royalty against future royalties.

Pursuant to the Somahlution Agreement and in consideration of the outstanding capital stock of Somahlution, Inc., the Company agreed to pay to certain beneficial owner designees of Somahlution, among other consideration:

For additional discussion of this transaction, see “Item 13. Certain Relationships and Related Transactions, and Director Independence – Transactions with Related Persons” of the 2022 Form 10-K.

Office and Laboratories Space Lease

The Company has entered into arrangements for office and laboratories spaces. As at March 31, 2023, minimum lease payments in relation to lease commitments were payable as outlined in “Note 4 – Leases”, included in “Item 1. Financial Statements” of this Quarterly Report on Form 10-Q.

Promissory Notes

On October 23, 2022, the Company issued a note payable to Hub International Limited for $204,050 bearing interest at the annual rate of 6.75% per annum, due September 23, 2023, payable monthly starting November 23, 2022. As of March 31, 2023, the balance of note payable due was $103,824 (December 31, 2022 - $164,729).

On December 28, 2022, the Company issued a promissory note to Hexin Global Ltd. for the principal amount of $750,000 bearing interest at the annual rate of 20% per annum, due June 28, 2023. Pursuant to the promissory note, the Company agreed to issue warrants to purchase common stock equal to $1,500,000 with the same terms as any warrants issued in the Company’s next financing round and which will be immediately exercisable. Default in the payment of principal or interest or other material covenant under the note triggers a default penalty equal to 0.666% of $750,000 per month during the period of default, and other lender rights, including the demand of immediate payment of all amounts due including accrued but unpaid interest, and recovery of all costs, fees including attorney’s fees and disbursements, and expenses relating to collection and enforcement of the promissory note. As of March 31, 2023, the balance due under this note was $750,000.

On February 2, 2023, the Company issued an unsecured promissory note to Walleye for $1,000,000 with a maturity date of May 7, 2023. The note has no interest and the principal amount shall be paid in full on the maturity date. In the event that the principal amount is not repaid in full on maturity date, the principal amount shall be increased to $1,250,000. The Company did not repay the note upon its maturity, and as of the date of this report, the principal outstanding under the note had been increased to $1,250,000.

As part of the My Health Logic acquisition, Marizyme assumed an aggregate of $468,137 in notes payable, the notes were unsecured, bore interest at a rate of 9% per annum with no maturity date. The Company settled an aggregate of $278,678 of these notes payable as part of Units Private Placement during the year ended December 31, 2022 (see “Note 7 – Convertible Promissory Notes and Warrants”, included in “Item 1. Financial Statements” of this Quarterly Report on Form 10-Q ). For the three months ended March 31, 2023, the Company accrued $13,068 in interest on the notes payable (March 31, 2022 - $6,085). As of March 31, 2023, the balance of the remaining note payable was $231,168 (December 31, 2022 - $218,100).

Changes in Capitalization

As previously reported, on August 3, 2022, the Company filed the First Certificate of Change with the Nevada Secretary of State, which provided for the First Reverse Stock Split. Pursuant to NRS Section 78.209(3), the First Certificate of Change became effective at the First Certificate of Change Effective Time. On December 30, 2022, the Company filed the Certificate of Amendment with the Nevada Secretary of State, which provided for the Authorized Capital Increase, and which became effective at the Certificate of Amendment Effective Time. On January 5, 2023, the Second Certificate of Change was filed with the Nevada Secretary of State, which provided for the Second Reverse Stock Split. Pursuant to NRS Section 78.209(3), the Second Certificate of Change became effective at the Second Certificate of Change Effective Time.

Subsequently, the Company submitted a request to FINRA to process and announce each of the First Reverse Stock Split and Second Reverse Stock Split on FINRA’s Daily List of issuer corporate actions in accordance with FINRA Rule 6490. In order to address FINRA’s issuer corporate action processing requirements, the Third Certificate of Change, Fourth Certificate of Change and Fifth Certificate of Change was each filed by the Company with the Nevada Secretary of State. These filings provided for two forward stock splits of the authorized and issued and outstanding common stock at the same ratios as the First Reverse Stock Split and Second Reverse Stock Split followed by a reverse stock split at their combined ratio. The Fifth Certificate of Change provided for the decrease of the authorized common stock from 300,000,000 to 20,000,000 and corresponding change of every fifteen (15) shares of the issued and outstanding common stock to one (1) share, and became effective at the Fifth Certificate of Change Effective Time.

As of the date of this report, FINRA had not processed the Consolidated Reverse Stock Split. Unless indicated otherwise, all share amounts, share price amounts and amounts derived from share amounts and share price amounts contained in this report do not give effect to the First Reverse Stock Split, the Second Reverse Stock Split, the First Forward Stock Split, the Second Reverse Stock Split, or the Consolidated Reverse Stock Split. See “Note Regarding Presentation of Capitalization in this Report” of this report for additional information.

Going Concern

The Company, since its inception, has incurred recurring operating losses and negative cash flows from operations and has an accumulated deficit of $88,544,017 at March 31, 2023 (December 31, 2022 - $85,989,433). Additionally, the Company has negative working capital of $6,148,031 (December 31, 2022 - $966,464) and $329,805 (December 31, 2022 - $510,865) of cash on hand, which may not be sufficient to fund operations for the next twelve months. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

The accompanying consolidated financial statements have been prepared in conformity with U.S. GAAP, which contemplate continuation of the Company as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business. The ability of the Company to continue its operations is dependent on the execution of management’s plans, which include the raising of capital through the debt and/or equity markets, until such time that funds provided by operations are sufficient to fund working capital requirements. If the Company were not to continue as a going concern, it would likely not be able to realize its assets at values comparable to the carrying value or the fair value estimates reflected in the balances set out in the preparation of the consolidated financial statements.

There can be no assurances that the Company will be successful in generating additional cash from the equity/debt markets or other sources to be used for operations. The consolidated financial statements do not include any adjustments relating to the recoverability of assets and classification of assets and liabilities that might be necessary. Based on the Company’s current resources, the Company will not be able to continue to operate without additional immediate funding. Should the Company not be successful in obtaining the necessary financing to fund its operations, the Company would need to curtail certain or all operational activities and/or contemplate the sale of its assets, if necessary.

The Company has been impacted by the COVID-19 pandemic and related supply chain shortages and other economic conditions, and some of its earlier plans to further diversify its operations and expand its operating subsidiaries were delayed as a result. See “–Impact of COVID-19 Pandemic” above.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in our financial statements and accompanying notes. We evaluate these estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are more fully described in “Note 3 – Summary of Significant Accounting Policies”, included in “Item 1. Financial Statements” of this Quarterly Report on Form 10-Q, we believe that the following accounting policies are the most critical for fully understanding and evaluating our financial condition and results of operations.  

Deferred Offering Cost

The Company capitalizes certain legal, professional accounting and other third-party fees that are directly associated with in-process capital stock financings as deferred offering costs until such financings are consummated. After consummation of the financing, these costs are recorded in stockholders’ equity (deficit) as a reduction of additional paid-in capital generated as a result of the offering. Should a planned equity financing be abandoned, the deferred offering costs will be expensed immediately as a charge to operating expenses in the statements of operations. As of March 31, 2023, the Company had recorded deferred offering costs of $549,795 (December 31, 2022 - $387,412) reported as a prepaid expense on the accompanying balance sheets.

Fair Value Measurements

The Company uses the fair value hierarchy to measure the value of its financial instruments. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources, while unobservable inputs reflect a reporting entity’s pricing based upon its own market assumptions. The basis for fair value measurements for each level within the hierarchy is described below:

The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and considers counterparty credit risk in its assessment of fair value.

The carrying amounts of certain accounts and other receivables, accounts payable and accrued expenses, note payable, and amounts due to related parties approximate fair value due to the short-term nature of these instruments.

The fair value of lease obligations is determined using discounted cash flows based on the expected amounts and timing of the cash flows discounted using a market rate of interest adjusted for appropriate credit risk.

The contingent liabilities assumed on the acquisition of Somahlution in 2020 consist of present values of royalty payments, performance warrants and pediatric voucher warrants, future rare pediatric voucher sales, and liquidation preference. Management measured these contingencies in accordance with Level 3 of the fair value hierarchy.

The derivative liabilities consist of optional and automatic conversion features and the share redemption feature attached to the convertible notes, issued pursuant to certain convertible promissory notes and warrants transactions (see “Note 7 – Convertible Promissory Notes and Warrants”, included in “Item 1. Financial Statements” of this Quarterly Report on Form 10-Q).

The Company has no financial assets measured at fair value on a recurring basis. None of the Company’s non-financial assets or liabilities are recorded at fair value on a non-recurring basis. No transfers between levels have occurred during the periods presented.

Marizyme measures the following financial instruments at fair value on a recurring basis. As of March 31, 2023, and December 31, 2022, the fair values of these financial instruments were as follows:

The following table provides a roll forward of all liabilities measured at fair value using Level 3 significant unobservable inputs:

Research and Development Expenses and Accruals

All research and development costs are expensed in the period incurred and consist primarily of salaries, payroll taxes, and employee benefits, for individuals involved in research and development efforts, external research and development costs incurred under agreements with contract research organizations and consultants to conduct and support the Company’s ongoing clinical trials of DuraGraft, and costs related to manufacturing DuraGraft for clinical trials. The Company has entered into various research and development contracts with various organizations. Payments of these activities are based on the terms of the individual agreements which matches to the pattern of costs incurred. Payments made in advance are reflected in the accompanying balance sheets as prepaid expenses. The Company records accruals for estimated costs incurred for ongoing research and development activities. When evaluating the adequacy of the accrued liabilities, the Company analyzes progress of the services, including the phase or completion of events, invoices received and contracted costs. Significant judgments and estimates may be required in determining the prepaid or accrued balances at the end of any reporting period. Actual results could differ from the Company’s estimates.

Stock-Based Compensation

Stock-based compensation expense for employees and directors is recognized in the Condensed Consolidated Statements of Operations based on estimated amounts, including the grant date fair value and the expected service period. For stock options, the Company estimates the grant date fair value using a Black-Scholes valuation model, which requires the use of multiple subjective inputs including estimated future volatility, expected forfeitures and the expected term of the awards. The Company estimates the expected future volatility based on the stock’s historical price volatility. The stock’s future volatility may differ from the estimated volatility at the grant date. For restricted stock unit (“RSU”) equity awards, the Company estimates the grant date fair value using its closing stock price on the date of grant. The Company recognizes the effect of forfeitures in compensation expense when the forfeitures occur. The estimated forfeiture rates may differ from actual forfeiture rates which would affect the amount of expense recognized during the period. The Company recognizes the value of the awards over the awards’ requisite service or performance periods. The requisite service period is generally the time over which share-based awards vest.

Off-Balance Sheet Arrangements

As of March 31, 2023, the Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.